Exhibit 2.7
AGREEMENT OF MERGER
BY AND AMONG
ZHONE TECHNOLOGIES, INC.,
VCI ACQUISITION CORPORATION,
VPACKET COMMUNICATIONS, INC.
AND
XXX XXXXXXX, as
SHAREHOLDERS' REPRESENTATIVE
JUNE 18, 2002
TABLE OF CONTENTS
Page
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1. The Merger................................................................ 1
1.2 Closing; Effective Time......................................... 1
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 Surrender of Certificates....................................... 5
1.8 No Further Ownership Rights in Target Capital Stock............. 7
1.9 Lost, Stolen or Destroyed Certificates.......................... 7
1.10 "Market Stand-Off".............................................. 7
1.11 Taking of Necessary Action; Further Action...................... 8
1.12 Securities Laws Issues.......................................... 8
2. Representations and Warranties of Target.................................. 8
2.1 Organization, Standing and Power................................ 9
2.2 Authority....................................................... 9
2.3 Governmental Authorization......................................10
2.4 Financial Statements............................................10
2.5 Capital Structure...............................................10
2.6 Absence of Certain Changes......................................11
2.7 Absence of Undisclosed Liabilities..............................12
2.8 Litigation......................................................12
2.9 Restrictions on Business Activities.............................12
2.10 Intellectual Property...........................................12
2.11 Interested Party Transactions...................................15
2.12 Minute Books....................................................16
2.13 Complete Copies of Materials....................................16
2.14 Material Contracts..............................................16
2.15 Inventory.......................................................16
2.16 Accounts Receivable.............................................17
2.17 Customers and Suppliers.........................................17
2.18 Employees and Consultants.......................................17
2.19 Title to Property...............................................17
2.20 Environmental Matters...........................................18
2.21 Taxes...........................................................19
2.22 Employee Benefit Plans..........................................20
2.23 Employee Matters................................................23
2.24 Insurance.......................................................23
2.25 Compliance With Laws............................................23
2.26 Brokers' and Finders' Fee.......................................23
2.27 Representations Complete........................................24
3. Representations and Warranties of Acquiror................................24
3.1 Organization, Standing and Power................................24
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3.2 Authority.......................................................24
3.3 Governmental Authorization......................................25
3.4 Financial Statements............................................25
3.5 Capital Structure...............................................26
3.6 Issuance of Shares..............................................26
3.7 Absence of Certain Changes......................................27
3.8 Absence of Undisclosed Liabilities..............................27
3.9 Interim Operations of Merger Sub................................27
3.10 Litigation......................................................27
3.11 Restrictions on Business Activities.............................28
3.12 Intellectual Property...........................................28
3.13 Interested Party Transactions...................................30
3.14 Minute Books....................................................30
3.15 Complete Copies of Materials....................................30
3.16 Material Contracts..............................................30
3.17 Inventory.......................................................31
3.18 Accounts Receivable.............................................31
3.19 Customers and Suppliers.........................................31
3.20 Title to Property...............................................32
3.21 Environmental Matters...........................................32
3.22 Taxes...........................................................33
3.23 Employee Matters................................................34
3.24 Employee Benefit Plan...........................................34
3.25 Insurance.......................................................36
3.26 Compliance With Laws............................................36
3.27 Brokers' and Finders' Fee.......................................36
3.28 Representations Complete........................................36
4. Conduct Prior to the Effective Time.......................................36
4.1 Conduct of Business of Target...................................36
4.2 Conduct of Business of Acquiror.................................39
4.3 No Solicitation.................................................40
5. Additional Agreements.....................................................40
5.1 Approval of Shareholders........................................41
5.2 Sale of Shares Pursuant to Regulation D.........................41
5.3 Access to Information...........................................41
5.4 Confidentiality.................................................41
5.5 Public Disclosure...............................................42
5.6 Regulatory Approval; Further Assurances.........................42
5.7 Blue Sky Laws...................................................43
5.8 Escrow Agreement................................................43
5.9 Nonaccredited Stockholders......................................43
5.10 Acquiror Restructuring..........................................43
5.12 Indemnification of Officers and Directors.......................43
5.12 Shareholders' Representative....................................44
5.13 Expenses........................................................44
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5.14 Acquiror Investor Rights Agreement..............................44
5.15 Cancellation of Target Warrants.................................44
5.16 Appointment of New Director.....................................44
5.17 Ownership of Surviving Corporation Following Merger.............44
5.18 Investor Representation Statement; Number of Shareholders.......45
6. Conditions to the Merger..................................................45
6.1 Conditions to Obligations of Each Party to Effect the Merger....45
6.2 Additional Conditions to the Obligations of Acquiror and
Merger Sub.....................................................45
6.3 Additional Conditions to Obligations of Target..................47
7. Termination, Amendment and Waiver.........................................48
7.1 Termination.....................................................48
7.2 Effect of Termination...........................................48
7.3 Amendment.......................................................49
7.4 Extension; Waiver...............................................49
8. Escrow and Indemnification................................................49
8.1 Escrow Fund.....................................................49
8.2 Indemnification.................................................49
8.3 Shareholders' Representative.................................50
8.4 Actions of the Shareholders' Representative..................51
8.5 Third Party Claims...........................................52
9. General Provisions........................................................52
9.1 Notices.........................................................52
9.2 Definitions.....................................................53
9.3 Counterparts....................................................53
9.4 Entire Agreement; Nonassignability; Parties in Interest.........54
9.5 Severability....................................................54
9.6 Remedies Cumulative.............................................54
9.7 Governing Law...................................................54
9.8 Rules of Construction...........................................54
9.9 Amendment; Waiver...............................................54
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LIST OF EXHIBITS
Exhibit A Form of Agreement of Merger
Exhibit B Form of Investor Representation Statement
Exhibit C Form of Shareholder Agreement
Exhibit D Form of Escrow Agreement
Exhibit E Form of Target Eighth Amended and Restated Articles of Incorporation
Exhibit F Form of Acquiror Second Amended and Restated Certificate of
Incorporation
Exhibit G Form of Rights Agreement
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AGREEMENT OF MERGER
This AGREEMENT OF MERGER (the "Agreement") is made and entered
into as of June 18, 2002 by and among Zhone Technologies, Inc., a Delaware
corporation ("Acquiror"), VCI Acquisition Corporation, a Delaware corporation
("Merger Sub") and indirect wholly owned subsidiary of Acquiror, Vpacket
Communications, Inc., a California corporation ("Target"), and Xxx Xxxxxxx, as
Shareholders' Representative (as defined in Section 5.12).
RECITALS
A. The Boards of Directors of Target, Acquiror and Merger Sub
believe it is in the best interests of their respective companies and the
shareholders of their respective companies that Target and Merger Sub combine
into a single company through the statutory merger of Merger Sub with and into
Target (the "Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding
shares of Target Common Stock, no par value ("Target Common Stock") shall be
converted into the right to receive an aggregate of $40,000 in cash.
C. Pursuant to the Merger, among other things, the outstanding
shares of Target Preferred Stock, no par value ("Target Preferred Stock"), shall
be converted into the right to receive Series B Preferred Stock of the Acquiror
("Acquiror Series B Preferred Stock"). Collectively, the Target Preferred Stock
and Target Common Stock are referred to herein as "Target Capital Stock.
C. Target, Acquiror and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the covenants and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
1. The Merger.
1.1 The Merger. At the Effective Time and subject to and upon
the terms and conditions of this Agreement, the Agreement of Merger attached
hereto as Exhibit A (the "Agreement of Merger") and the applicable provisions of
the Delaware General Corporation Law ("Delaware Law") and the California
Corporations Code ("California Law"), Merger Sub shall be merged with and into
Target, the separate corporate existence of Merger Sub shall cease and Target
shall continue as the surviving corporation (the "Surviving Corporation").
1.2 Closing; Effective Time. The closing of the transactions
contemplated hereby (the "Closing") shall take place as soon as practicable, but
no later than two (2) business days, after the satisfaction or waiver of each of
the conditions set forth in Section 6 hereof, or at such other time as the
parties hereto agree (the "Closing Date"). The Closing shall take place at the
offices of Xxxx Xxxx Xxxx & Freidenrich LLP, or at such other location as the
parties hereto
agree. In connection with the Closing, the parties hereto shall cause the Merger
to be consummated by filing an Agreement of Merger in substantially the form
attached hereto as Exhibit A, together with any required certificates, with the
Secretary of State of the State of California, in accordance with the relevant
provisions of California Law (the time of such filing being the "Effective
Time"). The parties shall also promptly cause a Certificate of Merger to be
filed with the Secretary of State of the State of Delaware, in accordance with
the relevant provisions of Delaware Law.
1.3 Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement, the Agreement of Merger and
the applicable provisions of California Law and Delaware Law. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time, all
the property, rights, privileges, powers and franchises of Target and Merger Sub
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of Target 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 Target in effect immediately prior to the Effective Time shall be amended and
restated in the form of Annex A attached to the Agreement of Merger, and, as so
amended and restated, such Articles of Incorporation shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended.
(b) The Bylaws of Target, as in effect immediately prior
to the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. At the Effective Time, the
directors and officers of Merger Sub immediately prior to the Effective Time
shall be the directors and officers of the Surviving Corporation, to serve until
their respective successors are duly elected or appointed and qualified.
1.6 Effect on Capital Stock. At the Effective Time, by virtue
of the Merger and without any action on the part of Acquiror, Merger Sub, Target
or any of their shareholders:
(a) Conversion of Target Capital Stock.
(i) Each share of Target Common Stock issued and
outstanding immediately prior to the Effective Time, other than any Dissenting
Shares (as defined in Section 1.6(g)), shall be converted into the right to
receive an amount of cash per share equal to the quotient obtained by dividing
(1) $40,000 by (2) the number of shares of Target Common Stock issued and
outstanding immediately prior to the Effective Time.
(ii) Each share of Target Series D Preferred Stock
issued and outstanding immediately prior to the Effective Time, other than any
Dissenting Shares, shall be converted into the right to receive 0.9882 shares of
Acquiror Series B Preferred Stock.
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(iii) Each Share of Target Series C Preferred Stock
issued and outstanding immediately prior to the Effective Time, other than any
Dissenting Shares, shall be converted into the right to receive that number of
shares of Acquiror Series B Preferred Stock determined by dividing (A) the
Series C Liquidation Proceeds by (B) the total number of shares of Target Series
C Preferred Stock issued and outstanding immediately prior to the Effective
Time.
(iv) Each Share of Target Series B Preferred Stock
issued and outstanding immediately prior to the Effective Time, other than any
Dissenting Shares, shall be converted into the right to receive that number of
shares of Acquiror Series B Preferred Stock determined by dividing (A) the
Series B Liquidation Proceeds by (B) the total number of shares of Target Series
B Preferred Stock issued and outstanding immediately prior to the Effective
Time.
(v) Each Share of Target Series A Preferred Stock
issued and outstanding immediately prior to the Effective Time, other than any
Dissenting Shares, shall be converted into the right to receive that number of
shares of Acquiror Series B Preferred Stock determined by dividing (A) the
Series A Liquidation Proceeds by (B) the total number of shares of Target Series
A Preferred Stock issued and outstanding immediately prior to the Effective
Time.
For the purposes of this Section 1.6(a), the following terms shall have the
following definitions:
"Aggregate Acquiror Series B Shares" means the total
number of shares of Acquiror Series B Preferred Stock issuable in the Merger
without regard to any claim for dissenters rights, calculated by dividing (i)
Net Cash (as defined below) of Target as of the Closing Date by (ii) $2.0238.
"Net Cash" means all cash and cash equivalents less
(i) all long-term liabilities and commitments that would normally be included as
part of a balance sheet prepared in accordance with GAAP, and (ii) an accrual
for all transaction related costs expected to be incurred by Target in
connection with the Merger.
"Residual Shares" means the Aggregate Acquiror
Series B Shares less the aggregate number of shares of Acquiror Series B
Preferred Stock issued to the Target Series D stockholders.
"Series C Liquidation Proceeds" equals the product
of (i) 0.7002 multiplied by (ii) the Residual Shares.
"Series B Liquidation Proceeds" equals the product
of (i) 0.2526 multiplied by (ii) the Residual Shares.
"Series A Liquidation Proceeds" equals the product
of (i) 0.0472 multiplied by (ii) the Residual Shares.
The cash and the shares of Acquiror Series B Preferred Stock issuable pursuant
to this Section are referred to herein as the "Merger Consideration."
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(b) Target Stock Options. At the Effective Time, all
options to purchase Target Common Stock then outstanding under the Target Option
Plan (as defined in Section 2.5) and all other options then outstanding ("Target
Options") shall, by virtue of the Merger and without any action on the part of
the holder thereof, not be assumed and shall terminate, and the Target Option
Plan shall be terminated.
(c) Target Warrants. At the Effective Time, all warrants
to purchase Target Preferred Stock or Target Common Stock then outstanding and
which have not been exercised, cancelled or terminated by its terms prior
thereto ("Target Warrants") shall, by virtue of the Merger and without any
action on the part of the holder thereof, be assumed by Acquiror in accordance
with its terms.
(d) Capital Stock of Merger Sub. At the Effective Time,
each share of Common Stock of Merger Sub ("Merger Sub Common Stock") 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 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.
(e) Adjustments to Exchange Ratio. The respective
exchange ratios set forth in Section 1.6(a) hereof shall be adjusted to reflect
fully the effect of any stock split, reverse split, stock dividend (including
any dividend or distribution of securities convertible into Acquiror Series B
Preferred Stock or Target Capital Stock), reorganization, recapitalization or
other like change with respect to Acquiror Series B Preferred Stock or Target
Capital Stock (including the exercise of any Target Warrants) occurring after
the date hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of
Acquiror Series B Preferred Stock will be issued, but in lieu thereof each
holder of shares of Target Capital Stock who would otherwise be entitled to a
fraction of a share of Acquiror Series B Preferred Stock (after aggregating all
fractional shares of Acquiror Series B Preferred Stock, respectively, to be
received by such holder) shall receive from Acquiror an amount of cash (rounded
to the nearest whole cent) equal to the product of such fraction multiplied by
$2.0238. The fractional share interests of each Target shareholder shall be
aggregated, so that no Target shareholder shall receive cash in respect of
fractional share interests in an amount greater than the value of one full share
of Acquiror Series B Preferred Stock.
(g) Dissenters' Rights. Notwithstanding any provision of
this Agreement to the contrary, any shares of Target Common Stock or Target
Preferred Stock held by a holder who has demanded and perfected such holder's
right for appraisal of such shares in accordance with California Law and who, as
of the Effective Time, has not effectively withdrawn or lost such right to
appraisal ("Dissenting Shares"), if any, shall not be converted into the Merger
Consideration but shall instead be converted into the right to receive such
consideration as may be determined to be due with respect to such Dissenting
Shares pursuant to California Law. Target shall give Acquiror prompt notice of
any demand received by Target to require Target to purchase shares of Target
Capital Stock, and Acquiror shall have the right to direct and participate in
all negotiations and proceedings with respect to such demand. Target
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agrees that, except with the prior written consent of Acquiror, or as required
under the California Law, it will not voluntarily make any payment with respect
to, or settle or offer to settle, any such purchase demand. Each holder of
Dissenting Shares ("Dissenting Shareholder") who, pursuant to the provisions of
California Law, becomes entitled to payment of the fair value for shares of
Target Capital Stock shall receive payment therefore (but only after the value
therefore shall have been agreed upon or finally determined pursuant to such
provisions). If, after the Effective Time, any Dissenting Shares shall lose
their status as Dissenting Shares, Acquiror shall issue and deliver, upon
surrender by such shareholder of a certificate or certificates representing
shares of Target Capital Stock, the portion of the Merger Consideration to which
such shareholder would otherwise be entitled under this Section 1.6 and the
Certificate of Merger, if any, less the portion of the Merger Consideration
allocable to such shareholder that has been deposited in the Escrow Fund in
respect of such shares of Target Common Stock pursuant to Section 1.7(f) and
Section 8 hereof, if any.
(h) Certificate Legends. The shares of Acquiror Series B
Preferred Stock to be issued pursuant to this Section 1.6 shall not have been
registered and shall be characterized as "restricted securities" under the
federal securities laws, and under such laws such shares may be resold without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), only in certain limited circumstances. Each certificate evidencing shares
of Acquiror Series B Preferred Stock to be issued pursuant to this Section 1.6
shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH
SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION WITHOUT AN
EXEMPTION UNDER THE SECURITIES ACT OR AN OPINION
OF LEGAL COUNSEL REASONABLY ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
and any legends required by state securities laws.
1.7 Surrender of Certificates.
(a) Acquiror to Provide Cash. Promptly after the
Effective Time, Acquiror shall make available the cash amount payable pursuant
to Section 1.6(a)(i) in exchange for shares of Target Common Stock outstanding
immediately prior to the Effective Time.
(b) Exchange. Promptly after the Effective Time, but in
no event later than ten business days thereafter, Acquiror shall cause to be
mailed to each holder of record of a certificate or certificates (the
"Certificates") that immediately prior to the Effective Time represented
outstanding shares of Target Capital Stock, whose shares were converted into the
right to receive cash or shares of Acquiror Series B Preferred Stock (and cash
in lieu of fractional shares) pursuant to Section 1.6, (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 receipt of the
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Certificates by the Acquiror, and shall be in such form and have such other
provisions as Acquiror and Target may reasonably specify); (ii) such other
customary documents as may be required pursuant to such instructions; and (iii)
instructions for use in effecting the surrender of the Certificates in exchange
for cash or certificates representing shares of Acquiror Series B Preferred
Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate
for cancellation to Acquiror or to such other agent or agents as may be
appointed by Acquiror, together with such letter of transmittal and other
documents, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefore (i) if the Certificate represents shares of Target
Common Stock, cash in an amount calculated in accordance with Section 1.6(a)(i);
or (ii) if the Certificate represents shares of Target Preferred Stock, (x) a
certificate representing the number of whole shares of Acquiror Series B
Preferred Stock less the number of shares of Acquiror Series B Preferred Stock,
if any, to be deposited in the Escrow Fund on such holder's behalf pursuant to
Sections 1.7(g) and 8 hereof; (y) any dividends or other distributions to which
such holder is entitled pursuant to Section 1.7(b); and (z) cash (without
interest) in respect of fractional shares as provided in Section 1.6(f), and the
Certificate so surrendered shall forthwith be canceled. Until so surrendered,
each outstanding Certificate that prior to the Effective Time represented shares
of Target Capital Stock will be deemed from and after the Effective Time, for
all corporate purposes other than the payment of dividends, to evidence, in the
case of Target Common Stock, the right to receive the cash payment specified in
Section 1.6(a)(i), or in the case of Target Preferred Stock, the ownership of
the number of full shares of Acquiror Series B Preferred Stock into which such
shares of Target Preferred 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.
(c) Distributions With Respect to Unexchanged Shares. No
dividends or other distributions with respect to Acquiror Series B Preferred
Stock with a record date after the Effective Time will be paid to the holder of
any unsurrendered Certificate with respect to the shares of Acquiror Series B
Preferred Stock represented thereby until the holder of record of such
Certificate shall surrender such Certificate. Subject to applicable law,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Acquiror Series B
Preferred Stock issued in exchange therefor, without interest at the time of
such surrender, the amount of any such dividends or other distributions with a
record date after the Effective Time theretofore payable (but for the provisions
of this Section 1.7(b)) with respect to such shares of Acquiror Series B
Preferred Stock.
(d) Transfers of Ownership. At the Effective Time, the
stock transfer books of the Target shall be closed, and there shall be no
further registration of transfers of Target Common Stock or Target Preferred
Stock thereafter on the records of the Target. If any certificate for shares of
Acquiror Series B Preferred Stock is to be issued in a name other than that in
which the Certificate surrendered in exchange therefor is registered, it will be
a condition of the issuance thereof that the Certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Acquiror or any agent designated by
it any transfer or other taxes required by reason of the issuance of a
certificate for shares of Acquiror Series B Preferred Stock in any name other
than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of Acquiror or any agent designated by it that
such tax has been paid or is not payable.
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(e) No Liability. Notwithstanding anything to the
contrary in this Section 1.7, neither the Surviving Corporation nor any party
hereto shall be liable to any person for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
(f) Dissenting Shares. The provisions of this
Section 1.7 shall also apply to Dissenting Shares that lose their status as
such, except that the obligations of Acquiror under this Section 1.7 shall
commence on the date of loss of such status and the holder of such shares shall
be entitled to receive in exchange for such shares the Merger Consideration (and
dividends, distributions and cash in lieu of fractional shares) to which such
holder is entitled pursuant to Section 1.6 hereof.
(g) Escrow. As soon as practicable after the Effective
Time, and subject to and in accordance with the provisions of Section 8 hereof,
Acquiror shall cause to be distributed to the Escrow Agent (as defined in
Section 8 hereof) a certificate or certificates representing 10% of the shares
of Acquiror Series B Preferred Stock to be issued at the Closing in exchange for
the Target Series A, Series B and Series C Preferred Stock (the "Escrow Shares")
(which shall be registered in the name of the Escrow Agent as nominee for the
holders of Certificates canceled pursuant to this Section 1.7). Such shares
shall be beneficially owned by such holders and such shares shall be held in
escrow and shall be available to compensate Acquiror for certain damages as
provided in Section 8. To the extent not used for such purposes, such shares
shall be released, all as provided in Section 8.
1.8 No Further Ownership Rights in Target Capital Stock. The
Merger Consideration (and dividends, distributions or cash paid in lieu of
fractional shares) delivered upon the surrender for exchange of shares of Target
Capital Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Target
Capital Stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Target Capital 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 Section 1.
1.9 Lost, Stolen or Destroyed Certificates. In the event any
Certificates shall have been lost, stolen or destroyed, the Acquiror 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 Merger Consideration (and
dividends, distributions and cash in lieu of fractional shares) as may be
required pursuant to Section 1.6; provided, however, that Acquiror 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 Acquiror or the Surviving Corporation with respect to the Certificates
alleged to have been lost, stolen or destroyed.
1.10 "Market Stand-Off". The Acquiror Series B Preferred Stock
issuable pursuant to this Agreement shall be subject to a restriction such that,
during the period of duration (not to exceed one hundred eighty (180) days)
specified by the Acquiror and an underwriter of Acquiror Common Stock or other
securities of the Acquiror following the
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effective date of a registration statement of the Acquiror filed under the
Securities Act, the holder of such Acquiror Series B Preferred Stock shall not,
to the extent requested by the Acquiror and such underwriter, directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase, pledge or otherwise transfer or
dispose of (other than to donees who agree to be similarly bound) any securities
of the Acquiror held by it at any time during such period except common stock
included in such registration; provided, however, that:
(a) such agreement shall be applicable only to the first
such registration statement of the Acquiror which covers common stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(b) such agreement shall not be required unless all
executive officers, directors and holders of 1% or more of the outstanding
capital stock of the Acquiror enter into similar agreements.
In order to enforce the foregoing covenant, the Acquiror may impose
stop-transfer instructions with respect to the Acquiror Series B Preferred Stock
(and the shares of securities of every other person subject to the foregoing
restriction) until the end of such period.
1.11 Taking of Necessary Action; Further Action. Each of
Acquiror, Merger Sub and Target will take all such reasonable and lawful action
as may be necessary or desirable in order to effectuate the Merger in accordance
with this Agreement as promptly as possible. 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
Target and Merger Sub, the officers and directors of Target and Merger Sub are
fully authorized in the name of their respective corporations or otherwise to
take, and will take, all such lawful and necessary action, so long as such
action is not inconsistent with this Agreement.
1.12 Securities Laws Issues. Acquiror intends to issue the
shares of Acquiror Series B Preferred Stock as provided in this Agreement
pursuant to a "private placement" exemption or exemptions from registration
under Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act and an exemption from qualification under the laws of
the State of California and other applicable state securities laws. Acquiror and
Target shall comply with all applicable provisions of and rules under the
Securities Act and applicable state securities laws in connection with the
offering and issuance of the shares of Acquiror Series B Preferred Stock
pursuant to this Agreement. Such shares of Acquiror Series B Preferred Stock
will be "restricted securities" under the Federal and state securities laws and
cannot be offered or resold except pursuant to registration under the Securities
Act or an available exemption from registration.
2. Representations and Warranties of Target. Target represents and
warrants to Acquiror and Merger Sub that the statements contained in this
Section are true and correct, except as disclosed in a document of even date
herewith and delivered by Target to Acquiror referring to the representations
and warranties in this Agreement (the "Target Disclosure Schedule"). The Target
Disclosure Schedule will be arranged in paragraphs corresponding to the
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numbered and lettered paragraphs contained in this Section 2, and the disclosure
in any such numbered and lettered section of the Target Disclosure Schedule
shall qualify only the corresponding subsection in this Section 2 and any other
subsection hereof where it is reasonably clear, upon reading the disclosure
without any independent knowledge on the part of the reader regarding the matter
disclosed, that the disclosure is intended to apply to such subsection.
2.1 Organization, Standing and Power. Target is a corporation
duly organized, validly existing and in good standing under the laws of the
state of California. Target has the corporate power to own its properties and to
carry on its business as now being conducted and is duly qualified to do
business and is in good standing in each jurisdiction where the properties
owned, leased or operated by it or the nature of its activities make such
qualification and good standing necessary, except if the failure to be so
qualified and in good standing would not reasonably be expected to have a
Material Adverse Effect on Target. Target has delivered or made available to
Acquiror a true and correct copy of the Articles of Incorporation and Bylaws or
other charter documents, as applicable, of Target, each as amended to date, to
Acquiror. Target is not in violation of any of the provisions of its Articles of
Incorporation or Bylaws or equivalent organizational documents. Target has no
Subsidiaries. Except as set forth on Section 2.1 of the Target Disclosure
Schedule, Target does not directly or indirectly own any equity or similar
interest in, or any interest convertible or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.
2.2 Authority. Target has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Target subject only to the
approval of the Merger by Target's shareholders as contemplated by Section
6.1(a). The affirmative vote of the holders of a majority of the shares of
Target Common Stock and two-thirds of the shares of Target Preferred Stock
voting as separate classes outstanding on the record date of the written consent
of Target's shareholders relating to this Agreement is the only vote of the
holders of any of Target's Capital Stock necessary under California Law and
Target's Articles of Incorporation to approve this Agreement and the
transactions contemplated hereby. The Board of Directors of Target has (a)
approved this Agreement and the Merger; (b) determined that in its opinion the
Merger is in the best interests of the shareholders of Target and is on terms
that are fair to such shareholders; and (c) recommended that the shareholders of
Target approve this Agreement and the Merger. This Agreement has been duly
executed and delivered by Target and, assuming the due execution, and delivery
of this Agreement by the other parties thereto, constitutes the valid and
binding obligation of Target enforceable against Target in accordance with its
terms, except that such enforceability may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting or relating to creditors' rights
generally, and is subject to general principles of equity. The execution and
delivery of this Agreement by Target does not, and the consummation of the
transactions contemplated hereby will not conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any material obligation or loss of any material benefit under (a) any provision
of the Articles of Incorporation or Bylaws of Target, as amended; or (b) any
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree,
9
statute, law, ordinance, rule or regulation applicable to Target or any of their
properties or assets. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality ("Governmental
Entity") is required by or with respect to Target in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (a) the filing of the Agreement of Merger,
together with the required officers' certificates, and the filing of the
Certificate of Merger, as provided in Section 1.2; (b) filings required under
Regulation D of the Securities Act of 1933; (c) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable state securities laws and the securities laws of any
foreign country; (d) such filings as may be required under the Xxxx-Xxxxx-Xxxxxx
Antitrust Improvements Act of 1976, as amended ("HSR"); and (e) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not be reasonably expected to have a Material Adverse
Effect on Target and would not reasonably be expected to prevent, or materially
alter or delay, any of the transactions contemplated by this Agreement.
2.3 Governmental Authorization. Target has obtained each
federal, state, county, local or foreign governmental consent, license, permit,
grant, or other authorization of a Governmental Entity (a) pursuant to which
Target currently operates or holds any interest in any of its properties; or (b)
that is required for the operation of Target's business or the holding of any
such interest and all of such authorizations are in full force and effect except
where the failure to obtain or have any such authorizations would not reasonably
be expected to have a Material Adverse Effect on Target.
2.4 Financial Statements. Target has delivered or made
available to Acquiror its unaudited financial statements for the fiscal year
ended December 31, 2001, and its unaudited financial statements (balance sheet,
statement of operations and statement of cash flows) as at and for the
four-month period ended April 30, 2002 (collectively, the "Target Financial
Statements"). The Target Financial Statements have been prepared in accordance
with generally accepted accounting principles (except as disclosed in the notes
thereto and except that the unaudited financial statements do not contain
footnotes and are subject to normal year-end audit adjustments) applied on a
consistent basis throughout the periods indicated and with each other. The
Target Financial Statements fairly present the consolidated financial condition
and operating results of Target as of the dates, and for the periods, indicated
therein, subject to normal year-end audit adjustments and the absence of
footnotes. Target maintains and will continue to maintain a standard system of
accounting established and administered in accordance with generally accepted
accounting principles.
2.5 Capital Structure. The authorized capital stock of Target
consists of 125,000,000 shares of Target Common Stock, of which there were
issued and outstanding as of the date of this Agreement, 13,775,217 shares, and
59,200,139 shares of Target Preferred Stock, of which as of that same date there
were designated 4,545,840 shares of Series A Preferred Stock, 10,545,919 shares
of Series B Preferred Stock and 44,108,380 shares of Series C Preferred Stock.
As of that same date, there were issued and outstanding, 4,545,830 shares of
Series A Preferred Stock, 10,517,918 shares of Series B Preferred Stock and
24,799,106 shares of Series C Preferred Stock. All outstanding shares of Target
Common Stock and Target Preferred Stock are duly authorized, validly issued,
fully paid and non-assessable and are free of
10
any liens or encumbrances other than any liens or encumbrances created by or
imposed upon the holders thereof, and are not subject to preemptive rights or
rights of first refusal created by statute, the Articles of Incorporation or
Bylaws of Target or any agreement to which Target is a party or by which it is
bound. As of that same date, there were 11,947,626 shares of Common Stock
reserved for issuance under Target stock option plans (the "Target Option
Plan"), of which 5,288,235 shares were subject to outstanding options and
3,143,424 shares were reserved for future option grants. As of that same date,
there were 28,000 shares of Series B Preferred Stock and 80,655 shares of Series
C Preferred Stock reserved for issuance upon the exercise of outstanding Target
Warrants, and the Target Warrants are held in the amounts and by the persons set
forth in Section 2.5 of the Target Disclosure Schedule. Target has delivered or
made available to Acquiror true and complete copies of each warrant and warrant
agreement evidencing each Target Warrant and each form of agreement or stock
option plan evidencing each Target Option. Except for the rights created
pursuant to this Agreement and the rights disclosed in the preceding three
sentences, there are no other options, warrants, calls, rights, commitments or
agreements of any character to which Target is a party or by which it is bound,
obligating Target to issue, deliver, sell, repurchase or redeem or cause to be
issued, delivered, sold, repurchased or redeemed, any shares of Target Capital
Stock or obligating Target to grant, extend, accelerate the vesting of, change
the price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. All shares of Target Common Stock issuable upon
conversion of the Target Preferred Stock or upon exercise of the options
described in this Section 2.5, and all shares of Target Preferred Stock issuable
upon exercise of warrants described in this Section 2.5, will be, when issued
pursuant to the respective terms of such Target Preferred Stock, options or
warrants, duly authorized, validly issued, fully paid and nonassessable. There
are no other contracts, commitments or agreements relating to voting, purchase
or sale of Target's capital stock (a) between or among Target and any of its
shareholders; and (b) to Target's knowledge, between or among any of Target's
shareholders, except for the shareholders delivering the Shareholder Agreements
(as hereinafter defined). Certain holders of the outstanding voting stock of
Target, and their affiliates, have executed and delivered to Acquiror, or will
execute and deliver to Acquiror prior to the Closing, a Shareholder Agreement
substantially in the form attached hereto as Exhibit C (collectively, the
"Shareholder Agreements"). All shares of outstanding Target Common Stock and
Target Preferred Stock and rights to acquire Target Capital Stock were issued in
compliance with all applicable federal and state securities laws.
2.6 Absence of Certain Changes. Since April 30, 2002 (the
"Target Balance Sheet Date"), except as contemplated by this Agreement, Target
has conducted its business in the ordinary course consistent with past practice
and there has not occurred (a) any change, event or condition (whether or not
covered by insurance) that has resulted in, or would reasonably be expected to
result in, a Material Adverse Effect on Target; (b) any acquisition, sale or
transfer of any material asset of Target other than in the ordinary course of
business and consistent with past practice; (c) any change in accounting methods
or practices (including any change in depreciation or amortization policies or
rates) by Target or any revaluation by Target of any of its assets; (d) any
declaration, setting aside, or payment of a dividend or other distribution with
respect to the shares of Target or any direct or indirect redemption, purchase
or other acquisition by Target of any of its shares of capital stock; (e) any
Material Contract (as defined in Section 2.14) entered into by Target, other
than in the ordinary course of business and as provided to Acquiror, or any
material amendment or termination of, or default under, any
11
Material Contract; (f) any amendment or change to the Articles of Incorporation
or Bylaws of Target; (g) any increase in or modification of the compensation or
benefits payable or to become payable by Target to any of its directors or
employees; or (h) any negotiation or agreement by Target to do any of the things
described in the preceding clauses (a) through (h) (other than negotiations with
Acquiror and its representatives regarding the transactions contemplated by this
Agreement). At the Effective Time, there will be no accrued but unpaid dividends
on shares of Target's Capital Stock.
2.7 Absence of Undisclosed Liabilities. Target has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (a) those set forth or adequately provided for in the
balance sheet of Target as of the Target Balance Sheet Date (the "Target Balance
Sheet"); (b) those incurred in the ordinary course of business and not required
to be set forth in the Target Balance Sheet under generally accepted accounting
principles; (c) those incurred in the ordinary course of business since the
Target Balance Sheet Date and consistent with past practice; and (d) those
incurred in connection with the execution of this Agreement.
2.8 Litigation. There is no private or governmental action,
suit, proceeding, claim, arbitration or investigation pending before any
Governmental Entity, foreign or domestic, or, to the knowledge of Target,
threatened against Target or any of its properties or any of its officers or
directors (in their capacities as such) that, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect on Target. There
is no judgment, decree or order against Target, or, to the knowledge of Target,
any of its respective directors or officers (in their capacities as such), that
could prevent, enjoin, or materially alter or delay any of the transactions
contemplated by this Agreement, or would reasonably be expected to have a
Material Adverse Effect on Target. All litigation to which Target is a party
(or, to the knowledge of Target, threatened to become a party) is described in
Section 2.8 of the Target Disclosure Schedule.
2.9 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon Target that has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any current or future business practice of Target, any acquisition of property
by Target or the conduct of business by Target as currently conducted or as
proposed to be conducted by Target.
2.10 Intellectual Property.
(a) For purposes of this Agreement, "Intellectual
Property" means:
(i) all issued patents, reissued or reexamined
patents, revivals of patents, utility models, certificates of invention,
registrations of patents and extensions thereof, regardless of country or formal
name (collectively, "Issued Patents");
(ii) all published or unpublished nonprovisional
and provisional patent applications, reexamination proceedings, invention
disclosures and records of invention (collectively "Patent Applications" and,
with the Issued Patents, the "Patents");
12
(iii) all copyrights, copyrightable works,
semiconductor topography and mask work rights, including all rights of
authorship, use, publication, reproduction, distribution, performance
transformation, moral rights and rights of ownership of copyrightable works,
semiconductor topography works and mask works, and all rights to register and
obtain renewals and extensions of registrations, together with all other
interests accruing by reason of international copyright, semiconductor
topography and mask work conventions (collectively, "Copyrights");
(iv) trademarks, registered trademarks,
applications for registration of trademarks, service marks, registered service
marks, applications for registration of service marks, trade names, registered
trade names and applications for registrations of trade names (collectively,
"Trademarks") and domain name registrations;
(v) all technology, ideas, inventions, designs,
proprietary information, manufacturing and operating specifications, know-how,
formulae, trade secrets, technical data, computer programs, hardware, software
and processes; and
(vi) all other intangible assets, properties and
rights (whether or not appropriate steps have been taken to protect, under
applicable law, such other intangible assets, properties or rights).
(b) Target owns and has good and marketable title to, or
possesses legally enforceable rights to use, all Intellectual Property used in
the business of Target as currently conducted or as currently proposed to be
conducted by Target, subject to such exceptions as could not individually or in
the aggregate reasonably be expected to have a Material Adverse Effect on
Target. The Intellectual Property owned by and licensed to Target collectively
constitutes all of the Intellectual Property necessary to enable Target to
conduct its business as such business is currently being conducted. To Target's
knowledge, no current or former officer, director, stockholder, employee,
consultant or independent contractor has any right, claim or interest in or with
respect to any Target Intellectual Property. To Target's knowledge, there is no
unauthorized use, disclosure or misappropriation of any Target Intellectual
Property by any employee or, former employee of Target or by any other third
party. There are no royalties, fees or other payments payable by Target to any
Person under any contract or understanding by reason of the ownership, use, sale
or disposition of Intellectual Property.
(c) With respect to each item of Intellectual Property
incorporated into any product of Target or otherwise used in the business of
Target (except "off the shelf" or other software widely available through
regular commercial distribution channels at a cost not exceeding $15,000 on
standard terms and conditions, as modified for Target's operations) ("Target
Intellectual Property"), Section 2.10 of the Target Disclosure Schedule lists:
(i) all Patents and Patent Applications, all
registered Trademarks, and pending trademark registrations and all registered
Copyrights, including the jurisdictions in which each of such Intellectual
Property has been issued or registered or in which any such application for such
issuance and registration has been filed; and
13
(ii) the following agreements relating to each of
the products of Target (the "Target Products") or other Target Intellectual
Property: all (A) agreements granting any right to distribute or sublicense a
Target Product; (B) any exclusive licenses of Intellectual Property to or from
Target; (C) agreements pursuant to which the amounts actually paid or payable
under firm commitments to Target are $25,000 or more; (D) joint development
agreements; (E) any agreement by which Target grants any ownership right to any
Target Intellectual Property owned by Target; (F) any judicial or governmental
order relating to Intellectual Property; (G) any option to purchase any Target
Intellectual Property; and (H) agreements pursuant to which any party is
explicitly granted any rights to access source code or to use source code to
create derivative works of Target Products.
(d) Section 2.10 of the Target Disclosure Schedule
contains an accurate list as of the date of this Agreement of all licenses,
sublicenses and other agreements to which Target is a party and pursuant to
which Target is authorized to use any Intellectual Property owned by any third
party, excluding "off the shelf" or other software at a cost not exceeding
$15,000 and widely available through regular commercial distribution channels on
standard terms and conditions ("Third Party Intellectual Property").
(e) To Target's knowledge, there is no unauthorized use,
disclosure, infringement or misappropriation of any Target Intellectual
Property, including any Third Party Intellectual Property, by any third party,
including any employee or former employee of Target. Target has not entered into
any agreement to indemnify any other person against any charge of infringement
of any Intellectual Property, other than indemnification provisions entered into
in the ordinary course of business, the forms of which have been delivered to or
made available to Acquiror. There are no future royalties, fees or other
payments payable by Target to any Person by reason of the ownership, use, sale
or disposition of Intellectual Property.
(f) Target is not in material breach of any license,
sublicense or other agreement relating to the Target Intellectual Property or
Third Party Intellectual Property. Neither the execution, delivery or
performance of this Agreement or any ancillary agreement contemplated hereby nor
the consummation of the Merger or any of the transactions contemplated by this
Agreement will materially contravene or conflict with or result in any material
limitation on the Acquiror's right to own or use any Target Intellectual
Property, including any Third Party Intellectual Property.
(g) To Target's knowledge, all Patents, registered
Trademarks, registered service marks and registered Copyrights held by Target
are valid and subsisting. All maintenance and annual fees have been fully paid
and all fees paid during prosecution and after issuance of any Patent comprising
or relating to such item have been paid in the correct entity status amounts.
Target is not infringing, misappropriating or making unlawful use of, or
received any notice or other communication (in writing or otherwise) of any
actual, alleged, possible or potential infringement, misappropriation or
unlawful use of any proprietary asset owned or used by any third party. There is
no proceeding pending or, to Target's knowledge, threatened, nor has any claim
or demand been made that challenges the legality, validity, enforceability or
ownership of any item of Target Intellectual Property or Third Party
Intellectual Property or alleges a claim of infringement of any Patents,
Copyrights, Trademarks or service marks, or violation of any trade secret or
other proprietary right of any third party. Target has
14
not brought a proceeding alleging infringement of Target Intellectual Property
or breach of any license or agreement involving Intellectual Property against
any third party.
(h) All current and former officers and employees of
Target have executed and delivered to Target an agreement (containing no
material exceptions or exclusions from the scope of its coverage) regarding the
protection of proprietary information and the assignment to Target of any
Intellectual Property arising from services performed for Target by such
persons, the form of which has been supplied to Acquiror. All current and former
consultants and independent contractors to Target involved in the development,
modification, marketing and servicing of any Target Products or Target
Intellectual Property have executed and delivered to Target an agreement
substantially in the form provided or made available to Acquiror or its counsel
(containing no material exceptions or exclusions from the scope of its coverage)
regarding the protection of proprietary information and the assignment to Target
of any Intellectual Property arising from services performed for Target by such
persons. To Target's knowledge, no employee or independent contractor of Target
is in violation of any term of any patent disclosure agreement or employment
contract or any other contract or agreement relating to the relationship of any
such employee or independent contractor with Target.
(i) Target has taken commercially reasonable and
customary measures and precautions necessary to protect and maintain the
confidentiality of all Target Intellectual Property (except such Target
Intellectual Property whose value would be unimpaired by public disclosure) and
otherwise to maintain and protect the full value of all Target Intellectual
Property. All use, disclosure or appropriation of Intellectual Property not
otherwise protected by patents, patent applications or copyright ("Confidential
Information") owned by Target by or to a third party has been pursuant to the
terms of a written agreement between Target and such third party in a form
provided or made available to Acquiror. To Target's knowledge, all use,
disclosure or appropriation of Confidential Information not owned by Target has
been pursuant to the terms of a written agreement between Target and the owner
of such Confidential Information, or is otherwise lawful.
(j) No product liability claims have been communicated
in writing to or, to Target's knowledge, threatened against Target.
(k) A complete list of each of the Target Products and
Target's proprietary software ("Target Software"), together with a brief
description of each, is set forth in Section 2.10 of the Target Disclosure
Schedule.
(l) Target is not subject to any proceeding or
outstanding decree, order, judgment or stipulation restricting in any manner the
use, transfer or licensing of any Target Intellectual Property by Target, or
which may materially affect the validity, use or enforceability of such Target
Intellectual Property. Target is not subject to any agreement that restricts in
any material respect the use, transfer, delivery or licensing by Target of the
Target Intellectual Property or Target Products.
2.11 Interested Party Transactions. Target is not indebted to
any director, officer, employee or agent of Target (except for amounts due as
normal salaries and bonuses and in reimbursement of ordinary expenses), and no
such person is indebted to Target. Since
15
January 1, 2000, there have been no transactions that would require disclosure
if Target were subject to disclosure under Item 404 of Regulation S-K under the
Securities Act.
2.12 Minute Books. The minute book of Target contains a
materially complete and accurate summary of all meetings of directors and
shareholders or actions by written consent since the time of incorporation of
Target through the date of this Agreement, and reflect all transactions referred
to in such minutes accurately in all material respects.
2.13 Complete Copies of Materials. Target has delivered or made
available true and complete copies of each document that has been requested by
Acquiror or its counsel in connection with their due diligence review of Target.
2.14 Material Contracts. All of Target's Material Contracts are
listed in Section 2.14 of the Target Disclosure Schedule. With respect to each
Material Contract (a) the Material Contract is legal, valid, binding and
enforceable and in full force and effect with respect to Target, and to Target's
knowledge is legal, valid, binding, enforceable and in full force and effect
with respect to each other party thereto, in either case subject to the effect
of bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and except as the availability of
equitable remedies may be limited by general principles of equity; (b) the
Material Contract will continue to be legal, valid, binding and enforceable and
in full force and effect immediately following the Effective Time in accordance
with its terms as in effect prior to the Effective Time, subject to the effect
of bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and except as the availability of
equitable remedies may be limited by general principles of equity; and (c)
neither Target nor, to Target's knowledge, any other party, is in material
breach or default, and no event has occurred that with notice or lapse of time
would constitute a material breach or default by Target or, to Target's
knowledge, by any such other party, or permit termination, modification or
acceleration, under such Material Contract. Target is not a party to any oral
contract, agreement or other arrangement. "Material Contract" means any
contract, agreement or commitment to which Target is a party and that has not
terminated or expired in accordance with its terms (i) with expected future
receipts or expenditures in excess of $20,000; (ii) required to be listed
pursuant to Section 2.10(c)(ii) or Section 2.10(d); (iii) requiring Target to
indemnify any Person; (iv) granting any exclusive rights to any party; (v)
evidencing indebtedness for borrowed or loaned money of $5,000 or more,
including guarantees of such indebtedness; or (vi) that would reasonably be
expected to have a Material Adverse Effect on Target if breached by Target in
such a manner as would (I) permit any other party to cancel or terminate the
same (with or without notice of passage of time); (II) provide a basis for any
other party to claim money damages (either individually or in the aggregate with
all other such claims under that contract) from Target; or (III) give rise to a
right of acceleration of any material obligation or loss of any material benefit
under such Material Contract.
2.15 Inventory. The inventories shown on the Target Balance
Sheet or thereafter acquired by Target, were acquired and maintained in the
ordinary course of business, are of good and merchantable quality, and consist
of items of a quantity and quality usable or salable in the ordinary course of
business. Since the Target Balance Sheet Date, Target has continued to replenish
inventories in a normal and customary manner consistent with past practices. The
values at which inventories are carried reflect the inventory valuation policy
of
16
Target, which is consistent with its past practice and in accordance with
generally accepted accounting principles applied on a consistent basis. Target
is not under any liability or obligation with respect to the return of any item
of inventory in the possession of wholesalers, retailers or other customers.
Since the Target Balance Sheet Date, adequate provision has been made on the
books of Target in the ordinary course of business consistent with past
practices to provide for all slow-moving, obsolete or unusable inventories to
their estimated useful or scrap values, and such inventory reserves are adequate
to provide for such slow-moving, obsolete or unusable inventory and inventory
shrinkage.
2.16 Accounts Receivable. Subject to any reserves set forth
therein, the accounts receivable shown on the Target Financial Statements are
valid and genuine, have arisen solely out of bona fide sales and deliveries of
goods, performance of services, and other business transactions in the ordinary
course of business consistent with past practices in each case with persons
other than affiliates, are not subject to any prior assignment, lien or security
interest, and are not subject to valid defenses, set-offs or counter claims. The
accounts receivable are collectible in accordance with the terms of their
recorded amounts, subject only to the reserve for doubtful accounts on the
Target Financial Statements.
2.17 Customers and Suppliers. As of the date hereof, no material
customer and no material supplier of Target has canceled or otherwise
terminated, or made any written threat to Target to cancel or otherwise
terminate its relationship with Target or has at any time on or after the Target
Balance Sheet Date, decreased materially its services or supplies to Target in
the case of any such supplier, or its usage of the services or products of
Target in the case of such customer, and to Target's knowledge no such supplier
or customer has indicated either orally or in writing that it intends to cancel
or otherwise terminate its relationship with Target or to decrease materially
its services or supplies to Target or its usage of the services or products of
Target, as the case may be. Target has not knowingly breached, so as to provide
a benefit to Target that was not intended by the parties, any agreement with, or
engaged in any fraudulent conduct with respect to, any customer or supplier of
Target.
2.18 Employees and Consultants. Section 2.18 of the Target
Disclosure Schedule or a letter delivered to Acquiror by Target contains a list
of the names of all employees (including without limitation part-time employees
and temporary employees), leased employees, independent contractors and
consultants of Target, together with their respective salaries or wages, other
compensation, dates of employment and positions.
2.19 Title to Property. Target has good and valid title to all
of its properties, interests in properties and assets, real and personal,
reflected in the Target Balance Sheet or acquired after the Target Balance Sheet
Date (except properties, interests in properties and assets sold or otherwise
disposed of since the Target Balance Sheet Date in the ordinary course of
business), or with respect to leased properties and assets, valid leasehold
interests therein, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any kind or character, except (a) the lien of current taxes not
yet due and payable; (b) such imperfections of title, liens and easements as do
not and will not materially detract from or interfere with the use of the
properties subject thereto or affected thereby, or otherwise materially impair
business operations involving such properties; (c) liens securing debt that is
reflected on the Target Balance Sheet; and (d) such other mortgages, liens,
pledges, charges or encumbrances that would not,
17
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Target. The plants, property and equipment of Target that are
used in the operations of Target's business are in all material respects in good
operating condition and repair, subject to normal wear and tear. All properties
used in the operations of Target are reflected in the Target Balance Sheet to
the extent required by generally accepted accounting principles. All leases to
which Target is a party are in full force and effect and are valid, binding and
enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting or relating to creditors' rights generally; and general
principles of equity, regardless of whether asserted in a proceeding in equity
or at law. True and correct copies of all such leases have been provided or made
available to Acquiror. Target owns no real property.
2.20 Environmental Matters.
(a) The following terms shall be defined as follows:
(i) "Environmental Laws" shall mean any
applicable foreign, federal, state or local governmental laws (including common
laws), statutes, ordinances, codes, regulations, rules, policies, permits,
licenses, certificates, approvals, judgments, decrees, orders, directives, or
requirements that pertain to the protection of the environment, protection of
public health and safety, or protection of worker health and safety, or that
pertain to the handling, use, manufacturing, processing, storage, treatment,
transportation, discharge, release, emission, disposal, re-use, recycling, or
other contact or involvement with Hazardous Materials , including, without
limitation, the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601, et seq., as amended ("CERCLA"),
and the federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., as amended ("RCRA").
(ii) "Hazardous Materials" shall mean any
material, chemical, compound, substance, mixture or by-product that is
identified, defined, designated, listed, restricted or otherwise regulated under
Environmental Laws as a "hazardous constituent," "hazardous substance,"
"hazardous material," "acutely hazardous material," "extremely hazardous
material," "hazardous waste," "hazardous waste constituent," "acutely hazardous
waste," "extremely hazardous waste," "infectious waste," "medical waste,"
"biomedical waste," "pollutant," "toxic pollutant," "contaminant" or any other
formulation or terminology intended to classify or identify substances,
constituents, materials or wastes by reason of properties that are deleterious
to the environment, natural resources, worker health and safety, or public
health and safety, including without limitation ignitability, corrosivity,
reactivity, carcinogenicity, toxicity and reproductive toxicity. The term
"Hazardous Materials" shall include without limitation any "hazardous
substances" as defined, listed, designated or regulated under CERCLA, any
"hazardous wastes" or "solid wastes" as defined, listed, designated or regulated
under RCRA, any asbestos or asbestos-containing materials, any polychlorinated
biphenyls, and any petroleum or hydrocarbonic substance, fraction, distillate or
by-product.
(b) Target is and has been in compliance with all
Environmental Laws relating to the properties or facilities used, leased or
occupied by Target at any time (collectively, "Target's Facilities;" such
properties or facilities currently used, leased or occupied by Target are
18
defined herein as "Target's Current Facilities"), and no discharge, emission,
release, leak or spill of Hazardous Materials has occurred at any of Target's
Facilities that may or will give rise to liability of Target under Environmental
Laws. To Target's knowledge, there are no Hazardous Materials (including without
limitation asbestos) present in the surface waters, structures, groundwaters or
soils of or beneath any of Target's Current Facilities. To Target's knowledge,
there neither are nor have been any aboveground or underground storage tanks for
Hazardous Materials at Target's Current Facilities. To Target's knowledge, no
Target employee or other person has claimed that Target is liable for alleged
injury or illness resulting from an alleged exposure to a Hazardous Material. No
civil, criminal or administrative action, proceeding or investigation is pending
against Target, or, to Target's knowledge, threatened against Target, with
respect to Hazardous Materials or Environmental Laws; and Target is not aware of
any facts or circumstances that could form the basis for assertion of a claim
against Target or that could form the basis for liability of Target, regarding
Hazardous Materials or regarding actual or potential noncompliance with
Environmental Laws.
2.21 Taxes.
(a) As used in this Agreement, the terms "Tax" and,
collectively, "Taxes" mean any and all federal, state and local taxes of any
country, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, stamp 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) Target has prepared and timely filed all returns,
estimates, information statements and reports required to be filed by Target on
or before the Closing Date with any taxing authority ("Returns") relating to any
and all Taxes concerning or attributable to Target or its operations with
respect to Taxes for any period ending on or before the Closing Date and, except
to the extent a reserve for Taxes has been established on the Target Balance
Sheet, such Returns are true and correct in all material respects and have been
completed in accordance with applicable law;
(c) Target, as of the Effective Time, (i) will have paid
all Taxes it is required to pay, except to the extent a reserve for Taxes has
been established on the Target Balance Sheet; and (ii) will have withheld with
respect to its employees all Taxes required to be withheld;
(d) There is no material Tax deficiency outstanding or
assessed or, to Target's knowledge, proposed against Target that is not
reflected as a liability on the Target Balance Sheet, nor has Target executed
any agreements or waivers extending any statute of limitations on or extending
the period for the assessment or collection of any Tax;
(e) Target has no material liabilities for unpaid Taxes
that have not been accrued for or reserved on the Target Balance Sheet, whether
asserted or unasserted,
19
contingent or otherwise and Target has no knowledge of any basis for the
assertion of any such liability attributable to Target, its assets or
operations;
(f) Target is not a party to any tax-sharing agreement
or similar arrangement with any other party, and Target has not assumed any
obligation to pay any Tax obligations of, or with respect to any transaction
relating to, any other person or agreed to indemnify any other person with
respect to any Tax;
(g) Target's Returns have never been audited by a
government or taxing authority, nor is any such audit in process or pending, and
Target has not been notified of any request for such an audit or other
examination;
(h) Target has never been a member of an affiliated
group of corporations filing a consolidated federal income tax return;
(i) Target has disclosed to Acquiror (i) any Tax
exemption, Tax holiday or other Tax-sparing arrangement that Target has in any
jurisdiction, including the nature, amount and lengths of such Tax exemption,
Tax holiday or other Tax-sparing arrangement; and (ii) any expatriate tax
programs or policies affecting Target. Target is in compliance with all terms
and conditions required to maintain such Tax exemption, Tax holiday or other
Tax-sparing arrangement or order of any governmental entity and the consummation
of the transactions contemplated hereby will not have any adverse effect on the
continuing validity and effectiveness of any such Tax exemption, Tax holiday or
other Tax-sparing arrangement or order;
(j) Target has made available to Acquiror copies of all
Returns filed for all periods since Target's inception;
(k) Target has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(4) apply to any
disposition of assets owned by Target;
(l) Target has not been at any time a United States Real
Property Holding Corporation within the meaning of Section 897(c)(2) of the
Code; and
(m) Target is not a party to any contract, agreement,
plan or arrangement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of Target that, individually
or collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 464 or 162(m) of the Code by Target or
Merger Sub as an expense under applicable law.
2.22 Employee Benefit Plans.
(a) Section 2.22 of the Target Disclosure Schedule
contains a complete and accurate list of each plan, program, policy, practice,
contract, agreement or other arrangement that has not terminated or expired in
accordance with its terms providing for employment, compensation, retirement,
deferred compensation, loans, severance, separation, relocation, repatriation,
expatriation, visas, work permits, termination pay, performance awards, bonus,
incentive, stock option, stock purchase, stock bonus, phantom stock, stock
appreciation
20
right, supplemental retirement, fringe benefits, cafeteria benefits or other
benefits, whether written or unwritten, including without limitation each
"employee benefit plan" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), which is or has
been sponsored, maintained, contributed to, or required to be contributed to by
Target and, with respect to any such plans which are subject to Code Section
401(a), any trade or business (whether or not incorporated) that is or at any
relevant time was treated as a single employer with Target within the meaning of
Section 414(b), (c), (m) or (o) of the Code, (an "ERISA Affiliate") for the
benefit of any person who performs or who has performed services for Target or
with respect to which Target or any ERISA Affiliate has or may have any
liability (including without limitation contingent liability) or obligation
(collectively, the "Target Employee Plans"). Section 2.22 of the Target
Disclosure Schedule separately lists each Target Employee Plan that has been
adopted or maintained by Target, whether formally or informally, for the benefit
of employees outside the United States (collectively, the "Target International
Employee Plans").
(b) Documents. To the extent requested by Acquiror,
Target has furnished to Acquiror true and complete copies of documents embodying
each of the Target Employee Plans and related plan documents, including without
limitation trust documents, group annuity contracts, plan amendments, insurance
policies or contracts, participant agreements, employee booklets, administrative
service agreements, summary plan descriptions, compliance and nondiscrimination
tests for the last three plan years, standard COBRA forms and related notices,
registration statements and prospectuses and, to the extent still in its
possession, any material employee communications relating thereto. With respect
to each Target Employee Plan that is subject to ERISA reporting requirements,
Target has provided or made available copies of the Form 5500 reports filed for
the last three plan years. Target has furnished or made available to Acquiror
the most recent Internal Revenue Service determination or opinion letter issued
with respect to each such Target Employee Plan, and to Target's knowledge
nothing has occurred since the issuance of each such letter that could
reasonably be expected to cause the loss of the tax-qualified status of any
Target Employee Plan subject to Code Section 401(a).
(c) Compliance. (i) Each Target Employee Plan has been
administered in accordance with its terms and in compliance with the
requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code), except as would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Target; and
Target and each ERISA Affiliate have performed all material obligations required
to be performed by them under, are not in material respect in default under or
violation of and have no knowledge of any material default or violation by any
other party to, any of the Target Employee Plans; (ii) any Target Employee Plan
intended to be qualified under Section 401(a) of the Code has either obtained
from the Internal Revenue Service a favorable determination letter as to its
qualified status under the Code, including all currently effective amendments to
the Code, or has time remaining to apply under applicable Treasury Regulations
or Internal Revenue Service pronouncements for a determination or opinion letter
and to make any amendments necessary to obtain a favorable determination or
opinion letter; (iii) none of the Target Employee Plans promises or provides
retiree medical or other retiree welfare benefits to any person; (iv) there has
been no "prohibited transaction," as such term is defined in Section 406 of
ERISA or Section 4975 of the Code, with respect to any Target Employee Plan; (v)
none of Target or any ERISA Affiliate is subject to any liability or penalty
under Sections 4976 through 4980 of
21
the Code or Title I of ERISA with respect to any Target Employee Plan; (vi) all
contributions required to be made by Target or any ERISA Affiliate to any Target
Employee Plan have been paid or accrued; (vii) with respect to each Target
Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the thirty (30) day notice requirement has
been waived under the regulations to Section 4043 of ERISA) nor any event
described in Section 4062, 4063 or 4041 or ERISA has occurred; (viii) each
Target Employee Plan subject to ERISA has prepared in good faith and timely
filed all requisite governmental reports, which were true and correct as of the
date filed, and has properly and timely filed and distributed or posted all
notices and reports to employees required to be filed, distributed or posted
with respect to each such Target Employee Plan; (ix) no suit, administrative
proceeding, action or other litigation has been brought, or to the knowledge of
Target is threatened, against or with respect to any such Target Employee Plan,
including any audit or inquiry by the IRS or United States Department of Labor;
and (x) there has been no amendment to, written interpretation or announcement
by Target or any ERISA Affiliate that would materially increase the expense of
maintaining any Target Employee Plan above the level of expense incurred with
respect to that Plan for the most recent fiscal year included in the Target
Financial Statements.
(d) No Title IV or Multiemployer Plan. Neither Target
nor any ERISA Affiliate has ever maintained, established, sponsored,
participated in, contributed to, or is obligated to contribute to, or otherwise
incurred any obligation or liability (including without limitation any
contingent liability) under any "multiemployer plan" (as defined in Section
3(37) of ERISA) or to any "pension plan" (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA or Section 412 of the Code. None of Target or any
ERISA Affiliate has any actual or potential withdrawal liability (including
without limitation any contingent liability) for any complete or partial
withdrawal (as defined in Sections 4203 and 4205 of ERISA) from any
multiemployer plan.
(e) COBRA, FMLA, HIPAA, Cancer Rights. With respect to
each Target Employee Plan, Target has complied with (i) the applicable health
care continuation and notice provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") and the regulations thereunder or any state
law governing health care coverage extension or continuation; (ii) the
applicable requirements of the Family and Medical Leave Act of 1993 and the
regulations thereunder; (iii) the applicable requirements of the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"); and (iv) the
applicable requirements of the Cancer Rights Act of 1998, except to the extent
that such failure to comply would not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect on Target. Target has no
material unsatisfied obligations to any employees, former employees or qualified
beneficiaries pursuant to COBRA, HIPAA or any state law governing health care
coverage extension or continuation.
(f) Effect of Transaction. The consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee or other service provider of Target or any ERISA Affiliate to
severance benefits or any other payment (including without limitation
unemployment compensation, golden parachute, bonus or benefits under any Target
Employee Plan), or (ii) accelerate the time of payment or vesting of any such
benefits or increase the amount of compensation due any such employee or service
provider. No
22
benefit payable or that may become payable by Target pursuant to any Target
Employee Plan or as a result of or arising under this Agreement shall constitute
an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code)
subject to the imposition of an excise Tax under Section 4999 of the Code or the
deduction for which would be disallowed by reason of Section 280G of the Code.
Except as required by law, each Target Employee Plan can be amended, terminated
or otherwise discontinued after the Effective Time in accordance with its terms,
without material liability to Acquirer or Target other than ordinary
administration expenses typically incurred in a termination event.
2.23 Employee Matters. Target is in compliance with all
currently applicable laws and regulations respecting terms and conditions of
employment, including without limitation applicant and employee background
checking, immigration laws, discrimination laws, verification of employment
eligibility, employee leave laws, classification of workers as employees and
independent contractors, wage and hour laws, and occupational safety and health
laws, except as would not reasonably be expected to have Material Adverse Effect
on Target. There are no proceedings pending or, to Target's knowledge,
reasonably expected or threatened, between Target, on the one hand, and any or
all of its current or former employees, on the other hand, including without
limitation any claims for actual or alleged harassment or discrimination based
on race, national origin, age, sex, sexual orientation, religion, disability, or
similar tortious conduct, breach of contract, wrongful termination, defamation,
intentional or negligent infliction of emotional distress, interference with
contract or interference with actual or prospective economic disadvantage. There
are no claims pending, or, to Target's knowledge, reasonably expected or
threatened, against Target under any workers' compensation or long-term
disability plan or policy. Target is not a party to any collective bargaining
agreement or other labor union contract, nor does Target know of any activities
or proceedings of any labor union to organize its employees. Target has provided
all employees with all wages, benefits, relocation benefits, stock options,
bonuses and incentives, and all other compensation that became due and payable
through the date of this Agreement.
2.24 Insurance. Section 2.24 of the Target Disclosure Schedule
lists all policies of insurance and bonds under which Target is a named insured
or is otherwise the principal beneficiary of coverage. There is no material
claim pending under any of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such policies or bonds.
All premiums due and payable under all such policies and bonds have been paid
and Target is otherwise in compliance in all material respects with the terms of
such policies and bonds. Target has no knowledge of any threatened termination
of, or material premium increase with respect to, any of such policies.
2.25 Compliance With Laws. Target has complied in all material
respects with, is not in violation of and has not received any notices of
violation with respect to, any federal state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business.
2.26 Brokers' and Finders' Fee. No broker, finder or investment
banker is entitled to brokerage or finders' fees or agents' commissions or
investment bankers' fees or any similar charges in connection with the Merger,
this Agreement or any transaction contemplated hereby.
23
2.27 Representations Complete. None of the representations or
warranties made by Target herein or in any Schedule or Exhibit hereto, including
the Target Disclosure Schedule, or certificate furnished by Target pursuant to
this Agreement or any written statement furnished to Acquiror pursuant hereto or
in connection with the transactions contemplated hereby, when all such documents
are read together in their entirety, contain, or will contain at the Effective
Time any untrue statement of a material fact, or omits or will omit at the
Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading; provided, however, that for purposes of this
representation, any document attached hereto and any document specifically
referenced in the Target Disclosure Schedule as a "Superseding Document" (even
if not attached hereto) that provides information inconsistent with or in
addition to any other written statement furnished to Acquiror in connection with
the transaction contemplated hereby, shall be deemed to supersede any other
document or written statement furnished to Acquiror with respect to such
inconsistent or additional information.
3. Representations and Warranties of Acquiror and Merger Sub.
Acquiror and Merger Sub represent and warrant to Target that the statements
contained in this Section 3 are true and correct, except as disclosed in a
document of even date herewith and delivered by Acquiror to Target referring to
the representations and warranties in this Agreement (the "Acquiror Disclosure
Schedule"). The Acquiror Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Section
3, and the disclosure in any such numbered and lettered section of the Acquiror
Disclosure Schedule shall qualify only the corresponding subsection in this
Section 3 and any other subsection hereof where it is reasonably clear, upon
reading the disclosure without any independent knowledge on the part of the
reader regarding the matter disclosed, that the disclosure is intended to apply
to such subsection.
3.1 Organization, Standing and Power. Acquiror is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Delaware. Acquiror has the corporate power to own its properties and to
carry on its business as now being conducted and is duly qualified to do
business and is in good standing in each jurisdiction where the properties
owned, leased or operated by it or the nature of its activities make such
qualification and good standing necessary, except if the failure to be so
qualified and in good standing would not reasonably be expected to have a
Material Adverse Effect on Acquiror. Acquiror has delivered or made available to
Target a true and correct copy of the Certificate of Incorporation and Bylaws or
other charter documents, as applicable, of Acquiror, each as amended to date, to
Target. Acquiror is not in violation of any of the provisions of its Certificate
of Incorporation or Bylaws or equivalent organizational documents.
3.2 Authority. Acquiror has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and Merger Sub. This
Agreement has been duly executed and delivered by Acquiror and Merger Sub and
constitutes the valid and binding obligation of Acquiror and Merger Sub
enforceable against Acquiror and Merger Sub in accordance with its terms, except
that such enforceability may be limited by bankruptcy, insolvency, moratorium or
other similar laws
24
affecting or relating to creditors' rights generally, and is subject to general
principles of equity. The execution and delivery of this Agreement by Acquiror
does not, and the consummation of the transactions contemplated hereby will not
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any material obligation or loss of any material
benefit under (a) any provision of the Certificate of Incorporation or Bylaws of
Acquiror, as amended; or (b) any mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Acquiror or any of their properties or assets, except in the case of clause (b),
for such conflicts, violations, defaults, rights of termination, cancellation or
acceleration that would not individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on Acquiror. No consent, approval,
order or authorization of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to Acquiror in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (a) the filing of the Agreement of
Merger, together with the required officers' certificates, and the filing of the
Certificate of Merger, as provided in Section 1.2; (b) filings required under
Regulation D of the Securities Act of 1933; (c) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable state securities laws and the securities laws of any
foreign country; (d) such filings as may be required under the HSR; and (e) such
other consents, authorizations, filings, approvals and registrations which, if
not obtained or made, could not be reasonably expected to have a Material
Adverse Effect on Acquiror and would not reasonably be expected to prevent, or
materially alter or delay, any of the transactions contemplated by this
Agreement.
3.3 Governmental Authorization. Acquiror has obtained each
federal, state, county, local or foreign governmental consent, license, permit,
grant, or other authorization of a Governmental Entity (a) pursuant to which
Acquiror currently operates or holds any interest in any of its properties; or
(b) that is required for the operation of Acquiror's business or the holding of
any such interest and all of such authorizations are in full force and effect
except where the failure to obtain or have any such authorizations would not
reasonably be expected to have a Material Adverse Effect on Acquiror.
3.4 Financial Statements. Acquiror has delivered or made
available to Target its audited financial statements for the fiscal year ended
December 31, 2001, and its unaudited financial statements (balance sheet,
statement of operations and statement of cash flows) on a consolidated basis as
at and for the three-month period ended March 31, 2002 (collectively, the
"Acquiror Financial Statements"). The Acquiror Financial Statements have been
prepared in accordance with generally accepted accounting principles (except as
disclosed in the notes thereto and except that the unaudited financial
statements do not contain footnotes and are subject to normal year-end audit
adjustments) applied on a consistent basis throughout the periods indicated and
with each other. The Financial Statements fairly present the consolidated
financial condition and operating results of Acquiror as of the dates, and for
the periods, indicated therein, subject to normal year-end audit adjustments and
the absence of footnotes in the case of the unaudited Financial Statements.
Acquiror maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles.
25
3.5 Capital Structure. The authorized capital stock of Acquiror
consists of 300,000,000 shares of Acquiror Common Stock, of which there were
issued and outstanding as of May 31, 2002, 96,753,027 shares, and 125,000,000
shares of Acquiror Preferred Stock, of which as of that same date there were
designated 125,000,000 shares of Series A Preferred Stock. Collectively, the
Acquiror Common Stock and Acquiror Preferred Stock are referred to herein as the
"Acquiror Capital Stock." As of that same date, there were issued and
outstanding, 125,000,000 shares of Series A Preferred, convertible into
125,000,000 shares of Common Stock. All outstanding shares of Acquiror Common
Stock and Acquiror Preferred Stock are duly authorized, validly issued, fully
paid and non-assessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof, and are
not subject to preemptive rights or rights of first refusal created by statute,
the Certificate of Incorporation or Bylaws of Acquiror or any agreement to which
Acquiror is a party or by which it is bound. As of that same date, there were
50,500,174 shares of Common Stock reserved for issuance under the Acquiror stock
option plans (the "Acquiror Option Plan"), of which 10,770,467 shares were
subject to outstanding options and 26,577,387 shares were reserved for future
option grants. As of that same date, there were 275,000 shares of Common Stock
reserved for issuance upon the exercise of outstanding Acquiror warrants. Except
for the rights created pursuant to this Agreement and the rights disclosed in
this Section, there are no other options, warrants, calls, rights, commitments
or agreements of any character to which Acquiror is a party or by which it is
bound, obligating Acquiror to issue, deliver, sell, repurchase or redeem or
cause to be issued, delivered, sold, repurchased or redeemed, any shares of
Acquiror Capital Stock. All shares of Common Stock issuable upon conversion of
the Acquiror Preferred Stock or upon exercise of the options and warrants
described in this Section, will be, when issued pursuant to the respective terms
of such Preferred Stock, options or warrants, duly authorized, validly issued,
fully paid and nonassessable. There are no other contracts, commitments or
agreements relating to voting, purchase or sale of Acquiror's capital stock (a)
between or among Acquiror and any of its shareholders; and (b) to Acquiror's
knowledge, between or among any of Acquiror's shareholders. All shares of
outstanding Acquiror Common Stock and Acquiror Preferred Stock and rights to
acquire Acquiror Capital Stock were issued in compliance with all applicable
federal and state securities laws.
3.6 Issuance of Shares. The issuance and delivery of the (i)
Acquiror Series B Preferred Stock as Merger Consideration in accordance with
this Agreement and (ii) the Acquiror Common Stock issuable upon the conversion
of the Acquiror Series B Preferred Stock (the "Conversion Shares"), shall be, at
or prior to the Effective Time, duly authorized by all necessary corporate
action on the part of Acquiror, and, when issued at the Effective Time as
contemplated hereby or upon conversion of the Acquiror Series B Preferred Stock
in accordance with the terms of Acquiror's Certificate of Incorporation, such
shares of Acquiror Series B Preferred Stock and the Conversion Shares will be
duly and validly issued, fully paid and nonassessable, and assuming the accuracy
of Target's representations, warranties and covenants hereunder and the accuracy
of the Target Preferred Stockholders' representations, warranties and covenants
in the Investor Representation Statements (as defined in Section 6.2(i)), will
be issued in compliance with all applicable Federal and State securities laws.
Such Acquiror Series B Preferred Stock and Conversion Shares, when so issued and
delivered in accordance with the provisions of this Agreement or upon conversion
of the Acquiror Series B Preferred Stock in accordance with the terms of
Acquiror's Certificate of Incorporation, shall be free and clear of all liens
and encumbrances and adverse claims, other than restrictions on transfer created
by
26
applicable securities laws and will not have been issued in violation of their
respective properties or any preemptive rights or rights of first refusal or
similar rights.
3.7 Absence of Certain Changes. Since March 31, 2002 (the
"Acquiror Balance Sheet Date"), Acquiror has conducted its business in the
ordinary course consistent with past practice and there has not occurred (a) any
change, event or condition (whether or not covered by insurance) that has
resulted in, or would reasonably be expected to result in, a Material Adverse
Effect on Acquiror; (b) any acquisition, sale or transfer of any material asset
of Acquiror other than in the ordinary course of business and consistent with
past practice; (c) any change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by Acquiror or any
revaluation by Acquiror of any of its assets; (d) any declaration, setting
aside, or payment of a dividend or other distribution with respect to the shares
of Acquiror or any direct or indirect redemption, purchase or other acquisition
by Acquiror of any of its shares of capital stock; (e) any Acquiror Material
Contract (as defined in Section 3.16) entered into by Acquiror, other than in
the ordinary course of business and as provided to Target, or any material
amendment or termination of, or any default under, any Acquiror Material
Contract, (f) any amendment or change to the Certificate of Incorporation or
Bylaws of Acquiror, [except as contemplated by the Acquiror Restructuring]; (g)
any increase in or modification of the compensation or benefits payable or to
become payable by Acquiror to any of its directors or employees other than in
the ordinary course of business consistent with past practice; or (h) any
negotiation or agreement by Acquiror to do any of the things described in the
preceding clauses (a) through (h) (other than negotiations with Target and its
representatives regarding the transactions contemplated by this Agreement). At
the Effective Time, there will be no accrued but unpaid dividends on shares of
Acquiror's capital stock.
3.8 Absence of Undisclosed Liabilities. Acquiror has no
material obligations or liabilities of any nature (matured or unmatured, fixed
or contingent) other than (a) those set forth or adequately provided for in the
balance sheet of Acquiror as of the Acquiror Balance Sheet Date (the "Acquiror
Balance Sheet"); (b) those incurred in the ordinary course of business and not
required to be set forth in the Acquiror Balance Sheet under generally accepted
accounting principles; (c) those incurred in the ordinary course of business
since the Acquiror Balance Sheet Date and consistent with past practice; and (d)
those incurred in connection with the execution of this Agreement.
3.9 Interim Operations of Merger Sub. Merger Sub was formed
solely for the purpose of engaging in the transactions contemplated by this
Agreement, has engaged in no other business activities and has conducted its
operations only as contemplated by this Agreement.
3.10 Litigation. There is no private or governmental action,
suit, proceeding, claim, arbitration or investigation pending before any
Governmental Entity, foreign or domestic, or, to the knowledge of Acquiror,
threatened against Acquiror or any of its properties or any of its officers or
directors (in their capacities as such) that, individually or in the aggregate,
if resolved adversely against Acquiror would reasonably be expected to have a
Material Adverse Effect on Acquiror. There is no judgment, decree or order
against Acquiror, or, to the knowledge of Acquiror, any of its respective
directors or officers (in their capacities as such), that could prevent, enjoin,
or materially alter or delay any of the transactions contemplated by this
Agreement, or that would reasonably be expected to have a Material Adverse
Effect on
27
Acquiror. All litigation to which Acquiror is a party (or, to the knowledge of
Acquiror, threatened to become a party) that could reasonably be expected to
have a Material Adverse Effect on Acquiror is described in the Acquiror
Disclosure Schedule.
3.11 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon Acquiror that has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any current or future business practice of Acquiror, any acquisition of property
by Acquiror or the conduct of business by Acquiror as currently conducted or as
proposed to be conducted by Acquiror.
3.12 Intellectual Property.
(a) Acquiror owns and has good and marketable title to,
or possesses legally enforceable rights to use, all Intellectual Property used
in the business of Acquiror as currently conducted or proposed to be conducted
by Acquiror subject to such exceptions as could not individually or in the
aggregate reasonably be expected to have a Material Adverse Effect on Acquiror.
The Intellectual Property owned by and licensed to Acquiror collectively
constitutes all of the Intellectual Property necessary to enable Acquiror to
conduct its business as such business is currently being conducted. To
Acquiror's knowledge, no current or former officer, director, stockholder,
employee, consultant or independent contractor has any right, claim or interest
in or with respect to any Acquiror Intellectual Property. To Acquiror's
knowledge, there is no unauthorized use, disclosure or misappropriation of any
Acquiror Intellectual Property by any employee or former employee of Acquiror or
by any other third party. There are no royalties, fees or other payments payable
by Acquiror to any Person under any contract or understanding by reason of the
ownership, use, sale or disposition of Intellectual Property, except in the
ordinary course of business.
(b) To Acquiror's knowledge, there is no unauthorized
use, disclosure, infringement or misappropriation of any Acquiror Intellectual
Property, including any Third Party Intellectual Property, by any third party,
including any employee or former employee of Acquiror subject to such exceptions
as could not individually or in the aggregate reasonably be expected to have a
Material Adverse Effect on Acquiror. Acquiror has not entered into any agreement
to indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions entered into in the
ordinary course of business. There are no royalties, fees or other payments
payable by Acquiror to any Person by reason of the ownership, use, sale or
disposition of Intellectual Property.
(c) To Acquiror's knowledge, there is no unauthorized
use, disclosure, infringement or misappropriation of any Acquiror Intellectual
Property, including any Third Party Intellectual Property, by any third party,
including any employee or former employee of Target, except for such
unauthorized uses, disclosures, infringements or misappropriations that would
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Acquiror. Acquiror has not entered into any agreement to
indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions entered into in the
ordinary course of business. There are no future royalties, fees or other
payments payable by Acquiror to any Person by reason of the ownership, use, sale
or disposition of Intellectual Property.
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(d) Acquiror is not in material breach of any license,
sublicense or other agreement relating to the Acquiror Intellectual Property or
Third Party Intellectual Property. Neither the execution, delivery or
performance of this Agreement or any ancillary agreement contemplated hereby nor
the consummation of the Merger or any of the transactions contemplated by this
Agreement will materially contravene, conflict with or result in any material
limitation on the Target's right to own or use any Acquiror Intellectual
Property, including any Third Party Intellectual Property.
(e) To Acquiror's knowledge, all Patents, registered
Trademarks, registered service marks and registered Copyrights held by Acquiror
are valid and subsisting. All maintenance and annual fees have been fully paid
and all fees paid during prosecution and after issuance of any Patent comprising
or relating to such item have been paid in the correct entity status amounts.
Acquiror is not infringing, misappropriating or making unlawful use of, or
received any notice or other communication (in writing or otherwise) of any
actual, alleged, possible or potential infringement, misappropriation or
unlawful use of any proprietary asset owned or used by any third party subject
to such exceptions as would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on Acquiror. There is no proceeding
pending or, to Acquiror's knowledge, threatened, nor has any claim or demand
been made that challenges the legality, validity, enforceability or ownership of
any item of Acquiror Intellectual Property or Third Party Intellectual Property
or alleges a claim of infringement of any Patents, Copyrights, Trademarks or
service marks, or violation of any trade secret or other proprietary right of
any third party. Acquiror has not brought a proceeding alleging infringement of
Acquiror Intellectual Property or breach of any license or agreement involving
Intellectual Property against any third party.
(f) All current and former officers and employees of
Acquiror have executed and delivered to Acquiror an agreement (containing no
material exceptions or exclusions from the scope of its coverage) regarding the
protection of proprietary information and the assignment to Acquiror of any
Intellectual Property arising from services performed for Acquiror by such
persons, the form of which has been supplied or made available to Target. All
current and former consultants and independent contractors to Acquiror involved
in the development, modification, marketing and servicing of any Acquiror
Products or Acquiror Intellectual Property have executed and delivered to
Acquiror an agreement substantially in the form provided or made available to
Target or its counsel (containing no material exceptions or exclusions from the
scope of its coverage) regarding the protection of proprietary information and
the assignment to Acquiror of any Intellectual Property arising from services
performed for Acquiror by such persons. To Acquiror's knowledge, no employee or
independent contractor of Acquiror is in violation of any term of any patent
disclosure agreement or employment contract or any other contract or agreement
relating to the relationship of any such employee or independent contractor with
Acquiror.
(g) Acquiror has taken commercially reasonable and
customary measures and precautions necessary to protect and maintain the
confidentiality of all Acquiror Intellectual Property (except such Acquiror
Intellectual Property whose value would be unimpaired by public disclosure) and
otherwise to maintain and protect the full value of all Acquiror Intellectual
Property. All use, disclosure or appropriation of Intellectual Property not
otherwise protected by patents, patent applications or copyright ("Confidential
Information")
29
owned by Acquiror by or to a third party has been pursuant to the terms of a
written agreement between Acquiror and such third party. To Acquiror's
knowledge, all use, disclosure or appropriation of Confidential Information not
owned by Acquiror has been pursuant to the terms of a written agreement between
Acquiror and the owner of such Confidential Information, or is otherwise lawful.
(h) No product liability claims have been communicated
in writing to or, to Acquiror's knowledge, threatened against Acquiror, other
than warranty claims occurring in the ordinary course of business.
(i) Acquiror is not subject to any proceeding or
outstanding decree, order, judgment or stipulation restricting in any manner the
use, transfer or licensing of any Acquiror Intellectual Property by Acquiror, or
which may materially affect the validity, use or enforceability of such Acquiror
Intellectual Property. Acquiror is not subject to any agreement that restricts
in any material respect the use, transfer, delivery or licensing by Acquiror of
the Acquiror Intellectual Property or Acquiror Products.
3.13 Interested Party Transactions. Acquiror is not indebted to
any director, officer, employee or agent of Acquiror (except for amounts due as
normal salaries and bonuses and in reimbursement of ordinary expenses), and no
such person is indebted to Acquiror. Since January 1, 2001, there have been no
transactions that would require disclosure if Acquiror were subject to
disclosure under Item 404 of Regulation S-K under the Securities Act.
3.14 Minute Books. The minute book of Acquiror contains a
materially complete and accurate summary of all meetings of directors and
shareholders or actions by written consent since the time of incorporation of
Acquiror through the date of this Agreement, and reflect all transactions
referred to in such minutes accurately in all material respects.
3.15 Complete Copies of Materials. Acquiror has delivered or
made available true and complete copies of each document that has been requested
by Target or its counsel in connection with their due diligence review of
Acquiror.
3.16 Material Contracts. Schedule 3.16 lists Acquiror's
contracts which, if there occurred a material breach or default of such
contract, would reasonably be expected to have a Material Adverse Effect on
Acquiror. With respect to each Acquiror material contract that has not
terminated or expired in accordance with its terms, such contract (a) is legal,
valid, binding and enforceable and in full force and effect with respect to
Acquiror, and to Acquiror's knowledge is legal, valid, binding, enforceable and
in full force and effect with respect to each other party thereto, in either
case subject to the effect of bankruptcy, insolvency, moratorium or other
similar laws affecting the enforcement of creditors' rights generally and except
as the availability of equitable remedies may be limited by general principles
of equity; and (b) will continue to be legal, valid, binding and enforceable and
in full force and effect immediately following the Effective Time in accordance
with its terms as in effect prior to the Effective Time, subject to the effect
of bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and except as the availability of
equitable remedies may be limited by general principles of equity. Neither
Acquiror nor, to Acquiror's knowledge, any other party, is in material breach or
default, and no event has occurred that with notice or
30
lapse of time would constitute a material breach or default by Acquiror or, to
Acquiror's knowledge, by any such other party, or permit termination,
modification or acceleration, under any contract that would reasonably be
expected to have a Material Adverse Effect on Acquiror.
3.17 Inventory. The inventories shown on the Acquiror Balance
Sheet or thereafter acquired by Acquiror, subject to the reserves maintained by
Acquiror, were acquired and maintained in the ordinary course of business, are
of good and merchantable quality, and consist of items of a quantity and quality
usable or salable in the ordinary course of business. Since the Acquiror Balance
Sheet Date, Acquiror has continued to replenish inventories in a normal and
customary manner consistent with past practices. Acquiror has not received
notice that it will experience in the foreseeable future any difficulty in
obtaining, in the desired quantity and quality and at a reasonable price and
upon reasonable terms and conditions, the raw materials, supplies or component
products required for the manufacture, assembly or production of its products.
The values at which inventories are carried reflect the inventory valuation
policy of Acquiror, which is consistent with its past practice and in accordance
with generally accepted accounting principles applied on a consistent basis.
Acquiror is not under any liability or obligation with respect to the return of
any item of inventory in the possession of wholesalers, retailers or other
customers, except as accrued for on the Acquiror Balance Sheet. Since the
Acquiror Balance Sheet Date, adequate provision has been made on the books of
Acquiror in the ordinary course of business consistent with past practices to
provide for all slow-moving, obsolete or unusable inventories to their estimated
useful or scrap values, and such inventory reserves are adequate to provide for
such slow-moving, obsolete or unusable inventory and inventory shrinkage.
3.18 Accounts Receivable. Subject to any reserves set forth
therein, the accounts receivable shown on the Acquiror Financial Statements are
valid and genuine, have arisen solely out of bona fide sales and deliveries of
goods, performance of services, and other business transactions in the ordinary
course of business consistent with past practices in each case with persons
other than affiliates, are not subject to any prior assignment, lien or security
interest, and to Acquiror's knowledge are not subject to valid defenses,
set-offs or counter claims. The accounts receivable are collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for doubtful accounts on the Acquiror Financial Statements.
3.19 Customers and Suppliers. As of the date hereof, no customer
that, individually or in the aggregate, accounted for more than 10% of
Acquiror's gross revenues during the 12-month period preceding the date hereof
and no suppliers of Acquiror that, individually or in the aggregate, accounted
for more than 10% of Target's purchases during the 12-month period preceding the
date hereof, has canceled or otherwise terminated, or made any written threat to
Acquiror to cancel or otherwise terminate their relationship with Acquiror or
has at any time on or after the Acquiror Balance Sheet Date, decreased
materially its services or supplies to Acquiror in the case of any such
supplier, or its usage of the services or products of Acquiror in the case of
such customers, and to Acquiror's knowledge no such suppliers or customers have
indicated either orally or in writing that they intend to cancel or otherwise
terminate their relationship with Acquiror or to decrease materially that
services or supplies to Acquiror or its usage of the services or products of
Acquiror, as the case may be. Acquiror has not knowingly breached, so as to
provide a benefit to Acquiror that was not intended by the
31
parties, any agreement with, or engaged in any fraudulent conduct with respect
to, any customer or supplier of Acquiror.
3.20 Title to Property. Acquiror has good and valid title to all
of its properties, interests in properties and assets, real and personal,
reflected in the Acquiror Balance Sheet or acquired after the Acquiror Balance
Sheet Date (except properties, interests in properties and assets sold or
otherwise disposed of since the Acquiror Balance Sheet Date in the ordinary
course of business), or with respect to leased properties and assets, valid
leasehold interests therein, free and clear of all mortgages, liens, pledges,
charges or encumbrances of any kind or character, except (a) the lien of current
taxes not yet due and payable; (b) such imperfections of title, liens and
easements as do not and will not materially detract from or interfere with the
use of the properties subject thereto or affected thereby, or otherwise
materially impair business operations involving such properties; (c) liens
securing debt that is reflected on the Acquiror Balance Sheet; and (d) such
other mortgages, liens, pledges, charges or encumbrances that would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Acquiror. The plants, property and equipment of Acquiror that
are used in the operations of Acquiror's business are in all material respects
in good operating condition and repair, subject to normal wear and tear. All
properties used in the operations of Acquiror are reflected in the Acquiror
Balance Sheet to the extent required by generally accepted accounting
principles. All leases to which Acquiror is a party are in full force and effect
and are valid, binding and enforceable in accordance with their respective
terms, except as such enforceability may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting or relating to creditors' rights
generally; and general principles of equity, regardless of whether asserted in a
proceeding in equity or at law. True and correct copies of all such leases have
been provided or made available to Target. Acquiror owns no real property.
3.21 Environmental Matters.
(a) Acquiror is and has been in compliance with all
Environmental Laws relating to the properties or facilities used, leased or
occupied by Acquiror at any time (collectively, "Acquiror's Facilities;" such
properties or facilities currently used, leased or occupied by Acquiror are
defined herein as "Acquiror's Current Facilities"), and no discharge, emission,
release, leak or spill of Hazardous Materials has occurred at any of Acquiror's
Facilities that may or will give rise to liability of Acquiror under
Environmental Laws. To Acquiror's knowledge, there are no Hazardous Materials
(including without limitation asbestos) present in the surface waters,
structures, groundwaters or soils of or beneath any of Acquiror's Current
Facilities. To Acquiror's knowledge, there neither are nor have been any
aboveground or underground storage tanks for Hazardous Materials at Acquiror's
Current Facilities. To Acquiror's knowledge, no Acquiror employee or other
person has claimed that Acquiror is liable for alleged injury or illness
resulting from an alleged exposure to a Hazardous Material. No civil, criminal
or administrative action, proceeding or investigation is pending against
Acquiror, or, to Acquiror's knowledge, threatened against Acquiror, with respect
to Hazardous Materials or Environmental Laws; and Acquiror is not aware of any
facts or circumstances that could form the basis for assertion of a claim
against Acquiror or that could form the basis for liability of Acquiror,
regarding Hazardous Materials or regarding actual or potential noncompliance
with Environmental Laws.
32
3.22 Taxes.
(a) Acquiror has prepared and timely filed all Returns
relating to any and all Taxes concerning or attributable to Acquiror or its
operations with respect to Taxes for any period ending on or before the Closing
Date and, except to the extent a reserve for Taxes has been established on the
Acquiror Balance Sheet, such Returns are true and correct in all material
respects and have been completed in accordance with applicable law;
(b) Acquiror, as of the Effective Time, (i) will have
paid all Taxes it is required to pay, except to the extent a reserve for Taxes
has been established on the Acquiror Balance Sheet; and (ii) will have withheld
with respect to its employees all Taxes required to be withheld;
(c) There is no material Tax deficiency outstanding or
assessed or, to Acquiror's knowledge, proposed against Acquiror that is not
reflected as a liability on the Acquiror Balance Sheet, nor has Acquiror
executed any agreements or waivers extending any statute of limitations on or
extending the period for the assessment or collection of any Tax;
(d) Acquiror has no material liabilities for unpaid
Taxes that have not been accrued for or reserved on the Acquiror Balance Sheet,
whether asserted or unasserted, contingent or otherwise and Acquiror has no
knowledge of any basis for the assertion of any such liability attributable to
Acquiror, its assets or operations;
(e) Acquiror is not a party to any tax-sharing agreement
or similar arrangement with any other party, and Acquiror has not assumed any
obligation to pay any Tax obligations of, or with respect to any transaction
relating to, any other person or agreed to indemnify any other person with
respect to any Tax;
(f) Acquiror's Returns have never been audited by a
government or taxing authority, nor is any such audit in process or pending, and
Acquiror has not been notified of any request for such an audit or other
examination;
(g) Acquiror has never been a member of an affiliated
group of corporations filing a consolidated federal income tax return;
(h) Acquiror has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(4) apply to any
disposition of assets owned by Acquiror;
(i) Acquiror has not been at any time a United States
Real Property Holding Corporation within the meaning of Section 897(c)(2) of the
Code; and
(j) Acquiror is not a party to any contract, agreement,
plan or arrangement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of Acquiror that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Sections 280G, 464 or 162(m) of the Code by
Acquiror or Merger Sub as an expense under applicable law.
33
3.23 Employee Matters. Acquiror is in compliance with all
currently applicable laws and regulations respecting terms and conditions of
employment, including without limitation applicant and employee background
checking, immigration laws, discrimination laws, verification of employment
eligibility, employee leave laws, classification of workers as employees and
independent contractors, wage and hour laws, and occupational safety and health
laws, except for such noncompliance that could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Acquiror.
There are no proceedings pending or, to Acquiror's knowledge, reasonably
expected or threatened, between Acquiror, on the one hand, and any or all of its
current or former employees, on the other hand which proceedings could
reasonably be expected to have, a Material Adverse Effect on Acquiror, including
without limitation any claims for actual or alleged harassment or discrimination
based on race, national origin, age, sex, sexual orientation, religion,
disability, or similar tortious conduct, breach of contract, wrongful
termination, defamation, intentional or negligent infliction of emotional
distress, interference with contract or interference with actual or prospective
economic disadvantage. There are no claims pending, or, to Acquiror's knowledge,
reasonably expected or threatened, against Acquiror under any workers'
compensation or long-term disability plan or policy. Acquiror has no material
unsatisfied obligations to any employees, former employees, or qualified
beneficiaries pursuant to COBRA, HIPAA, or any state law governing health care
coverage extension or continuation. Acquiror is not a party to any collective
bargaining agreement or other labor union contract, nor does Acquiror know of
any activities or proceedings of any labor union to organize its employees.
Acquiror has provided all employees with all wages, benefits, relocation
benefits, stock options, bonuses and incentives, and all other compensation that
became due and payable through the date of this Agreement.
3.24 Employee Benefit Plan. For purposes of this Agreement,
"Acquiror Employee Plans" includes each plan, program, policy, practice,
contract, agreement or other arrangement providing for employment, compensation,
retirement, deferred compensation, loans, severance, separation, relocation,
repatriation, expatriation, visas, work permits, termination pay, performance
awards, bonus, incentive, stock option, stock purchase, stock bonus, phantom
stock, stock appreciation right, supplemental retirement, fringe benefits,
cafeteria benefits or other benefits, whether written or unwritten, including
without limitation each "employee benefit plan" within the meaning of Section
3(3) of ERISA, which is or has been sponsored, maintained, contributed to, or
required to be contributed to by Acquiror or an ERISA Affiliate for the benefit
of any person who performs or who has performed services for Target or with
respect to which Acquiror or any ERISA Affiliate has or may have any liability
(including without limitation contingent liability) or obligation.
(a) Compliance. (i) Each Acquiror Employee Plan has been
administered in accordance with its terms and in compliance with the
requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code), except as would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Acquiror;
and Acquiror and each ERISA Affiliate have performed all material obligations
required to be performed by them under, are not in material respect in default
under or violation of and have no knowledge of any material default or violation
by any other party to, any of the Acquiror Employee Plans; (ii) any Acquiror
Employee Plan intended to be qualified under Section 401(a) of the Code has
either obtained from the Internal Revenue Service a favorable determination
letter as to its qualified status under the Code, including all currently
effective
34
amendments to the Code, or has time remaining to apply under applicable Treasury
Regulations or Internal Revenue Service pronouncements for a determination or
opinion letter and to make any amendments necessary to obtain a favorable
determination or opinion letter; (iii) none of the Acquiror Employee Plans
promises or provides retiree medical or other retiree welfare benefits to any
person; (iv) there has been no "prohibited transaction," as such term is defined
in Section 406 of ERISA or Section 4975 of the Code, with respect to any
Acquiror Employee Plan; (v) none of Acquiror or any ERISA Affiliate is subject
to any liability or penalty under Sections 4976 through 4980 of the Code or
Title I of ERISA with respect to any Acquiror Employee Plan; (vi) all
contributions required to be made by Acquiror or any ERISA Affiliate to any
Acquiror Employee Plan have been paid or accrued; (vii) with respect to each
Acquiror Employee Plan, no "reportable event" within the meaning of Section 4043
of ERISA (excluding any such event for which the thirty (30) day notice
requirement has been waived under the regulations to Section 4043 of ERISA) nor
any event described in Section 4062, 4063 or 4041 or ERISA has occurred; (viii)
each Acquiror Employee Plan subject to ERISA has prepared in good faith and
timely filed all requisite governmental reports, which were true and correct as
of the date filed, and has properly and timely filed and distributed or posted
all notices and reports to employees required to be filed, distributed or posted
with respect to each such Acquiror Employee Plan; (ix) no suit, administrative
proceeding, action or other litigation has been brought, or to the knowledge of
Acquiror is threatened, against or with respect to any such Acquiror Employee
Plan, including any audit or inquiry by the IRS or United States Department of
Labor; and (x) there has been no amendment to, written interpretation or
announcement by Acquiror or any ERISA Affiliate that would materially increase
the expense of maintaining any Acquiror Employee Plan above the level of expense
incurred with respect to such plan for the most recent fiscal year included in
the Acquiror Financial Statements.
(b) No Title IV or Multiemployer Plan. Neither Acquiror
nor any ERISA Affiliate has ever maintained, established, sponsored,
participated in, contributed to, or is obligated to contribute to, or otherwise
incurred any obligation or liability (including without limitation any
contingent liability) under any "multiemployer plan" (as defined in Section
3(37) of ERISA) or to any "pension plan" (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA or Section 412 of the Code. None of Acquiror or any
ERISA Affiliate has any actual or potential withdrawal liability (including
without limitation any contingent liability) for any complete or partial
withdrawal (as defined in Sections 4203 and 4205 of ERISA) from any
multiemployer plan.
(c) COBRA, FMLA, HIPAA, Cancer Rights. With respect to
each Acquiror Employee Plan, Acquiror has complied with (i) the applicable
health care continuation and notice provisions of COBRA and the regulations
thereunder or any state law governing health care coverage extension or
continuation; (ii) the applicable requirements of the Family and Medical Leave
Act of 1993 and the regulations thereunder; (iii) the applicable requirements of
HIPAA; and (iv) the applicable requirements of the Cancer Rights Act of 1998,
except to the extent that such failure to comply would not reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect on
Acquiror. Acquiror has no material unsatisfied obligations to any employees,
former employees or qualified beneficiaries pursuant to COBRA, HIPAA or any
state law governing health care coverage extension or continuation.
35
(d) International Employee Plans. Each of the Acquiror
International Employee Plans has been established, maintained and administered
in compliance with its terms and conditions and with the requirements prescribed
by any and all statutory or regulatory laws applicable to such International
Acquiror Employee Plan, except as would not reasonably be expected to have
Material Adverse Effect on Acquiror. No Acquiror International Employee Plan has
unfunded liabilities that as of the Effective Time will not be offset by
insurance or fully accrued. Except as required by law, no condition exists that
would prevent Acquiror from terminating or amending any International Acquiror
Employee Plan at any time for any reason.
3.25 Insurance. Acquiror has policies of insurance and bonds of
the type and in amounts customarily carried by persons conducting businesses or
owning assets similar to those of Acquiror. There is no material claim pending
under any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds. All premiums
due and payable under all such policies and bonds have been paid and Acquiror is
otherwise in compliance in all material respects with the terms of such policies
and bonds. Acquiror has no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
3.26 Compliance With Laws. Acquiror has complied with, is not in
violation of and has not received any notices of violation with respect to, any
federal state, local or foreign statute, law or regulation with respect to the
conduct of its business, or the ownership or operation of its business, except
for such violations or failures to comply as would not reasonably be expected to
have a Material Adverse Effect on Acquiror.
3.27 Brokers' and Finders' Fee. No broker, finder or investment
banker is entitled to brokerage or finders' fees or agents' commissions or
investment bankers' fees or any similar charges in connection with the Merger,
this Agreement or any transaction contemplated hereby.
3.28 Representations Complete. None of the representations or
warranties made by Acquiror herein or in any Schedule or Exhibit hereto,
including the Acquiror Disclosure Schedule, or certificate furnished by Acquiror
pursuant to this Agreement or any written statement furnished to Target pursuant
hereto or in connection with the transactions contemplated hereby, when all such
documents are read together in their entirety, contain, or will contain at the
Effective Time any untrue statement of a material fact, or omits or will omit at
the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading; provided, however, that for purposes of this
representation, any document attached hereto and any document specifically
referenced in the Acquiror Disclosure Schedule as a "Superseding Document" (even
if not attached hereto) that provides information inconsistent with or in
addition to any other written statement furnished to Target in connection with
the transaction contemplated hereby, shall be deemed to supersede any other
document or written statement furnished to Target with respect to such
inconsistent or additional information.
4. Conduct Prior to the Effective Time.
4.1 Conduct of Business of Target. During the period from the
date of this
36
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Target agrees (except to the extent expressly
contemplated by this Agreement or as consented to in writing by Acquiror, which
consent shall not be unreasonably withheld), to (a) carry on its business in the
usual regular and ordinary course in substantially the same manner as heretofore
conducted; (b) to pay its debts and Taxes when due subject (i) to good faith
disputes over such debts or Taxes; and (ii) in the case of Taxes of Target, to
Acquiror's consent to the filing of material Tax Returns if applicable; (c) to
pay or perform other obligations when due; and (d) to use all reasonable efforts
to preserve intact its present business organizations, keep available the
services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it, to the end that its goodwill and
ongoing businesses shall be unimpaired at the Effective Time. Target agrees to
promptly notify Acquiror of (a) any event or occurrence not in the ordinary
course of Target's business, and of any event which would reasonably be expected
to have a Material Adverse Effect on Target; and (b) any change in its
capitalization as set forth in Section 2.5. Without limiting the foregoing,
except as expressly contemplated by this Agreement or the Target Disclosure
Schedule, Target shall not do, cause or permit any of the following, without the
prior written consent of Acquiror, which consent shall not be unreasonably
withheld:
(a) Charter Documents. Cause or permit any amendments to
its Articles of Incorporation or Bylaws, provided, however, that Target may
adopt amended and restated Articles of Incorporation substantially in the form
attached as Exhibit E hereto so as to facilitate its proposed issuance and sale
of up to 15,000,000 shares of Target Series D Preferred Stock (the "Series D
Financing");
(b) Dividends; Changes in Capital Stock. Declare or pay
any dividends on or make any other distributions (whether in cash, stock or
property) in respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of shares
in connection with any termination of service to it;
(c) Stock Option Plans, Etc. Accelerate, amend or change
the period of exercisability or vesting of options or other rights granted under
its stock plans or authorize cash payments in exchange for any options or other
rights granted under any of such plans; or
(d) Issuance of Securities. Issue, deliver or sell or
authorize or propose the issuance, delivery or sale of, or purchase or propose
the purchase of, any shares of its capital stock or securities convertible into,
or subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities other than the issuance of shares of its Common Stock
pursuant to the exercise of stock options, warrants or other rights therefore
outstanding as of the date of this Agreement; provided, however, that Target may
(i) issue or agree to issue up to 15,000,000 shares of Target Series D Preferred
Stock at a per share purchase price of $2.00 and (ii) repurchase shares of its
capital stock, provided that such repurchase is (A) at cost, (B) in
37
consideration of cancellation of indebtedness incurred in connection with the
purchase of such shares and (C) in connection with the termination of employment
or service provider relationships.
(e) Intellectual Property. Transfer to any person or
entity any rights to its Intellectual Property, except in the ordinary course of
business;
(f) Marketing Rights. Enter into or amend any agreements
pursuant to which any other party is granted marketing, distribution or
exclusive rights of any type or scope with respect to any of Target Products or
Target Intellectual Property;
(g) Dispositions. Sell, lease, license or otherwise
dispose of or encumber any of its properties or assets are material,
individually or in the aggregate, to its business, taken as a whole, except in
the ordinary course of business, consistent with past practice;
(h) Indebtedness. Incur any indebtedness for borrowed
money, or guarantee any such indebtedness, or issue or sell any debt securities
or guaranty any debt securities of others;
(i) Agreements. Enter into, terminate or amend, in a
manner that will adversely affect the business of Target, (i) any agreement
involving the obligation to pay or the right to receive $5,000 or more; (ii) any
agreement relating to the license, transfer or other disposition or acquisition
of Intellectual Property rights or rights to market or sell Target Products; or
(iii) any other agreement material to the business or prospects of Target or
that is or would be a Material Contract;
(j) Payment of Obligations. Pay, discharge or satisfy,
in an amount in excess of $1,000 in the aggregate, any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or otherwise)
arising other than in the ordinary course of business, other than the payment,
discharge or satisfaction of liabilities reflected or reserved against in the
Target Financial Statements;
(k) Capital Expenditures. Make any capital expenditures,
capital additions or capital improvements in excess of $5,000 in the aggregate;
(l) Insurance. Reduce the amount of any insurance
coverage provided by existing insurance policies;
(m) Termination or Waiver. Terminate or waive any right
of substantial value;
(n) Employee Benefit Plans; New Hires; Pay Increases.
Amend any Target Employee Plan or adopt any plan that would constitute a Target
Employee Plan except as contemplated by Section 2.22 or in order to comply with
applicable laws or regulations, or hire any new employee, pay any bonus, special
remuneration or special noncash benefit (except payments and benefits made
pursuant to written agreements outstanding on the date hereof), or
38
increase the benefits, salaries or wage rates of its employees except in the
ordinary course of business in accordance with its standard past practice;
(o) Severance Arrangements. Grant or pay any severance
or termination pay or benefits (i) to any director or officer; or (ii) except
for payments made pursuant to written agreements outstanding on the date hereof
and disclosed on the Target Disclosure Schedule, to any other employee;
(p) Lawsuits. Commence a lawsuit other than for a breach
of this Agreement;
(q) Acquisitions. Acquire or agree to acquire by merging
with, or by purchasing the stock or assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire or agree to acquire any
assets that are material individually or in the aggregate, to its business,
taken as a whole;
(r) Taxes. Make or change any material election in
respect of Taxes, adopt or change any accounting method in respect of Taxes,
file any material tax Return or any amendment to a material tax Return, enter
into any closing agreement, settle any material claim or assessment in respect
of Taxes, or consent to any extension or waiver of the limitation period
applicable to any material claim or assessment in respect of Taxes;
(s) Revaluation. Revalue any of its assets, including
without limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business or as required
by changes in generally accepted accounting principles; or
(t) Other. Take or agree in writing or otherwise to
take, any of the actions described in Sections 4.1(a) through (s) above, or any
action that would cause a material breach of its representations or warranties
contained in this Agreement or prevent it from materially performing or cause it
not to materially perform its covenants hereunder.
4.2 Conduct of Business of Acquiror. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, Acquiror agrees (except to the extent
expressly contemplated by this Agreement or as consented to in writing by
Target, which consent shall not be unreasonably withheld), that it shall not do,
cause or permit any of the following:
(a) Charter Documents. Cause or permit any amendments to
its Certificate of Incorporation or Bylaws, provided, however, that Acquiror may
adopt a Second Amended and Restated Certificate of Incorporation substantially
in the form attached as Exhibit F hereto (the "Acquiror Restated Certificate")
so as to facilitate the proposed restructuring of its capital as set forth in
Section 4.2(b) below (the "Acquiror Restructuring") and to create the Acquiror
Series B Preferred Stock to be issued as Merger Consideration hereunder; or
39
(b) Issuance of Securities. Issue, deliver or sell or
authorize or propose the issuance, delivery or sale of, or purchase or propose
the purchase of, any shares of its capital stock or securities convertible into,
or subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities other than the issuance of shares of its Common Stock
pursuant to the exercise of stock options, warrants or other rights therefore
outstanding as of the date of this Agreement; provided, however, that Acquiror
may, in accordance with the terms of the Acquiror Restructuring (to the extent
applicable), (i) effect a 10 for 1 reverse split of Acquiror Common Stock, (ii)
authorize and issue 62,500,000 shares of Series AA Preferred Stock (with rights,
privileges and preferences as set out in the Acquiror Restated Certificate) in
exchange for all of the outstanding Class A Interests in the 12 limited
liability companies (the "LLCs") that own Acquiror Series A Preferred Stock,
(iii) issue 7,500,000 shares of Acquiror Common Stock in exchange for all of the
outstanding Class B Interests in the LLCs, (iv) issue shares or options to
purchase up to 8,062,412 shares of Acquiror Common Stock to certain key
employees of Acquiror, (v) authorize and reserve a certain number of shares of
Acquiror Series B Preferred Stock (with rights, privileges and preferences as
set out in the Acquiror Restated Certificate) to be issued as Merger
Consideration pursuant to this agreement and (viii) reserve a certain number of
shares of Acquiror Common Stock for issuance upon the conversion of the Acquiror
Series AA Preferred Stock, Acquiror Series B Preferred Stock and options and/or
warrants to acquire Acquiror Capital Stock. The parties acknowledge that
following the Effective Time, Acquiror intends to make a rights offering of
shares of Acquiror Series B Preferred Stock to its existing stockholders at
$2.0238 per share.
4.3 No Solicitation.
(a) From and after the date of this Agreement until the
Effective Time, Target shall not, directly or indirectly through any officer,
director, employee, representative or agent of Target or otherwise, (i) solicit,
initiate, or knowingly encourage any inquiries or proposals that constitute, or
could reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, share exchange, business combination, sale of all or
substantially all assets, sale of shares of capital stock or similar
transactions involving Target other than the transactions contemplated by this
Agreement (any of the foregoing inquiries or proposals an "Acquisition
Proposal"); (ii) engage or participate in negotiations or discussions
concerning, or provide any non-public information to any person or entity
relating to, any Acquisition Proposal; or (iii) agree to, enter into, accept,
approve or recommend any Acquisition Proposal. Target represents and warrants
that it has the legal right to terminate any pending discussions or negotiations
relating to an Acquisition Proposal without payment of any fee or other penalty.
(b) Target shall notify Acquiror promptly (and no later
than 24 hours) after receipt by Target (or its advisors) of any Acquisition
Proposal or any request for nonpublic information in connection with an
Acquisition Proposal or for access to the properties, books or records of Target
by any person or entity that informs Target that it is considering making, or
has made, an Acquisition Proposal. Such notice shall be made orally and in
writing and shall indicate in reasonable detail the identity of the offeror and
the terms and conditions of such proposal, inquiry or contact.
5. Additional Agreements.
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5.1 Approval of Shareholders. Target shall, as promptly as
practicable after the date hereof, take all commercially reasonably actions
necessary in accordance with California Law and its Articles of Incorporation
and Bylaws to solicit and obtain the written consent of the Target shareholders
approving the Merger.
5.2 Sale of Shares Pursuant to Regulation D. The parties hereto
acknowledge and agree that the shares of Acquiror Series B Preferred Stock
issuable to the Target shareholders pursuant to Section 1.6 hereof are intended
to be issued pursuant to the "private placement" exemption from registration
under Section 4(2) of the Securities Act or Regulation D promulgated thereunder
and that such shares shall constitute "restricted securities" under Securities
and Exchange Commission Rules 144 and 145. The certificates of Acquiror Series B
Preferred Stock shall bear the legends set forth in Section 1.6(h). It is
acknowledged and understood that in issuing such shares of Acquiror Series B
Preferred Stock, Acquiror is relying on certain written representations made by
each shareholder of Target. Target will use its commercially reasonable efforts
to cause each Target shareholder to execute and deliver to Acquiror an Investor
Representation Statement in the form attached hereto as Exhibit B.
5.3 Access to Information.
(a) Target and Acquiror shall provide to each other and
their respective accountants, counsel and other representatives, reasonable
access during normal business hours during the period prior to the Effective
Time to (i) all of each other's properties, personnel, books, contracts,
commitments and records, and (ii) all other information concerning their
business, properties and personnel as the other may reasonably request.
(b) Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of Acquiror and Target shall confer
on a regular and frequent basis with one or more representatives of the other
party to report operational matters of materiality and the general status of
ongoing operations.
(c) No information or knowledge obtained in any
investigation pursuant to this Section 5.3 shall affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.4 Confidentiality. No party to this Agreement nor any of its
subsidiaries shall release, publish, reveal or disclose, directly or indirectly,
any confidential or proprietary information of any other party hereto or any of
its subsidiaries, including, but not limited to, systems, processes, formulae,
data, functional specifications, computer programs, blueprints, know-how,
improvements, discoveries, developments, designs, inventions, techniques, new
products, marketing and advertising methods, supplier agreements, customer
lists, pricing policies, financial information, projections, forecasts,
strategies, budgets or other information related to is business or its customers
("Confidential Information"), except to a party's directors, officers,
employees, financial advisors, legal counsel, independent public accountants or
other agents, advisors or representatives as shall require access thereto on a
need-to-know basis for the purpose of the transactions contemplated by this
Agreement and who shall agree to be bound by the terms of this Section 5.4. Each
party agrees to take all reasonable precautions to safeguard the confidentiality
of the other party's Confidential Information and to exercise the same degree
41
of care with respect to such Confidential Information that such party exercises
with respect to its own confidential information. No party shall make, or permit
to be made, except in furtherance of the transactions contemplated by this
Agreement, any copies, abstracts or summaries of the Confidential Information.
The restrictions on disclosure of information contained in this Section 5.4 do
not extend to any item of information that (a) is already known to the receiving
party; (b) was or is independently developed by the receiving party without the
use of the Confidential Information; or (c) is now or hereafter becomes
available to the public other than as a consequence of a breach of obligations
under this Section 5.4 or similar confidentiality agreements. Upon written
request, the parties shall return all writings, documents and materials
containing Confidential Information with a letter confirming that all copies,
abstracts and summaries of the Confidential Information have been destroyed. In
the event that any party hereto becomes legally required to disclose another
party's Confidential Information, it shall provide such other party with prompt
prior written notice of such requirement prior to such disclosure. In the event
that a protective order or other remedy is not obtained, or such other party
waives compliance with the provisions of this Section 5.4 with respect to the
Confidential Information subject to such requirement, such party agrees to
furnish only that portion of the Confidential Information which it is legally
required to furnish and, where appropriate, to use its commercially reasonable
efforts to obtain assurances that such Confidential Information will be accorded
confidential treatment. In the event the transactions contemplated hereby are
not consummated, upon the request of a furnishing party, each party shall, and
shall cause its representatives and affiliates to, promptly redeliver or cause
to be redelivered all copies of Confidential Information furnished by or on
behalf of such furnishing party in connection with this Agreement or any of the
transactions contemplated hereby, and to destroy or cause to be destroyed all
notes, memoranda, summaries, analysis, compilations and other writings related
thereto or based thereon prepared by the receiving party.
5.5 Public Disclosure. Unless otherwise permitted by this
Agreement, Acquiror and Target shall consult with each other before issuing any
press release or otherwise making any public statement or making any other
public (or non-confidential) disclosure (whether or not in response to an
inquiry) regarding the terms of this Agreement and the transactions contemplated
hereby, and neither shall issue any such press release or make any such
statement or disclosure without the prior approval of the other (which approval
shall not be unreasonably withheld), except as may be required by law or by
obligations pursuant to any listing agreement with any national securities
exchange or with Nasdaq.
5.6 Regulatory Approval; Further Assurances.
(a) Each party shall use all reasonable efforts to file,
as promptly as practicable after the date of this Agreement, all notices,
reports and other documents required to be filed by such party with any
Governmental Entity with respect to the Merger and the other transactions
contemplated by this Agreement, and to submit promptly any additional
information requested by any such Governmental Entity.
(b) Acquiror and Target shall use all reasonable efforts
to take, or cause to be taken, all actions necessary to effectuate the Merger
and make effective the other transactions contemplated by this Agreement.
Without limiting the generality of the foregoing, each party to this Agreement
shall (i) make any filings and give any notices required to be made
42
and given by such party in connection with the Merger and the other transactions
contemplated by this Agreement; (ii) use all reasonable efforts to obtain any
consent required to be obtained (pursuant to any applicable legal requirement or
contract, or otherwise) by such party in connection with the Merger or any of
the other transactions contemplated by this Agreement; and (iii) use all
reasonable efforts to lift any restraint, injunction or other legal bar to the
Merger. Each party shall promptly deliver to the other a copy of each such
filing made, each such notice given and each such consent obtained by such party
during the period prior to the Effective Time. Each party, at the reasonable
request of the other party, shall execute and deliver such other instruments and
do and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby.
5.7 Blue Sky Laws. Acquiror shall take such steps as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
applicable to the issuance of the Acquiror Series B Preferred Stock in
connection with the Merger. Target shall use its commercially reasonable efforts
to assist Acquiror to comply with the securities and blue sky laws of all
jurisdictions applicable to the issuance of Acquiror Series B Preferred Stock in
connection with the Merger.
5.8 Escrow Agreement On or before the Effective Time, Acquiror,
Merger Sub, Target, Escrow Agent and the Shareholders' Representative will
execute the Escrow Agreement contemplated by Section 8 in substantially the form
attached as Exhibit D ("Escrow Agreement").
5.9 Nonaccredited Stockholders. Prior to the Effective Time,
Target shall not take any action that would, to its knowledge, cause the number
of Target Preferred Stock holders who are not "accredited investors" pursuant to
Regulation D promulgated under the Securities Act to increase to more than 35 as
of the Effective Time.
5.10 Acquiror Restructuring.
(a) Acquiror shall, prior to the Effective Time, (i)
take all commercially reasonably actions necessary in accordance with Delaware
Law and its Certificate of Incorporation and Bylaws to solicit and obtain the
written consent of its stockholders to approve, subject to Section 5.10(b), the
Acquiror Restructuring and all of the actions, documents and filings
contemplated thereby, and (ii) subject to Section 5.10(b), take all commercially
reasonable actions, execute all documents, make all filings and do all other
things necessary to consummate the Acquiror Restructuring.
(b) Acquiror shall, in connection with the Acquiror
Restructuring and subject to obtaining the necessary written consent of its
stockholders, adopt and file with the Secretary of State of Delaware prior to
the Effective Date, the Acquiror Restated Certificate.
5.11 Indemnification of Officers and Directors. For a period of
six years from and after the Closing Date, Acquiror and the Surviving
Corporation agree to indemnify (including advancement of expenses) and hold
harmless all past and present officers and directors of Target to the same
extent such persons are indemnified by the Company as of the
43
date of this Agreement pursuant to the Target's Articles of Incorporation or
Bylaws, employment agreements, indemnification agreements identified on the
Target Disclosure Schedule or under applicable law for acts or omissions which
occurred at or prior to the Effective Time. This Section 5.12 shall survive
consummation of the Merger, and is intended to be for the benefit of, and shall
be enforceable by, all past and present officers and directors of Target, their
respective heirs and personal representatives and shall be binding upon Acquiror
and the Surviving Corporation
5.12 Shareholders' Representative. Xxx Xxxxxxx (such person and
any successor or successors being the "Shareholders' Representative") shall be
appointed by Target and the Target shareholders to (i) perform duties
substantially similar to those performed by a "purchaser representative" as such
term is defined in Rule 501(h) of the Securities Act for certain Target
shareholders in connection with such holders' approval of this Agreement and the
transactions contemplated hereby, and (ii) act as the representative of the
Target shareholders in connection with claims under Section 8 of this Agreement,
as more specifically set out therein.
5.13 Expenses. Whether or not the Merger is consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense.
5.14 Acquiror Investor Rights Agreement. Acquiror and Target
shall each use commercially reasonable efforts to cause each Target shareholder
receiving Acquiror Series B Preferred Stock to be added as a party to the Rights
Agreement in substantially the form attached hereto as Exhibit G among Acquiror
and certain of its stockholders.
5.15 Cancellation of Target Warrants. Target shall use its
commercially reasonable efforts to cause to be cancelled any warrants that are
outstanding and unexercised on the Closing Date and that do no terminate in
accordance with their terms upon the Effective Time.
5.16 Appointment of New Director. Acquiror shall cause Xxx
Xxxxxxx to be appointed to the board of directors as soon as practicable after
the Effective Time.
5.17 Ownership of Surviving Corporation Following Merger.
Acquiror hereby agrees that, for a period of eighteen (18) months following the
Effective Time, Acquiror shall not take any of the following actions or cause
any of the following action to be taken: (i) liquidate the Surviving
Corporation, (ii) liquidate any direct wholly-owned subsidiary of Acquiror each,
a "Direct Subsidiary"), to the extent any such Direct Subsidiary directly owns
stock of Surviving Corporation (any such entity, an "Intermediate Subsidiary"),
(iii) liquidate any Intermediate Subsidiary, or (iv) cause the stock of the
Surviving Corporation, any Direct Subsidiary (to the extent any such Direct
Subsidiary directly owns stock of Surviving Corporation or of any Intermediate
Subsidiary), or any Intermediate Subsidiary, respectively, to be owned (A) by
any shareholder which did not hold stock in such respective entity immediately
following the Effective Time, or (B) by the shareholders of such respective
entity in any proportions which are different from the manner in which such
shareholders held stock in such respective entity immediately after the
Effective Time.
44
5.18 Investor Representation Statement; Number of Shareholders.
Target shall use commercially reasonable efforts to cause each of Target's
Preferred Stockholders to deliver, prior to the Effective Time, to Acquiror a
signed Investor Representation Statement substantially in the form of Exhibit B
(the "Investor Representation Statement") and each such Investor Representation
Statement shall be in full force in effect. Target shall also use commercially
reasonable efforts to ensure that there are no more than thirty-five (35) Target
Preferred Shareholders who are both (i) U.S. persons as defined under Regulation
S under the Securities Act (a "U.S. Person"); and (ii) not "accredited
investors" as defined in Rule 501 under the Securities Act.
6. 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 consummate
and effect this Agreement and the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, by agreement of
all the parties hereto:
(a) Shareholder Approval. This Agreement and the Merger
shall be approved by the shareholders of Target by the requisite vote under
California Law and Target's Articles of Incorporation.
(b) No Injunctions or Restraints; Illegality. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger shall be and
remain in effect, nor shall any proceeding brought by an administrative agency
or commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending, which would reasonably be
expected to have a Material Adverse Effect on Acquiror, either individually or
combined with the Surviving Corporation after the Effective Time, nor shall
there be any action taken, or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
(c) Governmental Approval. Acquiror, Target and Merger
Sub shall have timely obtained from each Governmental Entity all approvals,
waivers and consents necessary for consummation of or in connection with the
Merger and the several transactions contemplated hereby, including such
approvals, waivers and consents as may be required under the Securities Act,
under state blue sky laws and under HSR, other than filings and approvals
relating to the Merger or affecting Acquiror's ownership of Target or any of its
properties if failure to obtain such approval, waiver or consent could not
reasonably be expected to have a Material Adverse Effect on Acquiror after the
Effective Time.
6.2 Additional Conditions to the Obligations of Acquiror and
Merger Sub. The obligations of Acquiror and Merger Sub to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Acquiror:
45
(a) Representations, Warranties and Covenants. The
representations and warranties of Target in this Agreement shall be true and
correct without regard to any qualification as to materiality contained in such
representation or warranty on and as of the date of this Agreement and on and as
of the Closing as though such representations and warranties were made on and as
of such time (except for such representations and warranties that speak
specifically as of the date hereof or as of another date, which shall be true
and correct as of such date), except for changes contemplated by this Agreement
and any inaccuracies that would not be reasonably likely to have a Material
Adverse Effect on Target.
(b) Performance of Obligations. Target shall have
performed and complied in all material respects with all covenants, obligations
and conditions of this Agreement required to be performed and complied with by
it as of the Closing.
(c) Certificate of Officers. Acquiror and Merger Sub
shall have received a certificate executed on behalf of Target by the chief
executive officer and chief financial officer of Target certifying that the
conditions set forth in Section 6.2(a) and Section 6.2(b) have been satisfied.
(d) No Governmental Litigation. There shall not be
pending or threatened any legal proceeding in which a Governmental Entity is or
is threatened to become a party or is otherwise involved, and neither Acquiror
nor Target shall have received any written communication from any Governmental
Entity in which such Governmental Entity indicates the probability of commencing
any legal proceeding or taking any other action: (i) challenging or seeking to
restrain or prohibit the consummation of the Merger; (ii) relating to the Merger
and seeking to obtain from Acquiror or any of its subsidiaries, or Target, any
damages or other relief that would be material to Acquiror; (iii) seeking to
prohibit or limit in any material respect Acquiror's ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with respect to
the stock of Target; or (iv) that would materially and adversely affect the
right of Acquiror or Target to own the assets or operate the business of Target.
(e) No Other Litigation. There shall not be pending any
legal proceeding (i) challenging or seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by this
Agreement; (ii) relating to the Merger and seeking to obtain from Acquiror or
any of its subsidiaries, or Target, any damages or other relief that would be
material to Acquiror; (iii) seeking to prohibit or limit in any material respect
Acquiror's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to any of Target Capital Stock; or (iv)
which would materially and adversely affect the right of Acquiror or Target to
own the assets or operate the business of Target.
(f) Escrow Agreement. Acquiror, Merger Sub, Target,
Escrow Agent and the Shareholders' Agent shall have entered into an Escrow
Agreement substantially in the form attached hereto as Exhibit D.
(g) No Material Adverse Change. There shall not have
occurred and be continuing any event or events, that, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
Target.
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(h) Co-sale Agreement. The Amended and Restated Co-sale
and Stock Restriction Agreement dated as of July 6, 2001, as amended, by and
among Target and the shareholders named therein shall have been terminated.
(i) Registration Rights Agreement. The Third Amended and
Restated Rights Agreement dated as of July 6, 2001, as amended, by and among
Target and the shareholders named therein shall have been terminated.
(j) Dissenters' Rights. Not more than ten percent (10%)
of the Target Capital Stock outstanding immediately prior to the Effective Time
shall be eligible as Dissenting Shares.
(k) Issuance of Target New Preferred Stock. Target shall
have sold not less than 7,500,000 shares of Target New Preferred Stock at a
price per share of not less than $2.00.
(l) Options. All Target Options outstanding and
unexercised on the Closing Date shall be cancelled.
(m) Opinion. Counsel for Target shall have delivered to
Acquiror an opinion in a form reasonably acceptable to Acquiror.
6.3 Additional Conditions to Obligations of Target. The
obligations of Target to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by Target:
(a) Representations, Warranties and Covenants. The
representations and warranties of Acquiror and Merger Sub in this Agreement
shall be true and correct without regard to any qualification as to materiality
contained in such representation or warranty on and as of the date of this
Agreement and on and as of the Closing as though such representations and
warranties were made on and as of such time (except for such representations and
warranties that speak specifically as of the date hereof or as of another date,
which shall be true and correct as of such date), except for changes
contemplated by this Agreement and any inaccuracies that would not be reasonably
likely to have a Material Adverse Effect on Acquiror.
(b) Performance of Obligations. Acquiror and Merger Sub
shall have performed and complied in all material respects with all covenants,
obligations and conditions of this Agreement required to be performed and
complied with by them as of the Closing.
(c) Certificate of Officers. Target shall have received
a certificate executed on behalf of Acquiror and Merger Sub by the chief
executive officer and chief financial officer of Acquiror and Merger Sub,
respectively, certifying that the conditions set forth in Sections 6.3(a) and
6.3(b)have been satisfied.
(d) Acquiror Restructuring. The Acquiror Restructuring
shall have been completed substantially in accordance with the provisions set
forth in Section 4.2 of this Agreement.
47
(e) Restated Certificate. The Acquiror Restated
Certificate shall have been filed with the Secretary of State of Delaware, and
no amendments thereto or restatements shall have been filed or approved by
Acquiror.
(f) No Material Adverse Change. There shall not have
occurred and be continuing any event or events any event or events that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on Acquiror or Merger Sub.
(g) Opinion. Counsel for Acquiror and Merger Sub shall
have delivered to Target an opinion reasonably acceptable to Target.
7. Termination, Amendment and Waiver.
7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time (with respect to Section 7.1(b) through Section
7.1(d), by written notice by the terminating party to the other party):
(a) by the mutual written consent of Acquiror and
Target;
(b) by either Acquiror or Target if the Merger shall not
have been consummated by July 31, 2002 (the "Termination Date"); provided,
however, that the right to terminate this Agreement under this Section 7.1(b)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date;
(c) by either Acquiror or Target if a court of competent
jurisdiction or other Governmental Entity shall have issued a nonappealable
final order, decree or ruling or taken any other action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, unless the party relying on such order, decree or ruling or other action
has not complied in all material respects with its obligations under this
Agreement; or
(d) by Acquiror or Target, if there has been a breach of
any representation, warranty, covenant or agreement on the part of the other
party set forth in this Agreement, which breach (i) causes the conditions set
forth in Section 6.1 or 6.2 (in the case of termination by Acquiror) or Section
6.1 or 6.3 (in the case of termination by Target) not to be satisfied and (ii)
shall not have been cured within ten (10) business days following receipt by the
breaching party of written notice of such breach from the other party.
7.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 7.1, there shall be no liability or obligation
on the part of Acquiror, Target, Merger Sub or their respective officers,
directors, or stockholders, except to the extent that such termination results
from the willful breach by a party of any of its representations, warranties or
covenants set forth in this Agreement; provided, however, that the provisions of
Sections 5.4, 5.5, 5.12, and 9 shall remain in full force and effect and survive
any termination of this Agreement.
48
7.3 Amendment. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Boards of
Directors, 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 contained
herein or in any document delivered pursuant hereto; and (iii) waive compliance
with any of the agreements or conditions 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 a written instrument signed on behalf of such party.
8. Escrow and Indemnification
8.1 Escrow Fund.
(a) At the Closing, the Escrow Shares shall be
registered in the name of, and be deposited with, such institution selected by
Acquiror with the reasonable consent of Target as escrow agent (the "Escrow
Agent"), such deposit and any Additional Shares to constitute the Escrow Fund
and to be governed by the terms set forth herein and in the Escrow Agreement.
The Escrow Fund shall be available to compensate Acquiror pursuant to the
indemnification obligations of the shareholders of Target. In the event Acquiror
issues any Additional Escrow Shares (as defined below), such shares will be
issued in the name of the Escrow Agent and delivered to the Escrow Agent in the
same manner as the Escrow Shares delivered at the Closing.
(b) Except for dividends paid in stock declared with
respect to the Escrow Shares ("Additional Escrow Shares"), which shall be
treated as Escrow Shares pursuant to Section 8.1(a) hereof, any cash dividends,
dividends payable in securities or other distributions of any kind made in
respect of the Escrow Shares will be delivered to the shareholders of Target on
a pro rata basis. Each shareholder of Target will have voting rights with
respect to the Escrow Shares deposited in the Escrow Fund with respect to such
shareholder so long as such Escrow Shares are held in escrow, and Acquiror will
take all reasonable steps necessary to allow the exercise of such rights. While
the Escrow Shares remain in the Escrow Agent's possession pursuant to this
Agreement, the shareholders of Target will retain and will be able to exercise
all other incidents of ownership of said Escrow Shares which are not
inconsistent with the terms and conditions of this Agreement.
8.2 Indemnification.
(a) Survival of Warranties. All representations and
warranties made by Target, Acquiror or Merger Sub herein, or in any certificate,
schedule or exhibit delivered pursuant hereto, shall survive the Closing and
continue in full force and effect until the first anniversary of the Closing
Date (the "Survival Period"). Claims based upon or arising out of such
representations and warranties may be asserted only during the Survival Period.
If written notice of a claim has been given prior to the expiration of the
Survival Period by Acquiror to the
49
Shareholders' Representative or by the Shareholders' Representative to Parent,
then the relevant representations and warranties shall survive as to such claim
until such claim has been finally resolved.
(b) Subject to the limitations set forth in this
Section 8, the shareholders of Target who own, immediately prior to the Merger,
shares of Target Series A Preferred Stock, Target Series B Preferred Stock or
Target Series C Preferred Stock (and only to be the extent of such ownership)
will jointly and severally indemnify and hold harmless Acquiror and the
Surviving Corporation and their respective officers, directors, agents,
attorneys and employees, and each person, if any, who controls or may control
Acquiror or the Surviving Corporation within the meaning of the Securities Act
(individually an "Acquiror Indemnified Person" and collectively the "Acquiror
Indemnified Persons") from and against any and all losses, costs, damages,
liabilities and expenses arising from claims, demands, actions, causes of
action, including, without limitation, reasonable legal fees but excluding any
indirect or consequential changes, (collectively, "Damages") arising out of any
misrepresentation or breach of or default in connection with any of the
representations, warranties, covenants and agreements given or made by Target in
this Agreement, the Target Disclosure Schedule or any exhibit or schedule to
this Agreement; provided, however, that no claim may be made by an Acquiror
Indemnified Person until the aggregate Damages exceeds $50,000, at which time
the Acquiror Indemnified Person shall be entitled to recover any and all Damages
arising out of such claim. The sole recourse of the Acquiror Indemnified Persons
shall be against the Escrow Fund and claims against the Escrow Fund shall be the
sole and exclusive remedy of Acquiror Indemnified Persons for any Damages
hereunder.
(i) The amount of indemnifiable Damages required
to be paid under this Section 8 shall be reduced by (or if already paid, shall
be promptly repaid in the amount of) any recoveries actually received by an
Acquiror Indemnified Party under insurance policies or other form of payment
received from a third party. The Acquiror Indemnified Parties shall take all
actions reasonably necessary to mitigate any indemnifiable Damages in connection
with an indemnity claim made pursuant to this Section 8.
(ii) Nothing in this Agreement shall limit the
liability in amount or otherwise of any Target shareholder in connection with
any breach by such shareholder of any representation or covenant in the Investor
Representation Statement or Shareholder Agreement; or of Target for any claims
(x) for equitable remedies or (y) based on fraud or willful misrepresentation or
misconduct.
8.3 Shareholders' Representative.
(a) The Shareholders' Representative shall be
constituted and appointed as agent for and on behalf of the Target shareholders
to take any and all actions required or permitted to be taken by the
Shareholders' Representative with respect to any claims made by an Acquiror
Indemnified Party pursuant to this Section 8, including to give and receive
notices and communications, to authorize delivery to Acquiror of the Acquiror
Common Stock or other property from the Escrow Fund in satisfaction of claims by
Acquiror, to object to such deliveries, to make claims on behalf of the Target
shareholders, to agree to, negotiate, enter into settlements and compromises of,
and demand arbitration and comply with orders of courts and
50
awards of arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the judgment of the Shareholders' Representative for
the accomplishment of the foregoing. Such agency may be changed by the holders
of a majority in interest of the Escrow Fund from time to time upon not less
than 10 days' prior written notice to Acquiror. No bond shall be required of the
Shareholders' Representative, and the Shareholders' Representative shall receive
no compensation for his services. Notices or communications to or from the
Shareholders' Representative shall constitute notice to or from each of the
Target shareholders.
(b) The Shareholders' Representative shall provide
written notice to the Target shareholders of any material action taken on behalf
of them by the Shareholders' Representative pursuant to the authority delegated
to the Shareholders' Representative under this Section 8. The Shareholders'
Representative shall not be liable to any person for any error of judgment, or
any action taken, suffered or omitted to be taken under this Agreement
(including Section 5.13) or the Escrow Agreement, except in the case of its
gross negligence, bad faith or willful misconduct. The Shareholders'
Representative may consult with legal counsel, independent public accountants
and other experts selected by it. The Shareholders' Representative shall not
have any duty to ascertain or to inquire as to the performance or observance of
any of the terms, covenants or conditions of this Agreement or the Escrow
Agreement. As to any matters not expressly provided for in this Agreement or the
Escrow Agreement, the Shareholders' Representative shall not exercise any
discretion or take any action. Each Target shareholder shall indemnify and hold
harmless and reimburse the Stockholders' Representative from and against such
Target shareholders' ratable share of any and all liabilities, losses, damages,
claims, costs or expenses suffered or incurred by the Shareholders'
Representative arising out of or resulting from any action taken or omitted to
be taken by the Shareholders' Representative under this Agreement (including
Section 5.13) or the Escrow Agreement, other than such liabilities, losses,
damages, claims, costs or expenses arising out of or resulting from the
Shareholders' Representative's gross negligence, bad faith or willful
misconduct.
(c) The Shareholders' Representative shall have
reasonable access to information about Target and the reasonable assistance of
Target's officers and employees for purposes of performing his duties and
exercising his rights hereunder, provided that the Shareholders' Representative
shall treat confidentially and not disclose any nonpublic information from or
about Target to anyone (except on a need to know basis to individuals who agree
to treat such information confidentially).
8.4 Actions of the Shareholders' Representative. A decision,
act, consent or instruction of the Shareholders' Representative shall constitute
a decision of all Target shareholders for whom shares of Acquiror Series B
Preferred Stock otherwise issuable to them are deposited in the Escrow Fund and
shall be final, binding and conclusive upon each such Target shareholder, and
the Escrow Agent and Acquiror may rely upon any decision, act, consent or
instruction of the Shareholders' Representative as being the decision, act,
consent or instruction of each and every such Target shareholder. The Escrow
Agent and Acquiror are hereby relieved from any liability to any person for any
acts done by them in accordance with such decision, act, consent or instruction
of the Shareholders' Representative.
51
8.5 Third Party Claims. In the event Acquiror becomes aware of
a third-party claim which Acquiror believes may result in a demand against the
Escrow Fund, Acquiror shall notify the Shareholders' Representative within 60
days of becoming aware of such third party claim, which notice shall describe in
reasonable detail the facts known to Acquiror giving rise to such claim, and the
amount or good faith estimate of the amount arising from such claim. The
Shareholders' Representative and the Target shareholders for whom shares of
Acquiror Series B Preferred Stock otherwise issuable to them are deposited in
the Escrow Fund shall be entitled, at their expense, to participate in any
defense of such claim with the consent of Acquiror which shall not be
unreasonably withheld. Acquiror shall have the right to settle any such claim
after giving written notice to the Shareholders' Representative on such terms as
Acquiror may deem appropriate; provided, however, that Acquiror shall not settle
any claim for an amount less than the amount then outstanding in the Escrow Fund
without the consent of the Shareholders' Representative, which consent shall not
be unreasonably withheld. In the event that the Shareholders' Representative has
consented to any such settlement, the Shareholders' Representative shall have no
power or authority to object to the amount of any claim by Acquiror against the
Escrow Fund for indemnity with respect to such settlement.
9. General Provisions.
9.1 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed duly delivered (i) upon receipt if
delivered personally; (ii) three (3) business days after being mailed by
registered or certified mail, postage prepaid, return receipt requested; (iii)
one (1) business day after it is sent by commercial overnight courier service;
or (iv) upon transmission if sent via facsimile with confirmation of receipt
during normal business hours of the recipient (if not, then one (1) business day
after transmission) to the parties at the following address (or at such other
address for a party as shall be specified upon like notice:
(a) if to Acquiror or Merger Sub, to:
Zhone Technologies, Inc.
0000 Xxxxxxx Xxxxxx
Xxxxxxx, XX 00000
Attention: President
Facsimile: 000-000-0000
Telephone: 000-000-0000
with a copy to:
Xxxx Xxxx Xxxx & Freidenrich LLP
000 Xxxxxxxx Xxxxxx
Xxxx Xxxx, XX 00000
Attention: Xxxxx Xxxxx
Facsimile: 000-000-0000
Telephone: 000-000-0000
52
(b) if to Target, to:
Vpacket Communications, Inc.
0000 XxXxxxxx Xxxxxxxxx
Xxxxxxxx, XX 00000
Attention:
Facsimile: 000-000-0000
Telephone: 000-000-0000
with a copy to:
Xxxxxxxxx Xxxxxxx Xxxxxx Xxxxxxxxxx Xxxxxxxx &
Xxxxxxxxx, LLP
000 Xxxxxxxxxxxx Xxxxx
Xxxxx Xxxx, XX 00000-0000
Attention: Xxxxx Xxxxxxx
Facsimile: 000-000-0000
Telephone: 000-000-0000
(c) if to Shareholders' Representative, to:
NIF Ventures Co., Ltd.
0 Xxxx Xxxx Xxxxxx, 0xx Xxxxx
Xxxx Xxxx, XX 00000
Attention: Xxx Xxxxxxx
Facsimile: 000-000-0000
Telephone: 000-000-0000
9.2 Definitions. In this Agreement any reference to any event,
change, condition or effect being "material" with respect to any entity or group
of entities means any material event, change, condition or effect related to the
financial condition, properties, assets (including intangible assets),
liabilities, business, operations or results of operations of such entity or
group of entities. In this Agreement any reference to a "Material Adverse
Effect" with respect to any entity or group of entities means any event, change
or effect that is materially adverse to the financial condition, properties,
assets, liabilities, business, operations, or results of operations of such
entity and its subsidiaries, taken as a whole, except for any event, change or
effect resulting from or arising in connection with (i) any changes or events
affecting general economic or business conditions, (ii) any changes or events
affecting the industry in which such entity operates, (iii) the effect of the
announcement or pendency of the Merger or (iv) the taking of any action required
by the terms of this Agreement. In this Agreement any reference to a party's
"knowledge" means such party's actual knowledge after reasonable inquiry of
officers, directors and other employees of such party reasonably believed to
have knowledge of such matters. In this Agreement, an entity shall be deemed to
be a "Subsidiary" of a party if such party directly or indirectly owns,
beneficially or of record, at least 50% of the outstanding equity or financial
interests of such entity.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become
53
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties, it being understood that all parties need
not sign the same counterpart.
9.4 Entire Agreement; Nonassignability; Parties in Interest.
This Agreement and the documents and instruments and other agreements
specifically referred to herein or delivered pursuant hereto, including the
exhibits and schedules hereto, including the Target Disclosure Schedule and the
Acquiror Disclosure Schedule, (a) together 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 except for the Confidentiality Agreement,
which shall continue in full force and effect, and shall survive any termination
of this Agreement or the Closing, in accordance with its terms; and (b) except
as otherwise set forth herein, are not intended to confer upon any other person
any rights or remedies hereunder, and shall not be assigned by operation of law
or otherwise without the written consent of the other party.
9.5 Severability. In the event that any provision of this
Agreement, or the application thereof becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further agree
to replace such void or unenforceable provision of this Agreement with a valid
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
9.6 Remedies Cumulative. Except as otherwise provided herein,
any and all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or by
law or equity upon such party, and the exercise by a party of any one remedy
will not preclude the exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of California applicable to
parties residing in California, without regard applicable principles of
conflicts of law. Other than as set out in Section 8.6 or as provided by the
Escrow Agreement, each of the parties hereto irrevocably consents to the
exclusive jurisdiction of any court located within Alameda or Santa Xxxxx
County, California, in connection with any matter based upon or arising out of
this Agreement or the matters contemplated hereby and it agrees that process may
be served upon it 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 it might otherwise have to such jurisdiction and such process.
9.8 Rules of Construction. The parties hereto agree that they
have been represented by counsel during the negotiation, preparation 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.
9.9 Amendment; Waiver. Any amendment or waiver of any of the
terms or conditions of this Agreement prior to the Effective Time must be in
writing and duly executed
54
by or on behalf of both Acquiror and Target. Any amendment or waiver of any of
the terms or conditions of this Agreement after the Effective Time must be in
writing and duly executed by or on behalf of both Acquiror and the Shareholders'
Representative. The failure of a party to exercise any of its rights hereunder
or to insist upon strict adherence to any term or condition hereof on any one
occasion shall not be construed as a waiver or deprive that party of the right
thereafter to insist upon strict adherence to the terms and conditions of this
Agreement at a later date. Further, no waiver of any of the terms and conditions
of this Agreement shall be deemed to or shall constitute a waiver of any other
term of condition hereof (whether or not similar).
55
IN WITNESS WHEREOF, Target, Acquiror and Merger Sub have caused
this Agreement to be executed and delivered by each of them or their respective
officers thereunto duly authorized, all as of the date first written above.
VPACKET COMMUNICATIONS, INC.
By:
-----------------------------------------
Name: Xxxxxxx Xxx
Title: Chief Executive Officer
ZHONE TECHNOLOGIES, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
VCI ACQUISITION CORPORATION
By:
-----------------------------------------
Name: Xxxx Xxxxxx
Title: Chief Executive Officer
--------------------------------------------
Xxx Xxxxxxx, as Shareholders' Representative
