EXHIBIT 5.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
LANTRONIX, INC.
S COMPANY ACQUISITION CORPORATION
SYNERGETIC MICRO SYSTEMS, INCORPORATED
THE PRINCIPAL SHAREHOLDERS
AND
XXXXXXX X. XXXXXXX
AS SHAREHOLDER REPRESENTATIVE
Dated as of September 19, 2001
TABLE OF CONTENTS
(continued)
Page
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ARTICLE I THE MERGER....................................................................... 2
1.1 The Merger..................................................................... 2
1.2 Effective Time................................................................. 2
1.3 Effect of the Merger........................................................... 2
1.4 Articles of Incorporation and Bylaws........................................... 2
1.5 Directors and Officers......................................................... 3
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.......... 3
1.7 Net Worth True-Up.............................................................. 7
1.8 Reserved....................................................................... 9
1.9 Dissenting Shares.............................................................. 9
1.10 Surrender of Certificates...................................................... 10
1.11 No Further Ownership Rights in Company Common Stock............................ 11
1.12 Lost, Stolen or Destroyed Certificates......................................... 11
1.13 Tax Consequences............................................................... 11
1.14 Taking of Necessary Action; Further Action..................................... 12
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS.... 12
2.1 Organization of the Company.................................................... 12
2.2 Company Capital Structure...................................................... 12
2.3 Subsidiaries................................................................... 14
2.4 Authority...................................................................... 14
2.5 No Conflict.................................................................... 15
2.6 Consents....................................................................... 15
2.7 Company Financial Statements................................................... 16
2.8 No Undisclosed Liabilities..................................................... 16
2.9 No Changes..................................................................... 16
2.10 Tax Matters.................................................................... 18
2.11 Restrictions on Business Activities............................................ 21
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
Equipment...................................................................... 21
2.13 Intellectual Property.......................................................... 22
2.14 Agreements, Contracts and Commitments.......................................... 26
2.15 Interested Party Transactions.................................................. 27
2.16 Governmental Authorization..................................................... 27
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TABLE OF CONTENTS
(continued)
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2.17 Litigation..................................................................... 27
2.18 Accounts Receivable............................................................ 28
2.19 Minute Books................................................................... 28
2.20 Environmental Matters.......................................................... 28
2.21 Brokers' and Finders' Fees; Third Party Expenses............................... 29
2.22 Employee Benefit Plans and Compensation........................................ 29
2.23 Insurance...................................................................... 34
2.24 Compliance with Laws........................................................... 34
2.25 Foreign Corrupt Practices Act.................................................. 35
2.26 Warranties; Indemnities........................................................ 35
2.27 Complete Copies of Materials................................................... 35
2.28 Representations Complete....................................................... 35
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB............................... 35
3.1 Organization, Standing and Power............................................... 35
3.2 Authority...................................................................... 35
3.3 No Conflict.................................................................... 36
3.4 Consents....................................................................... 36
3.5 Parent Common Stock............................................................ 36
3.6 Broker's and Finders' Fees..................................................... 36
3.7 SEC Documents; Parent Financial Statements..................................... 36
3.8 Ownership of Sub............................................................... 37
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME............................................. 37
4.1 Conduct of Business of the Company............................................. 37
4.2 No Solicitation................................................................ 39
ARTICLE V ADDITIONAL AGREEMENTS............................................................ 40
5.1 Shareholder Approval........................................................... 40
5.2 Sale of Restricted Securities and Post-Sale Registration of Certain Shares..... 42
5.3 Access to Information.......................................................... 42
5.4 Confidentiality................................................................ 42
5.5 Expenses....................................................................... 42
5.6 Public Disclosure.............................................................. 43
5.7 Consents....................................................................... 43
5.8 FIRPTA Compliance.............................................................. 43
5.9 Reasonable Efforts............................................................. 43
5.10 Notification of Certain Matters................................................ 43
5.11 Additional Documents and Further Assurances.................................... 44
5.12 S-8 Registration............................................................... 44
5.13 Estimated Closing Balance Sheet................................................ 44
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TABLE OF CONTENTS
(continued)
Page
5.14 Termination of Company Employee Plans......................................... 44
5.15 Resignation of Officers and Directors......................................... 44
5.16 Registration Rights Agreement................................................. 45
5.17 Proprietary Information and Inventions Assignment Agreement................... 45
5.18 Lock-Up....................................................................... 45
5.19 No Additional Issuances....................................................... 45
5.20 Consultant/Employment Agreement............................................... 45
ARTICLE VI CONDITIONS TO THE MERGER....................................................... 45
6.1 Conditions to Obligations of Parent and the Company to Effect the Merger...... 45
6.2 Conditions to the Obligations of Parent and Sub............................... 46
6.3 Conditions to Obligations of the Company and the Principal Shareholders....... 49
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW............................ 50
7.1 Survival of Representations, Warranties and Covenants......................... 50
7.2 Indemnification............................................................... 50
7.3 Escrow Arrangements........................................................... 51
7.4 Shareholder Representative.................................................... 55
7.5 Maximum Payments; Remedy...................................................... 56
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER............................................ 57
8.1 Termination................................................................... 57
8.2 Effect of Termination......................................................... 58
8.3 Amendment..................................................................... 58
8.4 Extension; Waiver............................................................. 58
ARTICLE IX GENERAL PROVISIONS............................................................. 59
9.1 Notices....................................................................... 59
9.2 Interpretation................................................................ 60
9.3 Counterparts.................................................................. 61
9.4 Entire Agreement; Assignment.................................................. 61
9.5 Severability.................................................................. 61
9.6 Other Remedies................................................................ 61
9.7 Governing Law................................................................. 61
9.8 Rules of Construction......................................................... 61
9.9 WAIVER OF JURY TRIAL.......................................................... 61
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INDEX OF EXHIBITS
Exhibit Description
Exhibit A Form of Voting Agreement
Exhibit B Form of Shareholder Certificate
Exhibit C Form of Investor Rights Agreement
Exhibit D Form of Lock-Up Agreement
Exhibit E Form of Legal Opinion of Counsel of the Company
Exhibit F Form of Non-Competition and Non-Solicitation Agreement
Exhibit G-1 Form of Employment Agreement (M. Justice)
Exhibit G-2 Form of Noncompetition Agreement (M. Justice)
Exhibit H Form of Option Lock-Up Agreement
Exhibit I Form of Legal Opinion of Counsel for Parent
Exhibit J Form of Escrow Agreement
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THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
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entered into as of September 19, 2001, by and among Lantronix, Inc., a Delaware
corporation ("Parent"), S Company Acquisition Corporation, an Illinois
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corporation and a wholly owned subsidiary of Parent ("Sub"), Synergetic Micro
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Systems, Incorporated, an Illinois corporation (the "Company"), Xxxxxxx X.
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Justice, J. Xxxxxx Xxxxx and Xxxxxxx X. Xxxxxxxxx (each, a "Principal
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Shareholder," and collectively, the "Principal Shareholders"), and with respect
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only to Article VII and Article IX hereof, Xxxxxxx Xxxxxxx in the capacity of
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the Shareholder Representative (the "Shareholder Representative").
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RECITALS
A. The Boards of Directors of each of Parent, Sub and the Company believe
it is in the best interests of each company and its respective security holders
that Parent acquire the Company through the statutory merger of Sub with and
into the Company (the "Merger") and, in furtherance thereof, have approved the
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Merger.
B. Pursuant to the Merger, among other things, (i) all outstanding
warrants to purchase capital stock of the Company shall be converted into common
stock of the Company immediately prior to the Effective Time (as defined in
Section 1.2), (ii) all of the issued and outstanding capital stock of the
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Company shall be converted into the consideration set forth herein, and (iii)
all issued and outstanding options to purchase capital stock of the Company
shall be assumed by Parent and converted into options to purchase common stock
of Parent.
C. A portion of the cash and stock otherwise payable by Parent in
connection with the Merger shall be placed in escrow by Parent as security for
the indemnification obligations set forth in this Agreement.
D. The Company and the Principal Shareholders, on the one hand, and
Parent and Sub, on the other hand, desire to make certain representations,
warranties, covenants and other agreements in connection with the Merger.
E. Concurrent with the execution and delivery of this Agreement, as a
material inducement to Parent and Sub to enter into this Agreement, the
Principal Shareholders and certain other Shareholders of the Company are
entering into Voting Agreements, in substantially the form attached hereto as
Exhibit A (the "Voting Agreements"), with Parent.
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F. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"). The parties intend for the Merger to be
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accounted for as a purchase.
NOW, THEREFORE, in consideration of the mutual agreements, covenants and
other promises set forth herein, the mutual benefits to be gained by the
performance thereof, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged and accepted, the parties
hereby agree as follows:
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ARTICLE I
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THE MERGER
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1.1 The Merger. At the Effective Time (as defined in Section 1.2 hereof)
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and subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Illinois Corporation Act of 1983 ("Illinois Law"),
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Sub shall be merged with and into the Company, the separate corporate existence
of Sub shall cease, and the Company shall continue as the surviving corporation
and as a wholly owned subsidiary of Parent. The surviving corporation after the
Merger is sometimes referred to hereinafter as the "Surviving Corporation."
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1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
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to Section 8.1 hereof, the closing of the Merger (the "Closing") will take place
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as promptly as practicable after the execution and delivery hereof by the
parties hereto, but no later than five (5) business days following satisfaction
or waiver of the conditions set forth in Article VI hereof, at the offices of
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Xxxxxx Xxxxxxx Xxxxxxxx & Xxxxxx, Professional Corporation, 000 Xxxx Xxxx Xxxx,
Xxxx Xxxx, Xxxxxxxxxx, at 10 a.m. Palo Alto time, unless another time and/or
place is mutually agreed upon in writing by Parent and the Company. The date
upon which the Closing actually occurs shall be referred to herein as the
"Closing Date." On the Closing Date, the parties hereto shall cause the Merger
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to be consummated by filing a certificate of merger with the articles of merger
attached thereto with the Secretary of State of the State of Illinois (the
"Certificate of Merger"), in accordance with the applicable provisions of
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Illinois Law (the time of acceptance by the Secretary of State of the State of
Illinois of such filing shall be referred to herein as the "Effective Time").
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1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
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shall be as provided in the applicable provisions of Illinois Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, except as otherwise agreed to pursuant to the terms of this Agreement, all
the property, rights, privileges, powers and franchises of the Company and Sub
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of the Company and Sub shall become the debts, liabilities and duties of the
Surviving Corporation.
1.4 Articles of Incorporation and Bylaws.
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(a) Unless otherwise determined by Parent prior to the Effective
Time, the articles of incorporation of the Surviving Corporation shall be
identical to the articles of incorporation of Sub as in effect immediately prior
to the Effective Time, until thereafter amended in accordance with Illinois Law
and as provided in such articles of incorporation.
(b) Unless otherwise determined by Parent prior to the Effective
Time, the bylaws of Sub, as in effect immediately prior to the Effective Time,
shall be the bylaws of the Surviving Corporation at the Effective Time until
thereafter amended in accordance with Illinois Law and as provided in the
articles of incorporation of the Surviving Corporation and such bylaws;
provided, however, that the provisions of the articles of incorporation and
bylaws of Sub concerning liabilities and indemnification of officers, directors
and employees shall be no less favorable to officers, directors and employees
than provisions regarding such matters in the Parent's bylaws.
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1.5 Directors and Officers.
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(a) Directors. Unless otherwise determined by Parent prior to the
Effective Time, the directors of Sub immediately prior to the Effective Time
shall be the directors of the Surviving Corporation immediately after the
Effective Time, each to hold the office of a director of the Surviving
Corporation in accordance with the provisions of Illinois Law and the articles
of incorporation and bylaws of the Surviving Corporation until their successors
are duly elected and qualified.
(b) Officers. Unless otherwise determined by Parent prior to the
Effective Time, the officers of Sub immediately prior to the Effective Time
shall be the officers of the Surviving Corporation immediately after the
Effective Time, each to hold office in accordance with the provisions of the
bylaws of the Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
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(a) Definitions. For all purposes of this Agreement, the following
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terms shall have the following respective meanings:
"Average Trading Price" shall mean the average of the Trading
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Price during the ten (10) business day period prior to the third (3rd) business
day before the applicable date of determination.
"Closing Stock Price" shall mean the Trading Price on the Closing
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Date.
"Company Common Stock" shall mean shares of common stock, no par
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value per share, of the Company.
"Company Options" shall mean all issued and outstanding options
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issued pursuant to the Plan to purchase or otherwise acquire Company Common
Stock (whether or not vested) held by any person or entity.
"Company Restricted Stock" shall mean shares of Company Common
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Stock subject to a right of repurchase by the Company.
"Company Warrants" shall mean all issued and outstanding
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warrants to purchase or otherwise acquire Company Common Stock (whether or not
vested) held by any person or entity.
"Escrow Agent" shall mean Chase Manhattan Bank, N.A., or another
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institution acceptable to Parent and the Shareholder Representative (as defined
in Section 7.4 hereof).
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"Escrow Cash" shall mean twenty and three-tenths of one percent
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(20.3%) of the Merger Cash.
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"Escrow Shares" shall mean twenty and three-tenths of one percent
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(20.3%) of the Merger Shares.
"Exchange Ratio" shall mean an amount equal to the quotient
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obtained by dividing (x) the Merger Shares by (y) the Total Outstanding Shares.
"GAAP" shall mean United States generally accepted accounting
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principles consistently applied from period to period; provided, however, that
with respect to financial information that is to be presented or prepared or
determined in accordance with GAAP, but which is not year-end financial
statements, "GAAP" does not include footnotes and other presentation items that
may be required by GAAP and such financial information remains subject to year-
end adjustments.
"Knowledge" shall mean (i) with respect to the Company, the
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actual conscious knowledge of the Company's executive officers and directors,
assuming that such persons shall have made reasonable inquiry of those employees
of the Company whom such executive officers and directors reasonably believe
would have actual knowledge of the matters represented and (ii) with respect to
the Principal Shareholders, the actual conscious knowledge of such Principal
Shareholders.
"Material Adverse Effect" shall mean any change, event or effect
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that is materially adverse to the business, assets (whether tangible or
intangible), condition (financial or otherwise), results of operations or
capitalization of the Company and its subsidiaries, taken as a whole.
"Merger Cash" shall mean three million one hundred thousand
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dollars ($3,100,000) in cash consideration, to be received by the Shareholders
in connection with the Merger, on a Pro Rata Basis, as partial consideration in
exchange for the Company Common Stock (as adjusted in accordance with Sections
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1.7 and 5.5 and subject to Article VII); provided, however, that if the Average
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Trading Price is less than five dollars and ninety-five and one-half cents
($5.955), then the Merger Cash shall be reduced by five dollars and ninety-five
and one-half cents ($5.955) and the Merger Shares shall be increased by one
share of Parent Common Stock successively until the Merger Cash equals one-
fourth of the value of the Merger Shares (valued at the Average Trading Price).
"Merger Shares" shall mean that number of shares of Parent Common
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Stock as shall have an aggregate value of thirteen million two hundred thousand
dollars ($13,200,000) based on the Average Trading Price, to be received by the
Shareholders in connection with the Merger, on a Pro Rata Basis, as partial
consideration in exchange for the Company Common Stock (as adjusted in
accordance with Sections 1.7 and 5.5 and subject to Article VII); provided,
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however, that if the Average Trading Price is greater than nine dollars and
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ninety-two and one-half cents ($9.925), Merger Shares shall mean one million
three hundred twenty-nine thousand nine hundred seventy-five (1,329,975) shares
of Parent Common Stock; and provided, further, that if the Average Trading Price
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is less than five dollars and ninety-five and one-half cents ($5.955), then
Merger Shares shall mean two million two hundred sixteen thousand six hundred
and twenty-five
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(2,216,625) shares of Parent Common Stock, increased as described in the proviso
in the definition of Merger Cash.
"Option Exchange Ratio" shall be equal to (i) the quotient of
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(x) the quotient of (A) sixteen million three hundred thousand dollars
($16,300,000), divided by (B) the number of Total Outstanding Shares divided by
(y) the Closing Stock Price, and (ii) appropriately adjusted to fully reflect
the effect of any stock split, reverse stock split, stock dividend,
reorganization, recapitalization or like change with respect to Parent Common
Stock occurring after the date hereof and prior to the Closing Date.
"Parent Common Stock" shall mean unregistered shares of the
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common stock, par value $0.001 per share, of Parent.
"Parent Option" shall mean any option to purchase shares of
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Parent Common Stock issued pursuant to the terms of Section 1.6(d) hereof in
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connection with the assumption of a Company Option.
"Plan" shall mean the Synergetic Micro Systems, Incorporated
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Stock Option Plan.
"Pro Rata Basis" shall mean, with respect to each Shareholder, an
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amount equal to the quotient obtained by dividing (x) the number of shares of
Company Common Stock owned by such Shareholder immediately prior to the
Effective Time by (y) the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time.
"Pro Rata from Merger Cash and Merger Shares" shall mean an
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amount to be paid from Merger Cash and Merger Shares in the same proportion that
the Merger Cash bears to the Merger Shares.
"Shareholder" shall mean any holder of any Company Common Stock
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immediately prior to the Effective Time.
"Total Outstanding Shares" shall be the aggregate number of
------------------------
shares of Company Common Stock (including any rights convertible into, or
exercisable or exchangeable for, shares of Company Common Stock on an as-
converted, exercised, or exchanged basis other than Company Options) issued and
outstanding immediately prior to the Effective Time.
"Trading Price" shall mean the closing price of Parent Common
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Stock on the applicable measuring date, as reported on xxx.xxxxxx.xxx.
(b) Effect on Capital Stock. At the Effective Time, each outstanding
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share of Company Common Stock, upon the terms and subject to the conditions set
forth below and throughout this Agreement, will be canceled and extinguished and
be converted automatically into the right to receive such number of shares of
Parent Common Stock equal to the Exchange Ratio, rounded (with amounts 0.5 and
greater rounded up) to the nearest whole number of shares of Parent
5
Common Stock, plus the portion of the Merger Cash allocable to each share, upon
the terms and subject to conditions set forth in this Section 1.6 and throughout
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this Agreement, including, without limitation, the escrow provisions set forth
in Article VII. If any Company Restricted Stock is outstanding immediately prior
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to the Effective Time, then the Merger Shares issued in exchange for such
Company Restricted Stock shall be subject to the same restrictions and vesting
arrangements that were applicable to such Company Restricted Stock immediately
prior to the Effective Time, and no vesting acceleration of these shares shall
occur by reason of the Merger or any other transaction contemplated by this
Agreement or upon the subsequent termination of service or otherwise. All
outstanding rights to repurchase unvested shares of Company Restricted Stock
(the "Repurchase Options") that the Company may hold immediately prior to the
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Effective Time shall be assigned to the Parent in the Merger and shall
thereafter be exercisable by Parent upon the same terms and subject to the same
conditions that were in effect immediately prior to the Effective Time, except
that the shares purchasable pursuant to the Repurchase Options and the purchase
price per share shall be adjusted appropriately to reflect the applicable number
of shares of Parent Common Stock and cash issuable in respect of one share of
Company Common Stock pursuant to this Section 1.6(b).
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(c) Payment of Aggregate Consideration.
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(i) At the Closing, the Shareholders together shall receive the
Merger Shares less the Escrow Shares;
(ii) At the Closing, the Escrow Shares shall be placed in the
Escrow Fund (as defined in Section 7.3(a) below), which shall be placed with the
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Escrow Agent pursuant to the terms of an escrow agreement substantially in the
form attached hereto as Exhibit J (the "Escrow Agreement");
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(iii) By check delivered at the Closing or by wire transfer
initiated at the Closing, as each Shareholder may designate, the Shareholders
shall receive from the Parent the Merger Cash, less the Escrow Cash; and
(iv) At the Closing, the Escrow Cash shall be placed in the
Escrow Fund, which shall be placed with the Escrow Agent pursuant to the terms
of the Escrow Agreement.
(d) Assumption of Company Options; Conversion of Company Warrants.
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(i) As soon as practicable following the Closing but effective
as of the Effective Time, each Company Option shall be assumed by Parent as a
Parent Option. Subject to Section 6.2(t), each Company Option so assumed by
Parent pursuant to this Section 1.6(d) shall continue to have, and be
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subject to, the same terms and conditions (including vesting terms) set forth in
the Plan, and the option agreements relating thereto, as in effect immediately
prior to the Effective Time, except that (A) such assumed Company Option will be
exercisable for that number of whole shares of Parent Common Stock equal to the
product of the number of shares of Company Common Stock that were issuable upon
exercise of such Company Option (whether or not then exercisable or vested)
immediately prior to the Effective Time multiplied by the Option Exchange Ratio,
rounded down to the nearest whole number of shares of Parent Common Stock, and
(B) the per share exercise
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price for the shares of Parent Common Stock issuable upon exercise of such
assumed Company Option shall be equal to option exercise price (rounded up to
the nearest whole cent) of the Company Option divided by the Option Exchange
Ratio.
(ii) At the Effective Time, each outstanding warrant or other
right to purchase Company Common Stock (excluding unexercised Company Options)
(a "Company Warrant") shall not be assumed by Parent and shall be converted to
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Company Common Stock and exchanged for Parent Common Stock pursuant to the
provisions hereof.
(iii) Prior to the Effective Time, the Company shall take all
action necessary to effect the transactions anticipated by this Section 1.6(d)
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under all Company Option agreements and any outstanding Company Warrants and any
other plan or arrangement of the Company.
(e) Assumption Agreement. Promptly following the Closing, Parent
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shall issue to each holder of a Company Option to be assumed by Parent pursuant
to Section 1.6(d) hereof a document evidencing the assumption of such Company
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Option by Parent, and each former holder of a Company Option so assumed by
Parent shall acknowledge the receipt of the same in exchange for such holder's
Company Option.
(f) Withholding Taxes. The requisite number of shares of Parent
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Common Stock issuable to a Shareholder pursuant to Section 1.6(b) hereof shall
be subject to, and reduced by, the amount of any state, federal and foreign
withholding taxes incurred (and not previously paid by or on behalf of such
Shareholder or the Company) in connection with the acquisition of Company Common
Stock upon the exercise of Company Options, upon the lapsing of repurchase
rights in respect of shares of Company Common Stock, or upon payment of a bonus
in the form of Company Common Stock, if any, to such Shareholder.
(g) Shareholder Loans. In the event that any Shareholder has
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outstanding loans from the Company as of the Effective Time, the consideration
payable to such Shareholder pursuant to this Section 1.6 shall be reduced by an
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amount equal to the outstanding principal plus accrued interest of such
Shareholder's loans as of the Effective Time and such loans will be cancelled.
(h) Capital Stock of Sub. Each share of Common Stock of Sub issued
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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 Sub
evidencing ownership of any such shares shall continue to evidence ownership of
such shares of capital stock of the Surviving Corporation.
1.7 Net Worth True-Up.
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(a) Estimated Closing Balance Sheet. No later than five (5) business
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days prior to the Closing Date, the Company shall deliver to Parent an estimated
statement, prepared in good faith, of the Closing Net Worth (as defined below)
of the Company as of the Closing Date (the "Estimated Closing Balance Sheet"),
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which Estimated Closing Balance Sheet shall be in form and
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substance reasonably satisfactory to Parent and shall include, among other
things, all amounts owed by the Company to American National Bank and Trust
Company of Chicago as of the date of the Estimated Closing Balance Sheet.
(b) Interim Price Adjustment. On the Closing Date, the Merger Cash
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and Merger Shares to be received by all Shareholders pursuant to Section 1.6
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shall be reduced (on a Pro Rata Basis, Pro Rata from Merger Cash and Merger
Shares) by the amount (if any) by which $300,000 plus (or minus) any accumulated
earnings (or loss) from and after January 1, 2001 (such accumulated earnings (or
loss) shall be calculated by comparing the accumulated earnings (or loss) on the
December 31, 2000, balance sheet with the accumulated earnings (or loss) on the
Estimated Closing Balance Sheet)(the "Base Net Worth") exceeds the Closing Net
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Worth (as defined below) as set forth in the Estimated Closing Balance Sheet
(the "Interim Price Adjustment"). The Interim Price Adjustment shall take the
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form of a pro rata reduction in the Merger Cash and Merger Shares (valued at the
Closing Stock Price). As used in this Section 1.7, "Closing Net Worth" shall
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mean total assets less total liabilities of the Company, determined in
accordance with GAAP.
(c) Company Net Worth Report.
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(i) Parent Preparation. At Parent's election, within seventy-
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five (75) days following the Closing Date, Parent's internal auditors ("Parent's
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Accountants") shall furnish the Principal Shareholders with a report (the
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"Company Net Worth Report"), which shall set forth, in reasonable detail and in
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the same form as the Estimated Closing Balance Sheet, the Closing Net Worth of
the Company as of the Closing Date calculated in accordance with GAAP. In making
such determination, Parent's Accountants shall prepare a balance sheet for the
Company as of the Closing Date audited by Parent's Accountants and shall include
such audited balance sheet, and their report thereon, as part of the Company Net
Worth Report, each prepared in accordance with GAAP. The Company Net Worth
Report shall indicate the procedures employed by Parent's Accountants in
preparing the Company Net Worth Report and shall contain such other financial
information and methods of calculation as may be reasonably necessary for
Shareholders to evaluate the accuracy thereof. In the event Parent's Accountants
disagree with the accumulated earnings (or loss) presented on the December 31,
2000, balance sheet or the Estimated Closing Balance Sheet, Parent's Accountants
shall furnish the Principal Shareholders with a revised calculation of such
accumulated earnings (or loss) and such revised calculations shall be part of
the Company Net Worth Report (and shall be subject to the review and dispute
resolution provisions of this Section 1.7).
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(ii) Shareholder Representative Review. Shareholder
---------------------------------
Representative (who shall have the right to act on behalf of all Shareholders
pursuant to this Section 1.7) shall have a period of forty-five (45) days after
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receipt of the Company Net Worth Report to notify Parent of its acceptance or
rejection (and in the case of a rejection, there shall be included in such
notice the reasons for such rejection in reasonable detail) of the Company Net
Worth Report.
(iii) Dispute Resolution In the event no notice is received by
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Parent during such forty-five (45) day period, the Company Net Worth Report and
any required adjustments resulting therefrom shall be deemed accepted by
Shareholders. In the event Shareholders shall reject the Company Net Worth
Report, Shareholders' independent auditors ("Shareholders' Accountants")
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and Parent's Accountants shall promptly (and in any event within sixty (60) days
following the date upon which Shareholders shall reject the Company Net Worth
Report) attempt to make a joint determination of the Closing Net Worth of the
Company as of the Closing Date and such determination and any required
adjustments resulting therefrom shall be final and binding on the parties
hereto. In the event the Shareholders' Accountants and Parent's Accountants are
unable to agree upon the required Closing Net Worth determination as herein
provided, within two hundred twenty-five (225) days from the Closing Date, such
determination shall be made by a third-party accountant who shall have no prior
personal or professional relationships with the Parent, Sub or the Company. Such
third party accountant shall be mutually selected and agreed upon by Parent's
Accountants and Shareholders' Accountants. The date upon which written notice is
provided to the Shareholder Representative of the final Closing Net Worth's
determined shall be the "Closing Net Worth Determination Date."
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(d) Deficit Payment. On the Closing Net Worth Determination Date, if
---------------
the Company Net Worth Report shall reflect a Closing Net Worth of the Company as
of the Closing Date that is less than the Closing Net Worth set forth in the
Estimated Closing Balance Sheet, as determined pursuant to Section 1.7(b) above,
--------------
then the amount of such deficit (the "Deficit") shall be payable to Parent
-------
without regard to the Threshold Amount (as defined in Section 7.3(b) hereof)
--------------
within fifteen (15) business days of the Closing Net Worth Determination Date
jointly and severally by the Shareholders on a Pro Rata Basis. Any such payment
shall be Pro Rata from Merger Cash and Merger Shares.
1.8 Reserved.
--------
1.9 Dissenting Shares
-----------------
(a) Notwithstanding any other provisions of this Agreement to the
contrary, any shares of Company Common Stock held by a holder who has exercised
and perfected appraisal rights for such shares in accordance with Illinois Law
and who has not effectively withdrawn or lost such holder's appraisal rights
("Dissenting Shares") shall not be converted into or represent a right to
-----------------
receive the consideration for Company Common Stock set forth in Section 1.6 (and
-----------
subject to the provisions of Sections 7.2 and 7.3), but the holder thereof shall
------------ ---
only be entitled to such rights as are provided by Illinois Law.
(b) Notwithstanding the provisions of Section 1.9(a) hereof, if any
--------------
holder of Dissenting Shares shall effectively withdraw or lose (through failure
to perfect or otherwise) such holder's appraisal rights under Illinois Law,
then, as of the later of the Effective Time and the occurrence of such event,
such holder's shares shall automatically be converted into and represent only
the right to receive the consideration for Company Common Stock set forth in
Section 1.6 hereof, without interest thereon, and subject to the provisions of
-----------
Sections 7.2 and 7.3, upon surrender of the certificate representing such
------------ ---
shares.
(c) The Company shall give Parent (i) prompt notice of any written
demand for appraisal received by the Company pursuant to the applicable
provisions of Illinois Law, and (ii) the opportunity to consult regarding all
negotiations and proceedings with respect to such demands. The
9
Company shall not, except with the prior written consent of Parent which shall
not be unreasonably withheld, voluntarily make any payment with respect to any
such demands or offer to settle or settle any such demands. Notwithstanding the
foregoing, to the extent that Parent or the Company makes any payment or
payments in respect of any Dissenting Shares in excess of the consideration that
otherwise would have been payable in respect of such shares pursuant to this
Agreement valued at the Closing Stock Price or reasonably incurs any other costs
or expenses in respect any Dissenting Shares excluding payments for such shares)
(together "Dissenting Share Payments") that would not have otherwise been
-------------------------
incurred, Parent shall be entitled to recover the amount of such Dissenting
Share Payments (without regard to the Threshold Amount) jointly and severally
from the Shareholders on a Pro Rata Basis. Any such payment shall be Pro Rata
from Merger Cash and Merger Shares.
1.10 Surrender of Certificates.
-------------------------
(a) Exchange Agent. The Secretary of Parent, or its designee, shall
--------------
serve as the exchange agent (the "Exchange Agent") for the Merger.
--------------
(b) Parent to Provide Parent Common Stock. Promptly prior to the
-------------------------------------
Closing, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the shares of Parent Common Stock issuable
---------
pursuant to Section 1.6(b) in exchange for outstanding shares of Company Common
--------------
Stock; provided that, on behalf of the Shareholders, Parent shall deposit into
the Escrow Fund (as defined in Section 7.3(a) the Escrow Shares out of the
--------------
aggregate number of shares of Parent Common Stock otherwise issuable to the
Shareholders pursuant to Section 1.6. Each Shareholder shall be deemed to have
-----------
contributed to the Escrow Shares to the Escrow Fund on Pro Rata Basis.
(c) Exchange Procedures. On the Closing Date, the Shareholders will
-------------------
surrender the certificates representing their shares of Company Common Stock
(the "Company Stock Certificates") to the Exchange Agent for cancellation
--------------------------
together with (x) a letter of transmittal in such form and having such
provisions that Parent may reasonably request and (y) a fully executed
Shareholder Certificate in substantially the form attached hereto as Exhibit B
---------
(a "Shareholder Certificate"). Upon surrender of a Company Stock Certificate for
-----------------------
cancellation to the Exchange Agent, or such other agent or agents as may be
appointed by Parent, together with such letter of transmittal and Shareholder
Certificate, duly completed and validly executed in accordance with the
instructions thereto, subject to the terms of Section 1.10(e), the holder of
---------------
such Company Stock Certificate shall receive from the Exchange Agent in exchange
therefor, a certificate representing the number of whole shares of Parent Common
Stock (less the number of shares of Parent Common Stock to be deposited in the
Escrow Fund on such holder's behalf pursuant to Section 1.10(b) and Article VII)
--------------- ------------
to which such holder is entitled pursuant to Section 1.6(b), and the Company
--------------
Stock Certificate so surrendered shall be canceled. Until so surrendered, each
outstanding Company Stock Certificate will be deemed from and for all corporate
purposes, to evidence only the ownership of the number of full shares of Parent
Common Stock into which such shares of Company Common Stock shall have been so
converted.
10
(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Company Stock Certificate with respect to the
shares of Parent Common Stock represented thereby until the holder of record of
such Certificate shall surrender such Company Stock Certificate. Subject to
applicable law, following surrender of any such Company Stock Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of Parent Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such whole
shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.10, neither the Exchange Agent, the Surviving Corporation, nor any
------------
party hereto shall be liable to a holder of shares of Company Common Stock for
any amount properly paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
1.11 No Further Ownership Rights in Company Common Stock. The shares of
---------------------------------------------------
Parent Common Stock paid in respect of the surrender for exchange of shares of
Company Common Stock in accordance with the terms hereof shall be deemed to be
full satisfaction of all rights pertaining to such shares of Company Common
Stock, and there shall be no further registration of transfers on the records of
the Surviving Corporation of shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Company Stock Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Article I.
---------
1.12 Lost, Stolen or Destroyed Certificates. In the event any certificates
--------------------------------------
evidencing shares of Company Common Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificates, upon the making of an affidavit of that fact and
indemnification with respect thereto by the holder thereof, such amount, if any,
as may be required pursuant to Section 1.6. In no event shall Parent require any
-----------
Shareholder who is the owner of such lost, stolen or destroyed certificate to
deliver a bond to secure such lost, stolen or destroyed certificate.
1.13 Tax Consequences. It is intended by the parties hereto that the Merger
----------------
shall constitute a reorganization within the meaning of Section 368(a) of the
Code.
11
1.14 Taking of Necessary Action; Further Action. If at any time after the
------------------------------------------
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company, then Parent, Sub, and the officers and directors
of Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
AND THE PRINCIPAL SHAREHOLDERS
------------------------------
The Company and each of the Principal Shareholders (subject to the
limitations on liability contained in Sections 7.3 and 7.5 hereof) hereby
------------ ---
jointly and severally represent and warrant to Parent and Sub, subject to such
exceptions as are specifically disclosed in the disclosure schedule supplied by
the Company and the Principal Shareholders to Parent (the "Disclosure Schedule")
-------------------
and dated as of the date hereof, that on the date hereof and as of the Effective
Time as though made at the Effective Time as follows:
2.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Illinois. The Company has the corporate power to own its properties and to carry
on its business as currently conducted. Except as set forth in Section 2.1 of
-----------
the Disclosure Schedule, the Company is duly qualified or licensed to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to qualify would have a Material Adverse Effect. The Company
has delivered a true and correct copy of its articles of incorporation and
bylaws, each as amended to date and in full force and effect on the date hereof,
to Parent. Section 2.1 of the Disclosure Schedule lists the directors and
-----------
officers of the Company. The operations now being conducted by the Company are
not now and have never been conducted by the Company under any other name,
except the name "FactoryCOMM, LLC".
2.2 Company Capital Structure.
-------------------------
12
(a) The authorized capital stock of the Company consists of twenty
million (20,000,000) shares of common stock, of which seven million one hundred
fifty-eight thousand (7,158,000) shares are issued and outstanding as of the
date hereof. As of the date hereof, the capitalization of the Company is as set
forth in Section 2.2 of the Disclosure Schedule. Assuming the same total
-----------
capitalization as on the date hereof, the total number of shares of Company
Common Stock outstanding as of immediately prior to the Effective Time (assuming
the conversion, exercise or exchange of all securities convertible into, or
exercisable or exchangeable for, shares of Company Common Stock, other than
unexercised Company Options) will be as set forth in Section 2.2 of the
-----------
Disclosure Schedule. The issued and outstanding Company Common Stock is held by
the persons with the domicile addresses and in the amounts set forth in Section
-------
2.2 of the Disclosure Schedule. All outstanding shares of Company Common Stock
---
are duly authorized, validly issued, fully paid and non-assessable and not
subject to preemptive rights created by statute, the articles of incorporation
or bylaws of the Company, or any agreement to which the Company is a party or by
which it is bound. All outstanding shares of Company Common Stock and Company
Options have been issued in compliance with all applicable federal, state,
foreign, or local statutes, laws, rules, or regulations, including federal and
state securities laws. The Company has not, and will not have, suffered or
incurred any liability (contingent or otherwise) or Loss (as defined in Section
-------
7.2 hereof) relating to or arising out of the issuance or repurchase of any
---
Company Common Stock or Company Options, or out of any agreements or
arrangements relating thereto. There are no declared or accrued but unpaid
dividends with respect to any shares of Company Common Stock. The Company has no
other capital stock authorized, issued or outstanding. No vesting provisions
applicable to any shares of Company Restricted Stock, or to any other rights to
purchase Company Common Stock (other than the Company Warrants identified on
Section 2.2 of the Disclosure Schedule and the Company Options ) will accelerate
-----------
as a result of the Merger. The Company has made no repurchases of its capital
stock.
(b) Except for the Plan and the Phantom Stock Plan (now dissolved),
the Company has never adopted or maintained any stock option plan or other plan
providing for equity compensation of any person. The Company has reserved one
million nine hundred forty-seven thousand nine hundred fifty (1,947,950) shares
of Company Common Stock for issuance to employees and directors of, and
consultants to, the Company upon the exercise of options granted under the Plan,
of which (i) one million five hundred thousand (1,500,000) shares are issuable
as of the date hereof, upon the exercise of outstanding, unexercised options
grants under the Plan, and (ii) one hundred five thousand (105,000) shares have
been issued as of the date hereof, upon exercise of options granted under the
Plan. Section 2.2 of the Disclosure Schedule sets forth for outstanding Company
-----------
Options, the name of the holder of such option, the domicile address of such
holder, the number of shares of Company Common Stock issuable upon the exercise
of such option, the exercise price of such option, the vesting schedule for such
option, and whether such option is intended to qualify as an incentive stock
option as defined in Section 422 of the Code. Section 2.2 of the Disclosure
-----------
Schedule sets forth the outstanding Company Warrants, the name of the holder of
such Company Warrant and the number of shares of Company Common Stock issuable
upon exercise of such Company Warrant. As of the Closing Date in conjunction
with the Closing, all Company Warrants will be exercised by their terms for
Company Common Stock. As of the Closing Date, an aggregate of one million five
hundred thousand (1,500,000) and ninety-four thousand
13
(94,000) shares of Company Common Stock are issuable upon the exercise of
outstanding Company Options and Company Warrants, respectively. Except for the
Company Options and Company Warrants, there are no other options, warrants,
calls, rights, commitments or agreements of any character, written or oral, to
which the Company is a party or by which it is bound obligating the Company to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of the Company or
obligating the Company to grant, extend, accelerate the vesting of, change the
price of, otherwise amend or enter into any such option, warrant, call, right,
commitment or agreement. There are no outstanding or authorized stock
appreciation, phantom stock, profit participation, or other similar rights with
respect to the Company. Except as contemplated hereby, by the Voting Agreement
of even date herewith and the Company's Shareholder Agreement, and as set forth
in Section 2.2 of the Disclosure Schedule, there are no voting trusts, proxies,
-----------
or other agreements or understandings with respect to the voting stock of the
Company. Assuming the Parent is the sole record and beneficial holder of all
issued and outstanding equity securities of Sub, as result of the Merger, Parent
will be the sole record and beneficial holder of all issued and outstanding
Company Common Stock and all rights to acquire or receive any shares of Company
Common Stock, whether or not such shares of Company Common Stock are
outstanding.
2.3 Subsidiaries. Except as provided in Section 2.3 of the Disclosure
------------ -----------
Schedule, the Company does not have, and has never had, any subsidiaries or
affiliated companies and does not otherwise own, and has never otherwise owned,
any shares of capital stock or any interest in, or control, directly or
indirectly, any other corporation, partnership, association, joint venture or
other business entity.
2.4 Authority. The Company and each of the Principal Shareholders have
---------
all requisite power and authority to enter into this Agreement and any Related
Agreements (as hereinafter defined in this Section 2.4) to which it or he, as
-----------
the case may be, is a party and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and any Related
Agreements to which the Company is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company, and no further action is
required on the part of the Company to authorize the Agreement and any Related
Agreements to which it is a party and the transactions contemplated hereby and
thereby, subject only to the approval of this Agreement and the transactions
contemplated hereby by the Shareholders. This Agreement and the Merger have been
unanimously approved by the Board of Directors of the Company. This Agreement
and each of the Related Agreements to which the Company and/or the Principal
Shareholders are parties have been duly executed and delivered by the Company
and each of the Principal Shareholders, as the case may be, and assuming the due
authorization, execution and delivery by the other parties hereto and thereto,
constitute the valid and binding obligations of the Company and each of the
Principal Shareholders, enforceable against each such party in accordance with
their respective terms, except as such enforceability may be subject to the laws
of general application relating to bankruptcy, insolvency, and the relief of
debtors and rules of law governing specific performance, injunctive relief, or
other equitable remedies. For all purposes of this Agreement, the term "Related
-------
Agreements" shall mean
----------
14
the Voting Agreements, Employment Agreements, Non-Competition Agreements, Stand-
off Agreements, Certificate of Merger, Registration Rights Agreement and Escrow
Agreement.
2.5 No Conflict. Except as provided in Section 2.5 of the Disclosure
----------- -----------
Schedule, the execution and delivery by the Company and each of the Principal
Shareholders of this Agreement and any Related Agreement to which the Company
and/or any Principal Shareholder is a party, and the consummation of the
transactions contemplated hereby and thereby, will not conflict with or result
in any violation of or default under (with or without notice or lapse of time,
or both) or give rise to a right of termination, cancellation, modification or
acceleration of any obligation or loss of any benefit under (any such event, a
"Conflict") (i) any provision of the articles of incorporation or bylaws of the
--------
Company, (ii) any mortgage, indenture, lease, contract, covenant or other
agreement, instrument or commitment, permit, concession, franchise or license
(each a "Contract" and collectively the "Contracts") to which the Company or any
-------- ---------
of its properties or assets (whether tangible or intangible), or to which any of
the Principal Shareholders, is subject, or (iii) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or any of
its properties (whether tangible or intangible) or assets, or applicable to any
of the Principal Shareholders, except in each case as to (i) and (iii), where
such Conflict will not have a Material Adverse Effect or will not have an affect
on the legality, validity or enforceability of this Agreement. Except as set
forth in Section 2.5 of the Disclosure Schedule, the Company is in compliance
-----------
with and has not breached, violated or defaulted under, or received notice that
it has breached, violated or defaulted under, any of the terms or conditions of
any Contract, nor is the Company or any Principal Shareholder aware of any event
that would constitute such a breach, violation or default with the lapse of
time, giving of notice or both. Except as set forth in Section 2.5 of the
-----------
Disclosure Schedule, each Contract is in full force and effect, and the Company
is not subject to any default thereunder, nor to the Knowledge of the Company or
the Principal Shareholders is any party obligated to the Company pursuant to any
such Contract subject to any default thereunder. Except as provided in Section
-------
2.5 of the Disclosure Schedule, the Company has obtained, or will obtain prior
---
to the Effective Time, all necessary consents, waivers and approvals of parties
to any Contract as are required thereunder in connection with the Merger, or for
any such Contract to remain in full force and effect without limitation,
modification or alteration after the Effective Time. Except as provided in
Section 2.5 of the Disclosure Schedule, following the Effective Time, the
-----------
Surviving Corporation will be permitted to exercise all of its rights under the
Contracts without the payment of any additional amounts or consideration other
than ongoing fees, royalties or payments that the Company would otherwise be
required to pay pursuant to the terms of such Contracts had the transactions
contemplated by this Agreement not occurred.
2.6 Consents. Except as provided in Section 2.6 of the Disclosure
-------- -----------
Schedule, no consent, waiver, approval, order or authorization of, or
registration, declaration or filing with any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission (each, a "Governmental Entity")
-------------------
or any third party, including a party to any agreement with the Company (so as
not to trigger any Conflict), is required by or with respect to the Company
and/or the Principal Shareholders in connection with the execution and delivery
of this Agreement and any Related Agreement to which the Company and/or a
Principal Shareholder is a party or the consummation of the transactions
15
contemplated hereby and thereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws and (ii) the filing of the
Certificate of Merger with the Secretary of State of the State of Illinois, and
(iii) the approval of this Agreement and the transactions contemplated hereby by
the Shareholders.
2.7 Company Financial Statements. Section 2.7 of the Disclosure
---------------------------- -----------
Schedule sets forth the Company's unaudited balance sheet as of June 30, 2001,
and the related unaudited statement of income for the period then ended
(collectively, the "Financials"). The Financials are true and correct in all
----------
material respects and have been prepared in accordance with GAAP. The Financials
present fairly the Company's financial condition and operating results as of the
dates and during the periods indicated therein, subject to normal year-end
adjustments, which are not material (under the principles of GAAP) in amount or
significance in any individual case or in the aggregate. The Company's unaudited
balance sheet as of June 30, 2001 is referred to hereinafter as the "Current
-------
Balance Sheet."
-------------
2.8 No Undisclosed Liabilities. Except as set forth with respect to
--------------------------
obligations arising after June 30, 2001 on Section 2.9 of the Disclosure
-----------
Schedule, the Company has no liability, indebtedness, obligation, expense,
claim, deficiency, guaranty or endorsement of any type, whether accrued,
absolute, contingent, matured, unmatured or other (whether or not required to be
reflected in financial statements in accordance with GAAP), which individually
or in the aggregate (i) has not been reflected in the Current Balance Sheet, or
(ii) has not arisen in the ordinary course of business consistent with past
practices since June 30, 2001.
2.9 No Changes. Except as set forth in Section 2.9 of the Disclosure
---------- -----------
Schedule, since June 30, 2001, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted and consistent with past practices;
(b) amendments or changes to the articles of incorporation or bylaws
of the Company;
(c) capital expenditure or commitment by the Company exceeding
$10,000 individually or $25,000 in the aggregate;
(d) payment, discharge or satisfaction, in any amount in excess of
$10,000 in any one case, or $25,000 in the aggregate, of any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise),
other than payment, discharge or satisfaction in the ordinary course of business
of liabilities reflected or reserved against in the Current Balance Sheet;
(e) destruction of, damage to, or loss of any material assets
(whether tangible or intangible), material business or material customer of the
Company (whether or not covered by insurance);
16
(f) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action with respect to the Company;
(g) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates) by the Company other than as
required by GAAP;
(h) change in any material election in respect of Taxes (as defined
below), adoption or change in any accounting method in respect of Taxes,
agreement or settlement of any claim or assessment in respect of Taxes, or
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(i) revaluation by the Company of any of its assets (whether tangible
or intangible);
(j) declaration, setting aside or payment of a dividend or other
distribution (whether in cash, stock or property) in respect of any Company
Common Stock, or any split, combination or reclassification in respect of any
shares of Company Common Stock, or any issuance or authorization of any issuance
of any other securities in respect of, in lieu of or in substitution for shares
of Company Common Stock, or any direct or indirect repurchase, redemption, or
other acquisition by the Company of any shares of Company Common Stock (or
options, warrants or other rights convertible into, exercisable or exchangeable
therefor), except in accordance with the agreements evidencing Company Options;
(k) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment by the Company of a severance payment, termination payment, bonus or
other additional salary or compensation to any such person except in the
ordinary course of business as conducted and consistent with past practices;
(l) any agreement, contract, covenant, instrument, lease, license or
commitment to which the Company is a party or by which it or any of its assets
(whether tangible or intangible) are bound or any termination, extension,
amendment or modification of the terms of any agreement, contract, covenant,
instrument, lease, license or commitment to which the Company is a party or by
which it or any of its assets are bound, except in the ordinary course of
business as conducted and consistent with past practices;
(m) sale, lease, license or other disposition of any of the material
assets (whether tangible or intangible) or material properties of the Company,
including, but not limited to, the sale of any accounts receivable of the
Company, or any creation of any security interest in such material assets or
material properties, except in the ordinary course of business as conducted and
consistent with past practices;
(n) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for draws by the
17
Company under its secured revolving credit facility and advances to employees
for travel and business expenses, in each case, in the ordinary course of
business consistent with past practices;
(o) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company,
except in the ordinary course of business as conducted and consistent with past
practices;
(p) the commencement, settlement, notice or, to the Knowledge of the
Company or the Principal Shareholders, threat of any lawsuit or proceeding or
other investigation against the Company or its affairs, or any reasonable basis
for any of the foregoing;
(q) notice of any claim or potential claim of ownership by any person
other than the Company of the Company Intellectual Property (as defined in
Section 2.13 hereof) owned by or developed or created by the Company or of
------------
infringement by the Company of any other person's Intellectual Property (as
defined in Section 2.13 hereof);
------------
(r) issuance or sale, or contract to issue or sell, by the Company of
any shares of Company Common Stock or securities convertible into, or
exercisable or exchangeable for, shares of Company Common Stock, or any
securities, warrants, options or rights to purchase any of the foregoing, except
for issuances of Company Common Stock upon the exercise thereof;
(s) (i) sale or license of any Company Intellectual Property or
execution of any agreement with respect to the Company Intellectual Property
with any person or entity or with respect to the Intellectual Property of any
person or entity, or (ii) purchase or license of any Intellectual Property or
execution of any agreement with respect to the Intellectual Property of any
person or entity, (iii) agreement with respect to the development of any
Intellectual Property with a third party, or (iv) change in pricing or royalties
set or charged by the Company to its customers or licensees or in pricing or
royalties set or charged by persons who have licensed Intellectual Property to
the Company, except in each case, in the ordinary course of business consistent
with past practices;
(t) agreement or modification to any agreement pursuant to which any
other party was granted marketing, distribution, development or similar rights
of any type or scope with respect to any products or technology of the Company;
(u) any event or condition of any character that has had or is
reasonably likely to have a Material Adverse Effect on the Company; or
(v) agreement by the Company, or any officer or employees on behalf
of the Company, to do any of the things described in the preceding clauses (a)
through (u) of this Section 2.9 (other than negotiations with Parent and its
-----------
representatives regarding the transactions contemplated by this Agreement and
the Related Agreements).
2.10 Tax Matters.
-----------
18
(a) Definition of Taxes. For the purposes of this Agreement, the
-------------------
term "Tax" or, collectively, "Taxes" shall mean (i) any and all federal, state,
--- -----
local and foreign taxes, assessments and other governmental charges, duties,
impositions and liabilities, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes as well as public imposts, fees and social security
charges (including but not limited to health, unemployment and pension
insurance), together with all interest, penalties and additions imposed with
respect to such amounts, (ii) any liability for the payment of any amounts of
the type described in clause (i) of this Section 2.10(a) as a result of being a
---------------
member of an affiliated, consolidated, combined or unitary group for any period,
and (iii) any liability for the payment of any amounts of the type described in
clauses (i) or (ii) of this Section 2.10(a) as a result of any express or
---------------
implied obligation to indemnify any other person or as a result of any
obligation under any agreement or arrangement with any other person with respect
to such amounts and including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits.
----------------------
(i) As of the Closing Date, the Company will have prepared and
timely filed when due all required federal, state, local and foreign returns,
estimates, information statements and reports ("Tax Returns") relating to any
-----------
and all Taxes concerning or attributable to the Company or its operations and
such Tax Returns are or will be true and correct and have been or will be
completed in accordance with applicable law.
(ii) As of the Closing Date, the Company will have paid all
Taxes it is required to pay and will have withheld with respect to its employees
(and timely paid over to the appropriate taxing authority) all federal, state
and foreign income taxes and social security charges and similar fees, Federal
Insurance Contribution Act, Federal Unemployment Tax Act and other Taxes
required to be withheld.
(iii) The Company has not been delinquent in the payment of any
Tax, nor is there any Tax deficiency outstanding, assessed or, to the Knowledge
of the Company, proposed against the Company, nor has the Company executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(iv) No audit or other examination of any Tax Return of the
Company is presently in progress, nor has the Company been notified of any
request for such an audit or other examination (except for routine review of
such filings by the IRS).
(v) The Company has no liabilities for unpaid Taxes which have
not been accrued or reserved on the Current Balance Sheet, whether asserted or
unasserted, contingent or otherwise, and the Company has not incurred any
liability for Taxes since the date of the Current Balance Sheet other than in
the ordinary course of business.
(vi) The Company has made available to Parent or its legal
counsel, copies of all foreign, federal, state and local income and all state
and local sales and use Tax Returns for the Company filed for all periods since
its inception.
19
(vii) There are (and immediately following the Effective Time
there will be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort (collectively,
"Liens") on the assets of the Company relating to or attributable to Taxes
-----
other than Liens for Taxes not yet due and payable.
(viii) Neither the Company nor any Principal Shareholder has
Knowledge of any basis for the assertion of any claim relating or attributable
to Taxes which, if adversely determined, would result in any Lien on the assets
of the Company.
(ix) None of the Company's assets is treated as "tax-exempt use
property," within the meaning of Section 168(h) of the Code.
(x) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(4) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by the Company.
(xi) The Company has (a) never been a member of an affiliated
group (within the meaning of Code (S)1504(a)) filing a consolidated federal
income Tax Return (other than a group the common parent of which was Company),
(b) never been a party to any tax sharing, indemnification or allocation
agreement, (c) no liability for the Taxes of any person (other than Company or
any of its subsidiaries) under Treas. Reg. (S) 1.1502-6 (or any similar
provision of state, local or foreign law), as a transferee or successor, by
contract or agreement, or otherwise and (d) never been a party to any joint
venture, partnership or other arrangement that could be treated as a partnership
for Tax purposes.
(xii) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal income Tax
deductions is accurately reflected on the Company's tax books and records.
(xiii) The Company has not been, at any time, a "United States
Real Property Holding Corporation" within the meaning of Section 897(c)(2) of
the Code.
(xiv) No adjustment relating to any Tax Return filed by the
Company has been proposed formally or, to the Knowledge of the Company or any
Principal Shareholder, informally by any tax authority to the Company or any
representative thereof.
(xv) The Company has not constituted either a "distributing
corporation" or a "controlled corporation" in a distribution of stock qualifying
for tax-free treatment under Section 355 of the Code (x) in the two (2) years
prior to the date of this Agreement or (y) in a distribution which could
otherwise constitute part of a "plan" or "series of related transactions"
(within the meaning of Section 355(e) of the Code) in conjunction with the
Merger.
(c) Executive Compensation Tax. There is no contract, agreement,
--------------------------
plan or arrangement to which the Company is a party, including, without
limitation, the provisions of this Agreement, covering any employee or former
employee of the Company, which, individually or
20
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to (1) Section 280G or 162(m) of the Code as a result of the
transactions contemplated in this Agreement, or, (2) except as reflected on
Section 2.10 of the Disclosure Schedule, pursuant to Section 404.
------------
2.11 Restrictions on Business Activities.
-----------------------------------
Except as set forth in Section 2.11 of the Disclosure Schedule, there is no
------------
agreement (non-competition or otherwise), commitment, judgment, injunction,
order or decree to which the Company is a party or otherwise binding upon the
Company which has or may reasonably be expected to have the effect of
prohibiting or impairing the current business practice of the Company, any
acquisition of property (tangible or intangible) by the Company, the conduct of
business by the Company, or otherwise limiting the freedom of the Company to
engage in any line of business or to compete with any person. Without limiting
the generality of the foregoing, the Company has not entered into any agreement
under which the Company is restricted from selling, licensing or otherwise
distributing any of its technology or products or from providing services to
customers or potential customers or any class of customers, in any geographic
area, during any period of time, or in any segment of the market.
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
---------
(a) The Company does not own any real property, nor has Company ever
owned any real property. Section 2.12 of the Disclosure Schedule sets forth a
------------
list of all real property currently leased by the Company or otherwise used or
occupied by the Company for the operation of the Company's business (the
"Leased Real Property"), the name of the lessor, the date of the lease and each
---------------------
amendment thereto and, with respect to any current lease, the current aggregate
annual rental payable under any such lease. All such current leases are in full
force and effect, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default or event
of default (or event which with notice or lapse of time, or both, would
constitute a default) by the Company.
(b) The Company has provided Parent true, correct and complete
copies of all leases, lease guaranties, subleases, agreements for the leasing,
use or occupancy of, or otherwise granting a right in or relating to the Leased
Real Property, including all amendments, terminations and modifications thereof
("Lease Agreements"); and there are no other Lease Agreements for real property
----------------
affecting the real property or to which Company is bound, other than those
identified in Section 2.12 of the Disclosure Schedule. All such Lease Agreements
------------
are valid and enforceable and not in default, no rentals are past due, and no
circumstance exists, which, with notice, the passage of time or both, could
constitute a default under any such Lease Agreement. The Company has received no
notice of a default, alleged failure to perform, or any offset or counterclaim
with respect to any such Lease Agreement, which has not been fully remedied and
withdrawn. The Closing will not affect the enforceability against any person of
any such Lease Agreement or the rights of the Company or the Surviving
Corporation to the continued use and possession of the real property for the
conduct of business as presently conducted.
21
(c) The Leased Real Property is in reasonable operating condition and
repair, is maintained in a manner consistent with standards generally followed
with respect to similar properties, and is sufficient for the conduct of the
business as conducted as of the date hereof.
(d) The Company has good and valid title to, or, in the case of
leased properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except (i) as reflected in the Current
Balance Sheet or Section 2.12 of the Disclosure Schedule, (ii) Liens for Taxes
------------
not yet due and payable, and (iii) such imperfections of title and encumbrances,
if any, which do not detract materially from the Company's present use of the
property.
(e) All material items of equipment with a value of $25,000 or more
(the "Equipment") owned or leased by the Company are (i) adequate for the
---------
conduct of the business of the Company as currently conducted and (ii) to the
Knowledge of the Company, in reasonable operating condition, regularly and
properly maintained, subject to normal wear and tear.
(f) Except for the rights of American National Bank and Trust Company
of Chicago as a senior secured lender to the Company, the Company has sole and
exclusive ownership, free and clear of any Liens, of all customer lists,
customer contact information, customer correspondence and customer licensing and
purchasing histories relating to its current and former customers (the "Customer
--------
Information"), except for the rights of such customers in the Customer
-----------
Information not granted to the Company. No person other than the Company
possesses any claims or rights with respect to use of the Customer Information,
except for the rights of such customers in the Customer Information not granted
to the Company.
2.13 Intellectual Property.
---------------------
(a) Definitions. For all purposes of this Agreement, the following
-----------
terms shall have the following respective meanings:
"Intellectual Property" shall mean any or all of the following
---------------------
(i) works of authorship including, without limitation, computer programs, source
code, and executable code, whether embodied in software, firmware or otherwise,
documentation, designs, files, records, data and mask works, (ii) inventions
(whether or not patentable), improvements, and technology, (iii) proprietary and
confidential information, trade secrets and know how, (iv) databases, data
compilations and collections and technical data, (v) logos, trade names, trade
dress, trademarks and service marks, (vi) domain names, web addresses and sites,
(vii) tools, methods and processes, and (viii) any and all instantiations of the
foregoing in any form and embodied in any media.
"Intellectual Property Rights" shall mean worldwide common law
----------------------------
and statutory rights associated with (i) patents and patent applications, (ii)
copyrights, copyright registrations and copyright applications, "moral" rights
and mask work rights, (iii) the protection of trade and industrial secrets and
confidential information, (iv) other proprietary rights relating to intangible
intellectual property, (v) trademarks, trade names and service marks, (vi)
analogous rights
22
to those set forth above, and (vii) divisions, continuations, renewals,
reissuances and extensions of the foregoing (as applicable).
"Company Intellectual Property" shall mean any Intellectual
-----------------------------
Property and Intellectual Property Rights that are owned by or licensed to the
Company and necessary to the conduct of the business of the Company as it is
currently conducted, and all such Company Intellectual Property are identified
in Section 2.13 of the Disclosure Schedule.
------------
"Registered Intellectual Property" shall mean Intellectual
--------------------------------
Property and Intellectual Property Rights that have been registered, filed
(including applications), certified or otherwise perfected or recorded with any
state, government or other public legal authority.
(b) Section 2.13 of the Disclosure Schedule (i) lists all Registered
------------
Intellectual Property owned by, or filed in the name of, the Company (the
"Company Registered Intellectual Property") and (ii) lists any proceedings
----------------------------------------
or actions before any court, tribunal (including the United States Patent
and Trademark Office (the "PTO") or equivalent authority anywhere in the world)
---
related to any of the Company Registered Intellectual Property.
(c) Except as provided in Section 2.13 of the Disclosure Schedule,
------------
each item of Company Intellectual Property, including all Company Registered
Intellectual Property listed in Section 2.13 of the Disclosure Schedule, and all
------------
Intellectual Property licensed to the Company, is free and clear of any Liens or
other encumbrances. The Company is the exclusive owner or exclusive licensee of
all Company Intellectual Property that is expressly identified as "Exclusive" on
Section 2.13 of the Disclosure Schedule (the "Exclusive Intellectual Property").
------------ -------------------------------
Other as identified on Section 2.13 of the Disclosure Schedule, Parent will not
------------
be required to make any payments to third-parties to use any Intellectual
Property used in the conduct of the business of the Company as it is currently
conducted, and the Company is not currently making any such payments.
(d) With respect to such of the Exclusive Intellectual Property that
has been developed or created independently, or jointly by any person other than
the Company for which the Company has, directly or indirectly, paid, the Company
has a written agreement with such person or entity with respect thereto and the
Company thereby has obtained ownership of, or has obtained an exclusive,
perpetual, transferable, non-terminable license (sufficient for the conduct of
its Business as currently conducted) under, all Intellectual Property therein
and associated Intellectual Property Rights by agreement, operation of law, or
by valid assignment.
(e) Except as provided in Section 2.13 of the Disclosure Schedule,
------------
the Company not transferred ownership or granted any exclusive license of or
exclusive right to use, or authorized the retention of any exclusive rights to
use or joint ownership of, any Intellectual Property or Intellectual Property
Rights that is or was Company Intellectual Property, to any other person.
(f) Other than "shrink-wrap," "stacks," and "drivers" and similar
widely available binary code and commercial end-user licenses, but not including
public or open technology, the Company Intellectual Property constitutes all the
Intellectual Property and Intellectual Property
23
Rights used in and/or necessary to the conduct of the business of the Company as
it currently is conducted.
(g) Other than (i) "shrink-wrap," "stacks," and "drivers" and similar
widely available binary code and commercial end-user licenses, but not including
public or open technology, and (ii) other non-exclusive licenses and related
agreements with respect thereto of the Company's products to end-users Section
-------
2.13 of the Disclosure Schedule lists all contracts, licenses and agreements to
----
which the Company is a party with respect to any Intellectual Property and
Intellectual Property Rights. Except as provided in Section 2.13 of the
------------
Disclosure Schedule, no third party who has licensed Intellectual Property or
Intellectual Property Rights to the Company has ownership rights or license
rights to improvements made by the Company in such Intellectual Property which
has been licensed to the Company.
(h) Other than (i) "shrink-wrap," "stacks," and "drivers" and similar
widely available binary code and commercial end-user licenses, but not including
public or open technology, and (ii) other non-exclusive licenses and related
agreements with respect thereto of the Company's products to end-users, Section
-------
2.13 of the Disclosure Schedule lists all contracts, licenses and agreements
----
between the Company and any other person wherein or whereby the Company has
agreed to, or assumed, any obligation or duty to warrant, indemnify, reimburse,
hold harmless, guaranty or otherwise assume or incur any obligation or liability
or provide a right of rescission with respect to the infringement or
misappropriation by the Company or such other person of the Intellectual
Property Rights of any person other than the Company.
(i) Except as provided in Section 2.13 of the Disclosure Schedule,
------------
the operation of the business of the Company as it currently is conducted or is
currently contemplated by the Company to be conducted, including but not limited
to the design, development, use, import, manufacture and sale of the products,
technology or services (including products, technology or services currently
under development) of the Company, does not and will not infringe or
misappropriate the Intellectual Property Rights of any person, violate the
rights of any person (including rights to privacy or publicity), or constitute
unfair competition or trade practices under the laws of any jurisdiction. The
Company has not received any written notice from any person claiming that such
operation or any act, product, technology or service (including products,
technology or services currently under development) of the Company infringes or
misappropriates the Intellectual Property Rights of any person or constitutes
unfair competition or trade practices under the laws of any jurisdiction (nor
does Company or the Principal Shareholders have Knowledge of any basis
therefor).
(j) Each item of Company Registered Intellectual Property is, valid
and subsisting, and all necessary registration, maintenance and renewal fees in
connection with such Company Registered Intellectual Property have been paid and
all necessary documents and certificates in connection with such Company
Registered Intellectual Property have been filed with the relevant patent,
copyright, trademark or other authorities in the United States for the purposes
of maintaining such Registered Intellectual Property in the United States. There
are no actions that must be taken by the Company within sixty (60) days of the
Closing Date, including the payment of
24
any registration, maintenance or renewal fees or the filing of any documents,
applications or certificates for the purposes of maintaining, perfecting or
preserving or renewing any Registered Intellectual Property.
(k) There are no contracts, licenses or agreements between the
Company and any other person with respect to Company Intellectual Property under
which there is any dispute to the Knowledge of either Company or the Principal
Shareholders regarding the scope of such agreement, or performance under such
agreement including with respect to any payments to be made or received by the
Company thereunder.
(l) Neither this Agreement nor the transactions contemplated by this
Agreement, including the assignment to Parent by operation of law or otherwise
of any contracts or agreements to which the Company is a party, will result in:
(i) Parent, Sub or the Company granting to any third party any right to or with
respect to any Intellectual Property owned by, or licensed to, any of them,
except as provided in Section 2.13 of the Disclosure Schedule; (ii) Parent, Sub
------------
or the Company, being bound by, or subject to, any non-compete or other material
restriction on the operation or scope of their respective businesses, except
with respect to agreements identified as Change of Control Agreements in Section
---------------------------- -------
2.13 of the Disclosure Schedule; or (iii) Parent, Sub or the Company being
----
obligated to pay any royalties or other material amounts to any third party in
excess of those payable by any of them, respectively, in the absence of this
Agreement or the transactions contemplated hereby.
(m) To the Knowledge of the Company or the Principal Shareholders, no
person is infringing or misappropriating any Company Intellectual Property.
(n) The Company has taken all commercially reasonable steps that are
required to protect the Company's rights in confidential information and trade
secrets of the Company or provided by any other person to the Company. Without
limiting the foregoing, the Company has a policy requiring each employee,
consultant, and contractor to execute proprietary information, confidentiality
and assignment agreements.
(o) No Company Intellectual Property, Intellectual Property Rights or
service of the Company is subject to any proceeding or outstanding decree,
order, judgment or settlement agreement or stipulation that restricts in any
manner the use, transfer or licensing thereof by the Company or may affect the
validity, use or enforceability of such Company Intellectual Property.
(p) To the Knowledge of the Company or the Principal Shareholders, no
(i) product, technology, service or publication of the Company, (ii) material
published or distributed by the Company, or (iii) conduct or statement of
Company constitutes obscene material, a defamatory statement or material or
false advertising.
(q) None of the Company Intellectual Property was developed by or on
behalf of, or using grants or any other subsidies of, any governmental entity or
any university.
25
By way of clarification, the representations and warranties made by the
Company in this Section 2.13 shall be true and correct on the date hereof and as
of the Effective Time as though made at the Effective Time; however, the Company
and the Principal Shareholders make no representations or warranties with
respect to any revision, enhancement, modification, translation, abridgement,
consolidation, expansion, recasting, transformation, adaptation or derivative
work of or from any Company Intellectual Property made after the Closing by or
at the direction of or on behalf of Parent or Sub.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as provided in Section 2.14 of the Disclosure Schedule,
------------
the Company is not a party to, nor is it bound by:
(i) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson, or
consulting or sales agreement, contract, or commitment with a firm or other
organization;
(ii) any agreement that requires consent to assign such
agreement, which consent is not being given;
(iii) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement;
(iv) any fidelity or surety bond or completion bond;
(v) any lease of personal property having a value in excess of
$10,000 individually or $25,000 in the aggregate, except as entered into in the
ordinary course of business, consistent with past practice;
(vi) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $10,000 individually or
$25,000 in the aggregate, except as entered into in the ordinary course of
business, consistent with past practice;
(vii) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business;
(viii) any mortgages, indentures, guarantees, loans or credit
agreements, security agreements or other agreements or instruments relating to
the borrowing of money or extension of credit;
26
(ix) any purchase order or contract for the purchase of
materials involving in excess of $10,000 individually or $25,000 in the
aggregate, except as entered into in the ordinary course of business, consistent
with past practice;
(x) any construction contracts;
(xi) any dealer, distribution, joint marketing or development
agreement; or
(xii) any sales representative, original equipment manufacturer,
value added, remarketer, reseller, or independent software vendor, or other
agreement for use or distribution of the Company's products, technology or
services.
2.15 Interested Party Transactions. Except as provided in Section 2.15 of
----------------------------- ------------
the Disclosure Schedule, no officer, director or Shareholder of the Company (nor
any ancestor, sibling, descendant or spouse of any of such persons, or any
trust, partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) an interest in any entity
which furnished or sold, or furnishes or sells, services, products or technology
that the Company furnishes or sells, or proposes to furnish or sell, or (ii) any
interest in any entity that purchases from or sells or furnishes to the Company,
any goods or services, or (iii) a beneficial interest in any Contract to which
the Company is a party; provided, however, that ownership of no more than one
percent (1%) of the outstanding voting stock of a publicly traded corporation
shall not be deemed to be an "interest in any entity" for purposes of this
Section 2.15. Except as provided in Section 2.15 of the Disclosure Schedule,
------------ ------------
there are no agreements, contracts, or commitments with regard to contribution
or indemnification between or among any of the Shareholders.
2.16 Governmental Authorization. Each consent, license, permit, grant or
--------------------------
other authorization (i) pursuant to which the Company currently operates or
holds any interest in any of its properties, or (ii) which is required for the
operation of the Company's business as currently conducted or the holding of any
such interest (collectively, "Company Authorizations") has been issued or
----------------------
granted to the Company. The Company Authorizations are in full force and effect
and constitute all Company Authorizations required to permit the Company to
operate or conduct its business or hold any interest in its properties or
assets.
2.17 Litigation. There is no action, suit, claim or proceeding of any
----------
nature pending, or to the Knowledge of the Company or any of the Principal
Shareholders, threatened, against the Company, their properties (tangible or
intangible) or any of their officers or directors nor to the Knowledge of the
Company or the Principal Shareholders is there any reasonable basis therefor.
There is no investigation or other proceeding pending or, to the Knowledge of
the Company or any of the Principal Shareholders, threatened, against the
Company, any of their properties (tangible or intangible) or any of their
officers or directors by or before any Governmental Entity, nor to the Knowledge
of the Company or any of the Principal Shareholders is there any reasonable
basis therefor. No Governmental Entity has at any time challenged or questioned
the legal right of the Company to conduct its operations as presently or
previously conducted or as presently contemplated by the Company to be
conducted.
27
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of March 31, 2001, together with a range of days
elapsed since invoice.
(b) All of the Company's accounts receivable arose in the ordinary
course of business, are carried at values determined in accordance with GAAP
consistently applied, and are collectible except to the extent of reserves
therefor set forth in the Current Balance Sheet or, for receivables arising
subsequent to March 31, 2001, as reflected on the books and records of the
Company (which are prepared in accordance with GAAP). Except as provided in
Section 2.18 of the Disclosure Schedule, no person has any Lien on any of the
------------
Company's accounts receivable and no request or agreement for deduction or
discount has been made with respect to any of the Company's accounts receivable.
2.19 Minute Books. The minutes of the Company made available to counsel
------------
for parent are the only minutes of the Company and contain accurate summaries of
all duly called formal meetings or actions by written consent of the Board of
Directors (or committees thereof) of the Company and contain all shareholder
actions by written consent since the time of incorporation of the Company.
2.20 Environmental Matters.
---------------------
(a) Condition of Property. To the Knowledge of the Company and the
---------------------
Principal Shareholders there are no underground storage tanks, asbestos which is
friable or likely to become friable or PCBs present on any property currently
owned, operated, leased, occupied or controlled by the Company, and the Company
has never installed, used or disposed of such on any such property. No Hazardous
Materials are present in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time operated, occupied or leased, except for de minimis quantities used in
the normal course and in compliance with Environmental Laws; and except for such
Hazardous Materials the existence of which would not result in the material
liability of the Company. "Hazardous Material" is any material or substance that
------------------
is prohibited or regulated by any Environmental Law or that has been designated
by any Governmental Entity to be radioactive, toxic, hazardous or otherwise a
danger to health, reproduction or the environment. "Environmental Laws" are all
------------------
applicable laws, rules, regulations, orders, treaties, statutes, and codes
promulgated by any Governmental Entity which prohibit, regulate or control any
Hazardous Material or any Hazardous Material Activity, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Resource Recovery and Conservation Act of 1976, the
Federal Water Pollution Control Act, the Clean Air Act, the Hazardous Materials
Transportation Act, the Clean Water Act, the Occupational Health and Safety Act
of 1970, comparable laws, rules, regulations, ordinances, orders, treaties,
statutes, and codes of other Governmental Authorities, the regulations
promulgated pursuant to any of the foregoing, and all amendments and
modifications of any of the foregoing, all as amended to date.
(b) Hazardous Materials Activities. The Company has not transported,
------------------------------
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials
28
in violation of any material Environmental Law or in a manner that would
reasonably be expected to result in liability to the Company, nor has the
Company disposed of, transported, sold, or manufactured any product containing a
Hazardous Material in violation of any rule, regulation, treaty or statute
promulgated by any Governmental Entity to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activity "Hazardous Materials
-------------------
Activity" is the transportation, transfer, recycling, storage, use, treatment,
--------
manufacture, removal, remediation, release, exposure of others to, sale, or
distribution of any Hazardous Material or any product containing a Hazardous
Material. Permits. The Company does not hold, nor is it required to hold any,
environmental approvals, permits, licenses, clearances and consents (the
"Environmental Permits") for the conduct of the Company's businesses as such
---------------------
businesses are currently being conducted. All such Environmental Permits are
valid and in full force and effect. The Company has complied in all material
respects with all covenants and conditions of any Environmental Permit which is
or has been in force with respect to its Hazardous Materials Activities. No
circumstances exist which could cause any Environmental Permit to be revoked,
modified, or rendered non-renewable upon payment of the permit fee. All
Environmental Permits and all other consent and clearances required by any
Environmental Law or any agreement to which the Company is bound as a condition
to the performance and enforcement of this Agreement, have been obtained or will
be obtained prior to the Closing.
(c) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Knowledge of the Company or the Principal Shareholders threatened, concerning
any Environmental Permit, Hazardous Material or any Hazardous Materials Activity
of the Company. Neither the Company nor any of the Principal Shareholders has
any Knowledge of any fact or circumstance which is reasonably likely to involve
the Company in any environmental litigation, result in any environmental
liability or impose upon the Company any environmental liability.
(d) Reports and Records. The Company has no environmental audits and
-------------------
environmental assessments of any Leased Real Property conducted at the request
of, or otherwise in the possession of the Company. The Company has complied with
all environmental disclosure obligations imposed by applicable law with respect
to this transaction.
2.21 Brokers' and Finders' Fees; Third Party Expenses. The Company has not
------------------------------------------------
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with the Agreement or any transaction contemplated hereby.
2.22 Employee Benefit Plans and Compensation.
---------------------------------------
(a) Definitions. For all purposes of this Agreement, the following
-----------
terms shall have the following respective meanings:
"Affiliate" shall mean any other person or entity under common
---------
control with the Company within the meaning of Section 414(b), (c), (m) or (o)
of the Code, and the regulations issued thereunder.
29
"Company Employee Plan" shall mean any plan, program, policy,
---------------------
practice, contract, agreement or other arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether written, unwritten or otherwise, funded or unfunded,
including without limitation, each "employee benefit plan," within the meaning
---------------------
of Section 3(3) of ERISA or any "simplified employee pension" within the meaning
---------------------------
of Section 408(k) of the Code which is or has been maintained, contributed to,
or required to be contributed to, by the Company or any Affiliate for the
benefit of any Employee, or with respect to which the Company or any Affiliate
has or may have any liability or obligation.
"COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
-----
Act of 1985, as amended.
"DOL" shall mean the United States Department of Labor.
---
"Employee" shall mean any current, former or retired employee,
--------
consultant or director of the Company or any Affiliate.
"Employee Agreement" shall mean each management, employment,
------------------
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or other agreement, or contract between the Company or any Affiliate and
any Employee.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended.
"FMLA" shall mean the Family Medical Leave Act of 1993, as
----
amended.
"HIPAA" shall mean the Health Insurance Portability and
-----
Accountability Act of 1996, as amended.
"International Employee Plan" shall mean each Company Employee
---------------------------
Plan that has been adopted or maintained by the Company or any Affiliate,
whether informally or formally, or with respect to which the Company or any
Affiliate will or may have any liability, for the benefit of Employees who
perform services outside the United States.
"IRS" shall mean the United States Internal Revenue Service.
---
"Multiemployer Plan" shall mean any Pension Plan which is a
------------------
"multiemployer plan" as defined in Section 3(37) of ERISA.
"PBGC" shall mean the United States Pension Benefit Guaranty
----
Corporation.
"Pension Plan" shall mean each Company Employee Plan which is an
------------
"employee pension benefit plan," within the meaning of Section 3(2) of ERISA.
30
(b) Schedule. Section 2.22 of the Disclosure Schedule contains an
-------- ------------
accurate and complete list of each Company Employee Plan, each International
Employee Plan, and each Employee Agreement. The Company has not made any plan or
commitment to establish any new Company Employee Plan, International Employee
Plan or Employee Agreement, to modify any Company Employee Plan, International
Employee Plan or Employee Agreement (except to the extent required by law or to
conform any such Company Employee Plan, International Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Company Employee Plan, International Employee Plan or Employee
Agreement. Section 2.22 of the Disclosure Schedule sets forth a table setting
------------
forth the name and salary of each employee of the Company and a listing of the
accrued vacation liability of the Company as of the date of this Agreement.
(c) Documents. The Company has provided to Parent (i) correct and
---------
complete copies of all documents embodying each Company Employee Plan, each
International Employee Plan and each Employee Agreement including, without
limitation, all amendments thereto and all related trust documents, (ii) the
three (3) most recent annual reports (Form Series 5500 and all schedules and
financial statements attached thereto), if any, required under ERISA or the Code
in connection with each Company Employee Plan, (iii) if the Company Employee
Plan is funded, the most recent annual and periodic accounting of Company
Employee Plan assets, (iv) the most recent summary plan description together
with the summary(ies) of material modifications thereto, if any, required under
ERISA with respect to each Company Employee Plan, (v) all material written
agreements and contracts relating to each Company Employee Plan, including,
without limitation, administrative service agreements, group annuity agreements
and group insurance contracts, (vi) all written communications material to any
Employee or Employees relating to any Company Employee Plan and any proposed
Company Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any liability to the
Company, (vii) all correspondence to or from any governmental agency relating to
any Company Employee Plan, (viii) all COBRA forms and related notices (or such
forms and notices as required under comparable law), (ix) all policies
pertaining to fiduciary liability insurance covering the fiduciaries for each
Company Employee Plan, (x) all discrimination tests for each Company Employee
Plan for the three (3) most recent plan years, and (xi) the most recent IRS
determination or opinion letter issued with respect to each Company Employee
Plan.
(d) Employee Plan Compliance. The Company has performed all material
------------------------
obligations required to be performed by it under, is not in default or violation
of, and has no Knowledge of any default or violation by any other party to, any
Company Employee Plan, and each Company Employee Plan has been established and
maintained in accordance with its terms and in compliance with all applicable
laws, statutes, orders, rules and regulations, including but not limited to
ERISA or the Code, including all amendments to the Code effected by the Tax
Reform Act of 1986 and subsequent legislation, or has remaining a period of time
under applicable Treasury regulations or IRS pronouncements in which to apply
for such a letter and make any amendments necessary to obtain a favorable
determination as to the qualified status of each such Company
31
Employee Plan. Each Company Employee Plan intended to be qualified under
Section 401(a) of the Code has obtained a favorable determination letter (or
opinion letter, if applicable) as to its qualified status under the Code. No
"prohibited transaction," within the meaning of Section 4975 of the Code or
Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of
ERISA, has occurred with respect to any Company Employee Plan. Except as set
forth in Section 2.22 of the Disclosure Schedule, there are no actions, suits
------------
or claims pending or, to the Knowledge of the Company or the Principal
Shareholders, threatened or reasonably anticipated (other than routine claims
for benefits) against any Company Employee Plan or against the assets of any
Company Employee Plan. Each Company Employee Plan can be amended, terminated or
otherwise discontinued after the Effective Time in accordance with its terms,
without liability to Parent, the Company or any Affiliate (other than ordinary
administration expenses). There are no audits, inquiries or proceedings pending
(of which the Company has been sent notice or of which the Company has
Knowledge) or to the Knowledge of the Company or the Principal Shareholders or
any Affiliates, threatened by the IRS, DOL, or any other Governmental Entity
with respect to any Company Employee Plan. Neither the Company nor any Affiliate
is subject to any penalty or tax with respect to any Company Employee Plan under
Section 502(i) of ERISA or Sections 4975 through 4980 of the Code. The Company
has timely made all contributions and other payments required by and due under
the terms of each Company Employee Plan and applicable regulations promulgated
by the IRS and DOL.
(e) No Pension Plans. Neither the Company nor any Affiliate has ever
----------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plans subject to Title IV of ERISA or Section 412 of the Code.
(f) Collectively Bargained, Multiemployer and Multiple Employer
-----------------------------------------------------------
Plans. At no time has the Company or any Affiliate contributed to or been
-----
obligated to contribute to any Multiemployer Plan. Neither the Company nor any
Affiliate has at any time ever maintained, established, sponsored, participated
in, or contributed to any multiple employer plan, or to any plan described in
Section 413 of the Code.
(g) No Post-Employment Obligations. No Company Employee Plan
------------------------------
provides, or reflects or represents any liability to provide, retiree life
insurance, retiree health or other retiree employee welfare benefits to any
person for any reason, except as may be required by COBRA or other applicable
statute, and the Company has never represented, promised or contracted (whether
in oral or written form) to any Employee (either individually or to Employees as
a group) or any other person that such Employee(s) or other person would be
provided with retiree life insurance, retiree health or other retiree employee
welfare benefit, except to the extent required by statute.
(h) COBRA; FMLA; HIPAA. The Company and each Affiliate has, prior
------------------
to the Effective Time, complied with the health care continuation requirements
of COBRA, FMLA, HIPAA, the Women's Health and Cancer Rights Act of 1998, the
Newborns' and Mothers' Health Protection Act of 1996, and any similar provisions
of state law applicable to its Employees ("Applicable Regulations"). The
----------------------
Company has no obligations to any Employees or qualified beneficiaries pursuant
to COBRA, HIPAA or any state law governing health care coverage or
32
extension which have not been satisfied within the time required by applicable
law. Section 2.22 of the Disclosure Schedule sets out all currently applicable
------------
obligations of the Company to identified current and former employees (as
distinguished from general compliance obligations) under the Applicable
Regulations.
(i) Effect of Transaction. Except for the assumption of Company
---------------------
Options and conversion of Company Warrants pursuant to Section 1.6(d) hereof,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (either alone or upon the occurrence of
any additional or subsequent events) (i) result in any payment (including
severance, golden parachute, bonus or otherwise) becoming due to any
shareholder, director, consultant or employee of Company or any Affiliate under
any Company Employee Plan or otherwise, (ii) materially increase any benefits
otherwise payable by Company or any Affiliate, or (iii) result in the
acceleration of the time of payment or vesting of any such benefits. There is no
agreement, plan, arrangement or other contract covering any current or former
employee or other service provider of the Company or any Affiliate that,
considered individually or considered collectively with any other such
agreements, plans, arrangements or other contracts, will, or could reasonably be
expected to, give rise directly or indirectly to the payment of any amount that
would be characterized as an "excess parachute payment" within the meaning of
Section 280G(b)(1) of the Code. The Company has no reasonable basis to believe
that any persons are, with respect to the Company or any Affiliate,
"disqualified individuals" (within the meaning of Section 280G of the Code and
the regulations promulgated thereunder) as determined as of the date hereof. On
or about the date which is five (5) business days prior to the expected date of
the Closing, the Company shall, as and to the extent necessary, deliver to the
Parent a Schedule 2.21(i) which sets forth any additional information which the
Company reasonably believes would affect the determination of the persons who
are, with respect to the Company or any Affiliate, deemed to be "disqualified
individuals" (within the meaning of Section 280G of the Code and the regulations
promulgated thereunder) as of the date of each such Schedule 2.21(i).
(j) Employment Matters. The Company: (i) is in compliance in all
------------------
respects with all applicable foreign, federal, state and local laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours, in each case, with respect to Employees, (ii)
has withheld and reported all amounts required by law or by agreement to be
withheld and reported with respect to wages, salaries and other payments to
Employees, (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing, and (iv) is not liable
for any payment to any trust or other fund governed by or maintained by or on
behalf of any governmental authority, with respect to unemployment compensation
benefits, social security or other benefits or obligations for Employees (other
than routine payments to be made in the normal course of business and consistent
with past practice). There are no pending, or to the Knowledge of the Company or
the Principal Shareholders, threatened, claims or actions against the Company
under any worker's compensation policy or long-term disability policy.
(k) Labor. No work stoppage or labor strike against the Company is
-----
pending, or to the Knowledge of the Company or the Principal Shareholders,
threatened, or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to
33
organize any Employees. There are no actions, suits, claims, labor disputes or
grievances pending, or to the Knowledge of the Company or the Principal
Shareholders threatened, or reasonably anticipated relating to any labor, safety
or discrimination matters involving any Employee, including, without limitation,
charges of unfair labor practices or discrimination complaints. The Company has
not engaged in any unfair labor practices within the meaning of the National
Labor Relations Act. The Company presently is not, nor has it been in the past,
a party to, or bound by, any collective bargaining agreement or union contract
with respect to Employees and no collective bargaining agreement is being
negotiated by the Company.
(l) International Employee Plan. Each International Employee Plan,
---------------------------
if any, has been established, maintained and administered in material compliance
with its terms and conditions and with the requirements prescribed by any and
all statutory or regulatory laws that are applicable to such International
Employee Plan. Furthermore, no 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
the Company from terminating or amending any International Employee Plan at any
time for any reason without liability to the Company or its Affiliates (other
than ordinary administration expenses or routine claims for benefits).
(m) No Interference or Conflict. To the Knowledge of the Company or
---------------------------
the Principal Shareholders, no Shareholder, director, officer, Employee or
consultant of the Company is obligated under any contract or agreement, subject
to any judgment, decree, or order of any court or administrative agency that
would interfere with such person's efforts to promote the interests of the
Company or that would interfere with the Company's business. Neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
business as presently conducted nor any activity of such officers, directors,
Employees or consultants in connection with the carrying on of the Company's
business as presently conducted will, to the Knowledge of the Company or the
Principal Shareholders, conflict with or result in a breach of the terms,
conditions, or provisions of, or constitute a default under, any contract or
agreement under which any of such officers, directors, Employees, or consultants
is now bound.
2.23 Insurance. Section 2.23 of the Disclosure Schedule lists all
--------- ------------
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company or any
Affiliate. There is no claim by the Company or any Affiliate 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 (if due), and the
Company and its Affiliates are otherwise in material compliance with the terms
of such policies and bonds (or other policies and bonds providing substantially
similar insurance coverage). Neither the Company nor the Principal Shareholders
has any Knowledge of threatened termination of, or premium increase with respect
to, any of such policies.
2.24 Compliance with Laws. The Company has complied with, is not in
--------------------
violation of, and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation.
34
2.25 Foreign Corrupt Practices Act. The Company (including any of its
-----------------------------
officers or directors) has not taken any action which would cause it to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any rules
or regulations thereunder.
2.26 Warranties; Indemnities. Except for the warranties and indemnities
-----------------------
contained in those contracts and agreements set forth in Section 2.26 of the
------------
Disclosure Schedule and warranties implied by law, the Company has not given any
warranties or indemnities relating to products or technology sold or services
rendered by the Company.
2.27 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel, except as disclosed on Section 2.27
------------
of the Disclosure Schedule.
2.28 Representations Complete. None of the representations or warranties
------------------------
made by the Company or the Principal Shareholders (as modified by the Disclosure
Schedule) in this Agreement, and none of the statements made in any exhibit,
schedule or certificate furnished by the Company or the Principal Shareholders
pursuant to this Agreement contains, or will contain at the Effective Time, any
untrue statement of a material fact, or omits or will omit at the Effective Time
to state any material fact necessary in order to make the statements contained
herein or therein, in light of the circumstances under which made, not
misleading.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
------------------------------------------------
Parent and Sub hereby represent and warrant to the Company that on the date
hereof and as of the Effective Time, as though made at the Effective Time, as
follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Illinois. Each of Parent and Sub has the
corporate power to own its properties and to carry on its business as now being
conducted and is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the failure to be so qualified or
licensed would have a material adverse effect on the business, assets (including
intangible assets), condition (financial or otherwise), results of operations or
capitalization of Parent (a "Parent Material Adverse Effect").
------------------------------
3.2 Authority. Each of Parent and Sub has all requisite corporate power
---------
and authority to enter into this Agreement and any Related Agreements to which
it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and any Related Agreements
to which it is a party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Parent and Sub. This Agreement and any Related Agreements to
which Parent and Sub are parties have been duly executed and delivered by Parent
and Sub and constitute the valid and binding obligations of Parent and Sub,
enforceable in accordance with their terms, except as such
35
enforceability may be limited by principles of public policy and subject to the
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
3.3 No Conflict. The execution and delivery of this Agreement 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 Conflict under (i) any provision of
the articles of incorporation, as amended, and bylaws of Parent or Sub, (ii) any
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise or license to which Parent or any of its respective
properties or assets are subject and which has been filed as an exhibit to
Parent's filings under the Securities Act or the Securities and Exchange Act of
1934, as amended (the "Exchange Act") or (iii) any judgment, order, decree,
------------
statute, law, ordinance, rule or regulation applicable to Parent or Sub or their
respective properties or assets, except in each case where such Conflict will
not have a Parent Material Adverse Effect and will not have an effect on the
legality, validity or enforceability of this Agreement.
3.4 Consents. No consent, waiver, approval, order or authorization of, or
--------
registration, declaration or filing with, any Governmental Entity, or any third
party is required by or with respect to Parent or Sub in connection with the
execution and delivery of this Agreement and any Related Agreements to which
Parent or Sub is a party or the consummation of the transactions contemplated
hereby and thereby, except for (i) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable securities laws, (ii) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings which, if not obtained
or made, would not have a Parent Material Adverse Effect, and (iii) the filing
of the Certificate of Merger with the Secretary of State of the State of
Illinois.
3.5 Parent Common Stock. The Parent Common Stock that constitutes the
-------------------
Merger Shares has been duly authorized, and upon consummation of the
transactions contemplated by this Agreement, will be validly issued, fully paid
and nonassessable and will be issued in compliance with federal and state
securities laws.
3.6 Broker's and Finders' Fees. Neither Parent nor Sub has incurred, nor
--------------------------
will it incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
3.7 SEC Documents; Parent Financial Statements. A true and complete copy
------------------------------------------
of each annual, quarterly and other report, registration statement filed by
Parent with the Securities and Exchange Commission (the "SEC") is available on
---
the Web site maintained by the SEC at xxxx://xxx.xxx.xxx (the "Parent SEC
----------
Documents"). As of their respective filing dates, the Parent SEC Documents
---------
complied in all material respects with the requirements of the Securities Act
and the Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such Parent SEC Documents, and none of
the Parent SEC Documents contained on their filing dates any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
corrected by a subsequently filed Parent
36
SEC Document. The financial statements of Parent included in the Parent SEC
Documents (the "Parent Financial Statements") complied as to form in all
---------------------------
material respects with the published rules and regulations of the SEC with
respect thereto, were prepared in accordance with GAAP applied on a consistent
basis throughout the periods indicated (except as may be indicated in the notes
thereto, except in the case of pro forma statements, or, in the case of
unaudited financial statements, except as permitted under Form 10-Q under the
Exchange Act) and fairly presented the consolidated financial position of Parent
and its consolidated subsidiaries as of the respective dates thereof and the
consolidated results of Parent's operations and cash flows for the periods
indicated (subject to, in the case of unaudited statements, to normal and
recurring year-end audit adjustments).
3.8 Ownership of Sub. Parent currently owns, and at all times up through
----------------
the Closing Date will continue to directly own, all of the capital stock of the
Sub.
ARTICLE IV
----------
CONDUCT PRIOR TO THE EFFECTIVE TIME
-----------------------------------
4.1 Conduct of Business of the Company. During the period from the date of
----------------------------------
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees, and each Principal
Shareholder agrees, to cause the business of Company to be conducted, except to
the extent that Parent shall otherwise consent in writing, in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted, to
pay the debts and Taxes of the Company when due, to pay or perform other
obligations when due (except those reasonably in dispute), and, to the extent
consistent with such business, to use commercially reasonable efforts to
preserve intact the Company's present business organizations, keep available the
services of the Company's present officers and key employees and preserve the
Company's relationships with customers, suppliers, distributors, licensors,
licensees, and others having business dealings with it, all with the goal of
preserving the Company's goodwill and ongoing businesses at the Effective Time.
The Company and the Principal Shareholders shall promptly notify Parent of any
event or occurrence not in the ordinary course of business of the Company and
any material event involving the Company. Except as expressly contemplated by
this Agreement as set forth in Section 4.1 of the Disclosure Schedule, the
-----------
Company shall not, without the prior written consent of Parent:
(a) make any expenditures or enter into any commitment or transaction
outside the ordinary course of business (or otherwise not inconsistent with past
practices) or any commitment or transaction of the type described in Section 2.9
-----------
hereof;
(b) sell, license or transfer to any person or entity any rights to
any Company Intellectual Property or enter into any agreement with respect to
any Company Intellectual Property with any person or entity or with respect to
any Intellectual Property of any person or entity except in the ordinary course
of business and consistent with past practices, (ii) buy or license any
Intellectual Property or enter into any agreement with respect to the
Intellectual Property of any person or entity except in the ordinary course of
business and consistent with past practices,
37
(iii) except in the ordinary course of business and consistent with past
practices, enter into any agreement with respect to the development of any
Intellectual Property with a third party, (iv) or change pricing or royalties
charged by the Company to its customers or licensees, or the pricing or
royalties set or charged by persons who have licensed Intellectual Property to
the Company;
(c) enter into or amend any Contract pursuant to which any other
party is granted marketing, distribution, development or similar rights of any
type or scope with respect to any products or technology of the Company;
(d) amend or otherwise modify (or agree to do so), or violate the
terms of, any of the Contracts set forth or described in the Disclosure
Schedule;
(e) commence or settle any litigation;
(f) declare, set aside, or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any Company
Common Stock, or split, combine or reclassify any Company Common Stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of Company Common Stock, or repurchase, redeem or
otherwise acquire, directly or indirectly, any shares of Company Common Stock
(or options, warrants or other rights exercisable therefor) except in accordance
with the agreements evidencing Company Options;
(g) issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of capital stock of the Company or any securities convertible into,
or subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue or purchase any such shares
or other convertible securities, excluding only issuances of Company Common
Stock pursuant to exercises of Company Options and Company Warrants;
(h) cause or permit any amendments to its articles of incorporation,
bylaws or other organizational documents of the Company;
(i) acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the Company's
business;
(j) sell, lease, license or otherwise dispose of a material amount of
its properties or assets, including without limitation the sale of any accounts
receivable of the Company, except in the ordinary course of business and
consistent with past practices ;
(k) incur any indebtedness or guarantee any indebtedness or issue or
sell any debt securities or guarantee any debt securities of others, except
draws upon the secured revolving credit facility and otherwise in the
ordinary course of business and consistent with past practices;
38
(l) grant any loans to others or purchase debt securities of others
or amend the terms of any outstanding loan agreement;
(m) grant any severance or termination pay (in cash or otherwise) to
any Employee, including any officer, except payments made pursuant to standard
written agreements outstanding on the date hereof and disclosed in the
Disclosure Schedule;
(n) adopt or amend any Company Employee Plan, enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries, wage rates,
or other compensation of its employees except payments made pursuant to standard
written agreements outstanding on the date hereof and disclosed in the
Disclosure Schedule;
(o) revalue any of its assets (whether tangible or intangible),
including without limitation writing down the value of inventory or writing off
notes or accounts receivable other than in the ordinary course of business;
(p) pay, discharge or satisfy, in an amount in excess of $10,000 in
any one case, or $25,000 in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities incurred in connection with the transactions evidenced by this
Agreement or identified in Section 2.9 of the Disclosure Schedule or reflected
or reserved against in the Current Balance Sheet;
(q) make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(r) enter into any strategic alliance or joint marketing arrangement
or agreement;
(s) take any action to accelerate the vesting schedule of any of the
outstanding Company Options or Company Common Stock;
(t) hire or terminate any Employees, or encourage any employees to
resign from the Company; or
(u) take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through 4.1(t) hereof, or any other action
--------------- ------
that would (x) prevent the Company or any of the Principal Shareholders from
performing, or cause the Company or any of the Principal Shareholders not to
perform, their respective covenants hereunder or (y) cause or result in any of
its respective representations and warranties contained herein being untrue or
incorrect.
4.2 No Solicitation.
---------------
39
(a) Until the earlier of (i) the Effective Time, or (ii) the date of
termination of this Agreement pursuant to the provisions of Section 8.1, neither
-----------
the Company nor the Principal Shareholders shall (nor shall the Company or the
Principal Shareholders authorize, as applicable, any of their respective
officers, directors, employees, shareholders, agents, representatives or
affiliates to, and shall take reasonable efforts to prevent any of the
aforementioned from), directly or indirectly, take any of the following actions
with any party other than Parent and its designees: (a) solicit, encourage,
initiate or participate in any inquiry, negotiations or discussions, or enter
into any agreement, with respect to any offer or proposal to acquire all or any
material part of the Company's business, properties or technologies, or any
amount of the Company Common Stock (whether or not outstanding), whether by
merger, purchase of assets, tender offer, license or otherwise, or effect any
such transaction, (b) disclose any information not customarily disclosed to any
person concerning the Company's business, technologies or properties, or afford
to any person or entity access to its properties, technologies, books or
records, not customarily afforded such access, (c) assist or cooperate with any
person to make any proposal to purchase all or any part of the Company Common
Stock or assets of the Company, other than inventory in the ordinary course of
business, or (d) enter into any agreement with any person providing for the
acquisition of the Company, whether by merger, purchase of assets, license,
tender offer or otherwise.
(b) In the event that the Company, any Principal Shareholder, or any
of the Company's affiliates shall receive, prior to the Effective Time or the
termination of Agreement in accordance with Section 8.1, any offer, proposal, or
-----------
request, directly or indirectly, of the type referenced in clauses (a) ), (c),
or (d) above, or any request for disclosure or access as referenced in clause
(b) above, the Company or such Principal Shareholder, as applicable, shall
immediately (x) suspend any discussions with such offeror or party with regard
to such offers, proposals, or requests and (y) notify Parent thereof, including
information as to the identity of the offeror or the party making any such offer
or proposal and the specific terms of such offer or proposal, as the case may
be, and such other information related thereto as Parent may reasonably request.
(c) If the Merger does not occur as a result of a breach of this
Section 4.2, the Company will pay Parent a five hundred thousand dollar
-----------
($500,000) cash break-up fee as Parent's and Sub's sole and exclusive remedy for
breach of this Agreement.
ARTICLE V
---------
ADDITIONAL AGREEMENTS
---------------------
5.1 Shareholder Approval
--------------------
(a) As soon as practicable after the execution of this Agreement, the
Company shall prepare, with the cooperation of Parent, an information statement
for its Shareholders to approve this Agreement, the Certificate of Merger and
the transactions contemplated hereby and thereby (the "Information Statement").
---------------------
The Information Statement shall constitute a disclosure document for the offer
and issuance of the shares of Parent Common Stock to be received by the holders
of Company Common Stock in the Merger. Each of Parent and the Company shall use
40
commercially reasonable efforts to cause the Information Statement to comply
with applicable federal and state securities laws, including Regulation D
promulgated under the Securities Act. Each of Parent and the Company agrees to
provide promptly to the other such information concerning its business and
financial statements and affairs as, in the reasonable judgment of the providing
party or its counsel, may be required or appropriate for inclusion in the
Information Statement, or in any amendments or supplements thereto, and to cause
its counsel and auditors to cooperate with the other's counsel and auditors in
preparation of the Information Statement. The Company will promptly advise
Parent, and Parent will promptly advise the Company, in writing if at any time
prior to the Effective Time either Parent or the Company shall obtain knowledge
of any facts that might make it necessary or appropriate to amend or supplement
the Information Statement in order to make statements contained or incorporated
by reference therein not misleading or to comply with applicable law. The
Information Statement to be submitted to the Company's Shareholders in
connection with the solicitation of their approval of the Merger and this
Agreement shall be subject to review and approval by Parent and shall include
information regarding the Company, the terms of the Merger and this Agreement,
and the unanimous recommendation of the Board of Directors of the Company in
favor of the Merger and this Agreement. Anything to the contrary contained
herein notwithstanding, the Company shall not include in the Information
Statement any information with respect to Parent or its affiliates or
associates, the form and content of which shall not have been approved by Parent
prior to such inclusion.
(b) Promptly following the preparation and Parent's approval of the
Information Statement, the Company shall submit this Agreement and the
transactions contemplated hereby to its Shareholders for approval and adoption
as provided by Illinois Law and the articles of incorporation and bylaws of the
Company. Such submission, and any proxy or consent in connection therewith,
shall specify that adoption of this Agreement shall constitute approval by the
Shareholders of: (A) the escrow and indemnification obligations of the
Shareholders set forth in Article VII hereof and the deposit of Escrow Shares
-----------
into the Escrow Fund and (B) in favor of the appointment of Xxxxxxx Xxxxxxx as
Shareholder Representative, under and as defined in this Agreement. If a
Shareholder Meeting is to be held, the Company shall consult with Parent
regarding the date of the Company Shareholders' meeting to approve this
Agreement and the Merger (the "Company Shareholder Meeting") and shall not
---------------------------
postpone or adjourn (other than for absence of a quorum) the Company Shareholder
Meeting without the consent of Parent. The Company shall use its best efforts to
obtain the consent of its Shareholders sufficient to approve the Merger and this
Agreement and to enable the Closing to occur as promptly as practicable. The
Company shall give Shareholders sufficient notice such that no Shareholder will
be able to exercise appraisal rights if such Shareholder has not perfected such
appraisal rights prior to Closing, pursuant to Section 11.70 of Illinois Law. In
addition, the Company shall (i) promptly submit for approval by its Shareholders
by the requisite vote the payment of any amount or the provision of any benefit
that would not be deductible by reason of Section 280G of the Code as is
required by the terms of Section 280G(b)(5)(B) in order for such payments and
benefits not to be deemed parachute payments under Code Section 280G, with such
approval to be obtained in a manner which satisfies all applicable requirements
of such Code Section 280G(b)(5)(B) and the proposed Treasury Regulations
thereunder, including Q&A-7 of Section 1.280G-1 of such proposed regulations,
or, in the absence of such Shareholder approval, none of those payments or
benefits shall be paid or provided, pursuant to the waivers of those
41
payments and benefits to be executed by the affected individuals in form and
substance reasonable satisfactory to Parent.
5.2 Sale of Restricted Securities and Post-Sale Registration of Certain
--------------------------------------------------------------------
Shares. The parties hereto acknowledge and agree that all of the shares of
------
Parent Common Stock issuable to the Shareholders pursuant to Section 1.6 hereof
-----------
shall constitute "restricted securities" within the meaning of Rule 144 of the
Securities Act and will be issued in a private placement transaction in reliance
upon the exemption from the registration and prospectus delivery requirements of
Section 5 of the Securities Act afforded by Section 4(2) of the Securities Act
and Regulation D promulgated thereunder. The certificates evidencing the shares
of Parent Common Stock to be issued in the Merger shall bear appropriate legends
to identify such privately placed shares as being "restricted securities" under
the Securities Act, to comply with state and federal securities laws and, if
applicable, to notice the restrictions on transfer of such shares. It is
acknowledged and understood that Parent is relying on certain written
representations made by each of the Shareholders in a Shareholder Certificate
delivered to Parent in connection with the transactions contemplated hereby,
including, without limitation, representations as to accredited investor status
made by Shareholders who are accredited investors.
5.3 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during the
period from the date hereof and prior to the Effective Time to (i) all of the
Company's properties, books, contracts, commitments and records, including the
Company's source code, (ii) all other information concerning the business,
properties and personnel (subject to restrictions imposed by agreement or
applicable law) of the Company as Parent may reasonably request, and (iii) all
Employees of the Company as identified by Parent, subject to the approval of
Xxxxxxx X. Xxxxxxx. The Company agrees to provide to Parent and its accountants,
counsel and other representatives copies of internal financial statements
(including Tax Returns and supporting documentation) promptly upon request. 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 in accordance with the terms and provisions hereof.
5.4 Confidentiality. Each of the parties hereto hereby agrees that the
---------------
information obtained in any investigation pursuant to Section 5.3 hereof, or
-----------
pursuant to the negotiation and execution of this Agreement, due diligence prior
to execution of this Agreement or the effectuation of the transactions
contemplated hereby, shall be governed by the terms of the Confidential
Disclosure Agreements effective as of December 11, 2000 (the "Confidential
------------
Disclosure Agreement") between the Company and Parent.
--------------------
5.5 Expenses. Whether or not the Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third-Party Expenses") incurred by a party in
--------------------
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses. Any out-of-pocket
expenses of the Company associated with the
42
consummation of the Merger, including but not limited to expenses of counsel,
accountants, finders fees and investment banking fees shall result in a
reduction first in the Merger Cash and, if necessary, second in the Merger
Shares to be received by the Shareholders, all on a Pro Rata Basis; provided,
however, that at the Closing Parent shall pay for or reimburse, as applicable,
the reasonable legal expenses of the Company in an amount not to exceed twenty-
five thousand dollars ($25,000). The Company shall pay all reasonably
anticipated fees of its counsel, accountants and other providers of professional
services related to the Merger before or at the Closing.
5.6 Public Disclosure. No party shall issue any statement or communication
-----------------
to any third party (other than their respective agents) regarding the subject
matter of this Agreement or the transactions contemplated hereby, including, if
applicable, the termination of this Agreement and the reasons therefor, without
the consent of Parent or the Company, as the case may be, which consent shall
not be unreasonably withheld, except that this restriction shall be subject to
Parent's obligation to comply with applicable securities laws and the rules of
the Nasdaq Stock Market.
5.7 Consents. The Company shall use commercially reasonable efforts to
--------
obtain the consents, waivers and approvals under any of the Contracts to which
the Company is a party deemed appropriate or necessary by Parent in connection
with the Merger, including all consents, waivers and approvals set forth in the
Disclosure Schedule, so as to preserve all rights of, and benefits to, the
Company thereunder from and after the Effective Time.
5.8 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
-----------------
Parent a properly executed statement (a "FIRPTA Compliance Certificate") in a
-----------------------------
form reasonably acceptable to Parent for purposes of satisfying Parent's
obligations under Treasury Regulation Section 1.1445-2(c)(3).
5.9 Reasonable Efforts. Subject to the terms and conditions provided in
------------------
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated by this Agreement;
provided, however, that Parent shall not be required to agree to any divestiture
by Parent or the Company or any of Parent's subsidiaries or affiliates, of
shares of capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates, or of the Company, its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
5.10 Notification of Certain Matters. The Company or any Principal
-------------------------------
Shareholder, as the case may be, shall give prompt notice to Parent of: (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or any
Principal Shareholder, respectively and as the case may be, contained in this
Agreement to be untrue or inaccurate at or prior to the Effective Time, and (ii)
any failure of the
43
Company or any Principal Shareholder, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any written notice
pursuant to this Section 5.10 shall not (a) limit or otherwise affect any
------------
remedies available to the party receiving such notice or (b) constitute an
acknowledgment or admission of a breach of this Agreement. No written disclosure
by the Company or the Principal Shareholders pursuant to this Section 5.10,
------------
however, shall be deemed to amend or supplement the Disclosure Schedule and to
prevent or cure any misrepresentations, breach of warranty or breach of
covenant.
5.11 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be commercially reasonable and
necessary or desirable for effecting completely the consummation of the Merger
and the transactions contemplated hereby.
5.12 S-8 Registration. Parent agrees to use commercially reasonable
----------------
efforts to file, if available for use by Parent, with the Securities and
Exchange Commission not later than thirty (30) days after the Closing Date, a
registration statement on Form S-8 registering the shares of Parent Common Stock
issuable upon the exercise of all Company Options assumed by Parent with Parent
Options pursuant to Section 1.6(d) hereof.
--------------
5.13 Estimated Closing Balance Sheet. The Company shall prepare and
-------------------------------
deliver the Estimated Closing Balance Sheet at least five (5) business days
prior to the Closing Date.
5.14 Termination of Company Employee Plans. Effective as of the day
-------------------------------------
immediately preceding the Closing Date the Company shall terminate any and all
group severance, separation or salary continuation plans, programs or
arrangements, its salary reduction simplified employee pension ("SARSEP"), and
------
any and all Company Employee Plans intended to include a Code Section 401(k)
arrangement (unless Parent provides written notice to the Company that such
401(k) plans shall not be terminated) (collectively, "Company Employee Plans").
----------------------
Unless Parent provides such written notice to the Company, the Company shall
provide Parent with evidence that such Company Employee Plan(s) have been
terminated (effective as of the day immediately preceding the Closing Date
pursuant to resolutions of the Company's Board of Directors. The form and
substance of such resolutions shall be subject to review and approval of Parent.
The Company also shall take such other actions in furtherance of terminating
such Company Employee Plan(s) as Parent may reasonably require. In the event
that the termination of a Company Employee Plan or the distribution of assets
therefrom is reasonably anticipated to trigger liquidation charges, surrender
charges, or other fees to be imposed upon the account of any participant or
beneficiary of such terminated plan or upon the Company or plan sponsor, the
Company shall take all such actions as are necessary to reasonably estimate the
amount of such charges and/or fees and provide such estimate in writing to
Parent prior to the Closing Date.
5.15 Resignation of Officers and Directors. Each of Xxxxxxx X. Xxxxxxx,
-------------------------------------
J. Xxxxxx Xxxxx, Xxxxxxx X. Xxxxxxxxx, Xxxxxx Xxxxxxx and Xxxxxxx Xxxxxx shall
resign as directors of the Company effective as of the Effective Time.
44
5.16 Registration Rights Agreement. Parent and each of the Shareholders
-----------------------------
shall have executed a Registration Rights Agreement in the form attached hereto
as Exhibit C (the "Registration Rights Agreement").
--------- -----------------------------
5.17 Proprietary Information and Inventions Assignment Agreement. Each
-----------------------------------------------------------
Each current and former employee and contractor of the Company shall enter into
and execute or shall have previously entered into and executed a proprietary
information and inventions assignment agreement with the Company in a form
satisfactory to Parent.
5.18 Lock-Up. Each Principal Shareholder shall enter into a Lock-Up
-------
Agreement in the form attached hereto as Exhibit D, restricting certain
---------
transactions in the capital stock of Parent (the "Lock-Up Agreement"). The
-----------------
parties agree that the Company may allocate among the Shareholders exceptions to
such restricted transactions in an aggregate amount equal to the sum of fifty
percent (50%) of the number of shares of Parent Common Stock owned by Xxxxxxx X.
Xxxxxxx immediately following the Effective Time, plus an additional three
hundred thousand (300,000) shares of Parent Common Stock.
5.19 No Additional Issuances. As of the date hereof, the Company shall
-----------------------
not issue any security of the Company, including, without limitation, capital
stock of the Company or rights to acquire capital stock of the Company
(including options or warrants); provided, however, that the Company may issue
shares of Company Common Stock upon exercise of outstanding Company Options and
Company Warrants.
5.20 Consultant/Employment Agreement. Parent shall use commercially
-------------------------------
reasonable efforts to enter into an at-will consultant or employment agreement
with Xxxxxx Xxxxx, with aggregate annual compensation consistent with Xx.
Xxxxx'x historic compensation, six month severance and other terms and
conditions consistent with other employees or consultants, as the case may be,
with similar experience and responsibilities.
ARTICLE VI
----------
CONDITIONS TO THE MERGER
------------------------
6.1 Conditions to Obligations of Parent and the Company to Effect the
-----------------------------------------------------------------
Merger. The respective obligations of the Company and Parent to effect the
------
Merger shall be subject to the satisfaction, at or prior to the Effective Time,
of the following conditions:
(a) No Order. No Governmental Entity shall have enacted, issued,
--------
promulgated, enforced or entered any statute, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger.
(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 restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor
45
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 threatened or pending.
(c) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against Parent or the Company,
their respective properties or any of their respective officers or directors
seeking to enjoin or otherwise prevent the consummation of, or alter the terms
of, the Merger or the other transactions contemplated by the terms of this
Agreement.
6.2 Conditions to the Obligations of Parent and Sub. The obligation of
-----------------------------------------------
Parent and Sub to effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent and Sub:
(a) Representations, Warranties and Covenants. (i) The
-----------------------------------------
representations and warranties of the Company and the Principal
Shareholders in this Agreement (other than the representations and
warranties of the Company and the Principal Shareholders as of a specified
date, which will be true and correct as of such date) shall be true and
correct on the date they were made and shall be true and correct in all
material respects (except for such representations and warranties which are
qualified by materiality, which shall be true in all respects) on and as of
the Closing Date as though such representations and warranties were made on
and as of such time, and (ii) the Company and the Principal Shareholders
shall have performed and complied in all material respects with all
covenants and obligations under this Agreement required to be performed and
complied with by such parties as of the Closing.
(b) Governmental Approval. Approvals from any court, administrative
---------------------
agency, commission, or other federal, state, county, local or other foreign
governmental authority, instrumentality, agency, or commission (if any)
deemed appropriate or necessary by Parent shall have been timely obtained.
(c) Securities Act Compliance. The transactions contemplated by this
-------------------------
Agreement shall qualify for the exemption from the registration and
prospectus delivery requirements of Section 5 of the Securities Act
afforded by Section 4(2) of the Securities Act and Regulation D promulgated
by the SEC under the Securities Act.
(d) Third-Party Consents. Parent shall have been furnished with
--------------------
evidence satisfactory to it that the Company has obtained the consents,
waivers and approvals of Siemens Aktiengesellschaft and Vautomation, Inc.
in connection with the Merger for any Contract between the Company and each
of them to remain in full force and effect without limitation, modification
or alteration after the Effective Time.
(e) Shareholder Certificate. Each Shareholder shall have executed
-----------------------
and delivered to Parent a Shareholder Certificate.
(f) Resignation of Directors. Parent shall have received a written
------------------------
resignation from each of the directors of the Company effective as of the
Effective Time.
46
(g) Legal Opinion. Parent shall have received a legal opinion from
-------------
legal counsel to the Company, substantially in the form attached hereto as
Exhibit E.
---------
(h) No Material Adverse Change. There shall not have occurred any
--------------------------
event or condition of any character that has had or is reasonably likely to
have a Material Adverse Effect on the Company since the date of this
Agreement.
(i) Non-Competition Agreements. The Principal Shareholders other than
--------------------------
Xxxxxxx X. Xxxxxxx shall have executed and delivered to Parent a Non-
Competition Agreement in the form attached hereto as Exhibit F, and all of
---------
such Non-Competition Agreements shall be in full force and effect.
(j) Xxxxxxx X. Xxxxxxx Employment and Non-Competition Agreements.
------------------------------------------------------------
Xxxxxxx X. Xxxxxxx shall have executed and delivered to Parent an
Employment Agreement and Non-Competition Agreement each in the forms
attached hereto as Exhibit G-1 and G-2, respectively, and such agreements
----------- ---
shall be in full force and effect.
(k) Purchaser Representative. There shall be a Purchaser
------------------------
Representative, as defined under Regulation D of the Securities Act,
reasonably satisfactory to Parent, and such Purchaser Representative shall
have executed documentation reasonably satisfactory to Parent.
(l) Shareholder Approval. Shareholders holding at least ninety
--------------------
percent (90%) of the outstanding shares of Company Common Stock (including
Company Warrants on an as-converted basis) shall have approved this
Agreement, the Merger and the transactions contemplated hereby and thereby.
The payment of any amount or the provision of any benefit that would not be
deductible by reason of Section 280G of the Code shall have been approved
by such number of Shareholders of Company as is required by the terms of
Section 280G(b)(5)(B) in order for such payments and benefits not to be
deemed parachute payments under Code Section 280G, with such approval to be
obtained in a manner which satisfies all applicable requirements of such
Code Section 280G(b)(5)(B) and the proposed Treasury Regulations
thereunder, including Q&A-7 of Section 1.280G-1 of such proposed
regulations, or, in the absence of such Shareholder approval, none of those
payments or benefits shall be paid or provided, pursuant to the waivers of
those payments and benefits to be executed by the affected individuals in
form and substance reasonable satisfactory to Parent.
(m) Investigation by Parent. The Parent shall have completed its due
-----------------------
diligence investigation of the Company, with results reasonably
satisfactory to Parent.
(n) Certificate of the Company and the Principal Shareholders. Parent
---------------------------------------------------------
shall have received a certificate, validly executed by the Principal
Shareholders and the Chief Executive Officer of the Company for and on its
behalf, to the effect that, as of the Closing:
(i) all representations and warranties made by the Company and
the Principal Shareholders, as the case may be, in this Agreement (other
than the representations and warranties of the Company and the Principal
Shareholders as of a specified date, which will be true
47
and correct as of such date) were true and correct when made and are true and
correct in all material respects (except for such representations and warranties
which are qualified by materiality, which shall be true and correct in all
respects) on the Closing Date and that all covenants and obligations under this
Agreement to be performed by the Company or the Principal Shareholders on or
before the Closing have been so performed in all material respects; and
(ii) the conditions to the obligations of Parent and Sub set
forth in this Section 6.2 have been satisfied (unless otherwise waived in
-----------
accordance with the terms hereof).
(o) Certificate of Secretary of Company. Parent shall have received
-----------------------------------
a certificate, validly executed by the Secretary of the Company, certifying as
to (i) the terms and effectiveness of the articles of incorporation and the
bylaws of the Company, and (ii) the valid adoption of resolutions of the Board
of Directors of the Company and the Shareholders approving this Agreement and
the consummation of the transactions contemplated hereby.
(p) Certificate of Good Standing. Parent shall have received a
----------------------------
long-form certificate of good standing from the Secretary of State of the State
of Illinois, dated within a reasonable period prior to Closing.
(q) FIRPTA Certificate. Parent shall have received a copy of the
------------------
FIRPTA Compliance Certificate, validly executed by a duly authorized officer of
the Company.
(r) Termination of Company Employee Plans. Parent shall have
-------------------------------------
received from the Company evidence that the Company's 401(k) plan and any other
Company Employee Plans required to be terminated pursuant to Section 5.14 hereof
------------
have been terminated pursuant to resolution of the Company's Board of Directors
(the form and substance of which shall have been subject to review and approval
of Parent), effective as of the day immediately preceding the Closing Date.
(s) Estimated Closing Date Balance Sheet. Parent shall have
------------------------------------
received from the Company the Estimated Closing Balance Sheet pursuant to
Section 1.7 hereof.
-----------
(t) Vesting Agreements. All of the persons who accept offers of
------------------
employment with Parent or Sub as of the Closing shall have entered into a lock-
up agreement (the "Option Lock-up Agreement") attached hereto in Exhibit H
------------------------ ---------
with respect to all options that vest as a result of accelerated vesting caused
by the Merger; provided, however, that a pool of options which, if exercised as
of the Closing, would yield aggregate pre-tax proceeds of $75,000 based on the
Closing Stock Price (the "Excluded Options"), shall be allocated among the
----------------
employees and in the share amounts listed on Section 6.2(t) of the Disclosure
--------------
Schedule. The Option Lock-up Agreement shall provide all of the options subject
to such agreement and held by such person, other than the Excluded Options,
shall be subject to transfer restrictions, provided that twenty-five percent
(25%) of such options shall be released from the lock-up on the first
anniversary of the Closing and one-forty eighth (1/48/th/) of such options shall
be released from the lock-up over each of the subsequent thirty-six (36) months;
provided further, however, that all such options shall be released from such
lock-up upon the termination by Parent or Sub without cause of such person.
48
(u) Proprietary Information and Inventions Assignment Agreement. The
-----------------------------------------------------------
Company shall have provided evidence reasonably satisfactory to Parent that each
employee and contractor of the Company has entered into and executed a
proprietary information and inventions assignment agreement with the Company in
a form satisfactory to Parent.
(v) Parent Capital Stock Lock-Up Agreements. Each Shareholder of
---------------------------------------
the Company shall have entered into a Lockup Agreement.
(w) Termination of Company Shareholder Agreement. The Company shall
--------------------------------------------
have provided evidence reasonably satisfactory to the Company that the Company's
Shareholder Agreement shall have been terminated in accordance with applicable
law and the terms thereof.
6.3 Conditions to Obligations of the Company and the Principal
----------------------------------------------------------
Shareholders. The obligations of the Company and each of the Principal
------------
Shareholders to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Sub in this Agreement were true and correct when
made and shall be true and correct in all material respects (except for such
representations and warranties which are qualified by materiality, which shall
be true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time, and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Certificate of Parent. Company shall have received a
---------------------
certificate executed on behalf of Parent by an appropriate officer of Parent to
the effect that, as of the Closing:
(i) all representations and warranties made by Parent and Sub in
this Agreement were true and correct when made and are true and correct in all
material respects (except for such representations and warranties that are
qualified by materiality, which shall be true and correct in all respects) on
and as of the Closing Date as though such representations and warranties were
made on and as of such time; and
(ii) all covenants and obligations under this Agreement to be
performed by Parent and Sub on or before the Closing have been so performed in
all material respects.
(c) Registration Rights Agreement. The Parent shall have taken all
-----------------------------
reasonable actions to ensure that Parent and Shareholders shall have executed
and become signatories to the Registration Rights Agreement.
(d) Legal Opinion. Company shall have received a legal opinion from
-------------
legal counsel to Parent, substantially in the form attached hereto as Exhibit I.
---------
49
(e) Certificate of Good Standing. The Company shall have received a
----------------------------
long-form Certificate of good standing from the Secretary of State of the State
of Delaware, dated within a reasonable period prior to Closing.
(f) Release. American National Bank and Trust Company of Chicago
--------
("ANB") shall have released each of the Principal Shareholders from their
---
respective guaranties of the Company's indebtedness and obligations to ANB.
ARTICLE VII
-----------
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
--------------------------------------------------
7.1 Survival of Representations, Warranties and Covenants. The
-----------------------------------------------------
representations and warranties of the Company and the Principal Shareholders
contained in this Agreement, or in any certificate or other instrument delivered
pursuant to this Agreement, shall survive for a period of eighteen (18) months
following the Closing Date (the expiration of such eighteen (18) month period,
the "Survival Date"); provided, however, that the representations and warranties
-------------
contained in Section 2.10 (Tax Matters), Section 2.20 (Environmental Matters)
------------ ------------
and claims for Fraud (as defined in Section 7.5) (collectively, "Excluded
----------- --------
Claims") shall survive until the expiration of the applicable statute of
------
limitations. The representations and warranties of Parent and Sub contained in
Section 3.2 (Authority), Section 3.5 (Parent Common Stock), Section 3.7 (SEC
----------- ----------- -----------
Documents; Parent Financial Statement) and Section 3.8 (Ownership of Sub) shall
-----------
survive until the first anniversary of the Closing Date, all other
representations and warranties of Parent and Sub contained this Agreement, or in
any certificate or other instrument delivered pursuant to this Agreement, shall
survive until the Closing Date.
7.2 Indemnification. The Shareholders agree to indemnify and hold Parent
---------------
and its officers, directors, and affiliates, including the Surviving Corporation
(collectively, the "Indemnified Parties"), harmless, subject to the limitations
-------------------
contained in Section 7.5, against all claims, losses, liabilities, damages,
-----------
deficiencies, costs and expenses, including reasonable attorneys' fees and
expenses of investigation and defense (hereinafter individually a "Loss" and
----
collectively "Losses") incurred or sustained by the Indemnified Parties, or any
------
of them, directly or indirectly, as a result of (i) any breach or inaccuracy of
a representation or warranty of the Company or the Principal Shareholders
contained in this Agreement or in any certificate, instrument, or other document
delivered pursuant to this Agreement, (ii) any failure by the Company or the
Principal Shareholders to perform or comply with any covenant applicable to any
of them contained in this Agreement and (iii) any violation of the Code
(including Treasury Regulations or IRS pronouncements promulgated thereunder) or
ERISA (including Department of Labor ("DOL") regulations DOL or pronouncements
promulgated thereunder) by the Company arising from or relating to the SARSEP
maintained by the Company occurring prior to the Effective Date (whether or not
continuing on or after the Effective Date) (a "SARSEP Violation"), including,
but not limited to, the costs of correcting such SARSEP Violations; provided,
however, that Parent shall take commercially reasonable efforts to mitigate any
Loss; and provided, further, that the amount of any Loss shall be reduced by
amounts actually received from insurance relating to such claims which Parent
shall use
50
commercially reasonable efforts to collect. The Shareholders shall not have any
right of contribution from the Company or Parent with respect to any Loss
claimed by an Indemnified Party pursuant to this Article VII.
-----------
7.3 Escrow Arrangements.
-------------------
(a) Escrow Fund. By virtue of this Agreement and as exclusive
-----------
remedy (except with respect to Excluded Claims, the amount of any Deficit and
any Dissenting Share Payments) for the indemnity provided for in Section 7.2
-----------
at the Effective Time, the Shareholders will be deemed to have received and
deposited the Escrow Shares with the Escrow Agent (plus any additional shares as
may be issued in respect of any stock split, stock dividend or recapitalization
effected by Parent after the Effective Time) without any act of the
Shareholders. Promptly after the Closing, the Escrow Cash and Escrow Shares,
without any act of the Shareholders, will be deposited with the Escrow Agent,
such deposit of the Escrow Cash and Escrow Shares to constitute an escrow fund
(the "Escrow Fund") to be governed by the terms of a separate Escrow Agreement
-----------
in the form attached as Exhibit J. The Escrow Fund shall be available to
---------
compensate the Indemnified Parties for any claims by such parties for any Losses
suffered or incurred by them and for which they are entitled to recovery under
this Article VII. Parent on the one hand and Shareholders in the aggregate (on a
-----------
Pro Rata Basis) on the other hand each shall bear fifty percent (50%) of the
costs of the Escrow Agent's services.
(b) Threshold. Notwithstanding any provision of this Agreement to
---------
the contrary, Parent may not recover any Losses from the Escrow Fund unless and
until one or more Officer's Certificates or Pending Claim Certificates (each as
defined below) identifying Losses in excess of one hundred thousand dollars
($100,000) in the aggregate (the "Threshold Amount") has or have been delivered
----------------
to the Escrow Agent and Shareholder Representative as provided in Section
-------
7.3(e), in which case Parent shall be entitled to recover all Losses so
------
identified, including fifty thousand dollars ($50,000) of the Threshold Amount.
Notwithstanding the foregoing, Parent shall be entitled to recover for, and the
Threshold Amount shall not apply as a threshold to, any and all claims or
payments made with respect to the Excluded Claims, SARSEP Violations, the amount
of any Deficit and any Dissenting Share Payments. For the purposes hereof,
"Officer's Certificate" shall mean a certificate signed by any executive officer
---------------------
of Parent: (1) stating that Parent has paid, sustained, or incurred Losses, and
(2) specifying in reasonable detail the individual items of Losses included in
the amount so stated, the date each such item was paid, sustained, incurred, or
properly accrued, or the basis for such anticipated liability, and the nature of
the misrepresentation, breach of warranty or covenant to which such item is
related. "Pending Claims Certificate" shall mean a certificate signed by any
--------------------------
executive officer of Parent: (1) stating that Parent reasonably anticipates that
it will have to pay, sustain, incur or accrue Losses in connection with the
existing, but unsatisfied claims as of the Survival Date or, with respect to
SARSEP Violations only, as of the passing of forty (40) months after the
Effective Date (each a "Pending Claim"), and (2) specifying in reasonable
-------------
detail the individual items of Losses included in the amount so stated, the date
each such item is anticipated to be paid, sustained or incurred, or properly
accrued, or the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which such items relate.
51
(c) Satisfaction of Claims.
----------------------
(i) Claims by an Indemnified Party for Losses shall be
satisfied: (A) first, from the Escrow Fund, and (B) second, but only with
respect to Excluded Claims, against the Shareholders directly; provided,
however, that only Principal Shareholders shall be liable for Losses related to
Fraud.
(ii) Claims with respect to the Deficit and any Dissenting Share
Payments shall be satisfied: (A) first, by the Shareholders directly, on a joint
and several basis, and (B) second, from the Escrow Fund; each subject to the
limitations contained in Section 7.5.
-----------
(d) Escrow Period; Distribution of Escrow Shares and Escrow Cash Upon
-----------------------------------------------------------------
Termination of Escrow Period. Subject to the following requirements, the Escrow
----------------------------
Fund shall be in existence immediately following the Effective Time and, except
as provided below, shall terminate at 5:00 p.m., California time, on the date
that is eighteen (18) months from the Closing Date (the "Escrow Period");
--------------
provided, however, that the Escrow Period shall not terminate with respect to
0.3% of the Escrow Fund (or such lesser amount (allocated Pro Rata from Merger
Cash and Merger Shares) equal to $50,000 minus the amount of any Losses
resulting from SARSEP Violations for which the Indemnified Parties have already
been indemnified pursuant to this Article VII), which amount shall remain in the
Escrow Fund until the passing of forty (40) months after the Effective Date and
shall be applied only toward satisfaction of Losses, if any, resulting from
SARSEP Violations; and provided further, however, that the Escrow Period shall
not terminate with respect to the amount of any Losses set forth in a Pending
Claims Certificate until the claims identified therein are resolved pursuant to
this Article VII. As soon as all such claims have been resolved, if any, the
-----------
Escrow Agent shall deliver to the Shareholders the remaining portion of the
Escrow Fund, if any, not required to satisfy such claims. Deliveries of the
Escrow Shares and Escrow Cash out of the Escrow Fund to the Shareholders
pursuant to this Section 7.3(d) shall be made on a Pro Rata Basis. All interest
--------------
on the Escrow Cash shall be distributed to the Shareholders on a Pro Rata Basis
upon distribution of the Escrow Fund. All cash dividends and distributions, if
any, on the Escrow Shares, shall be distributed to the Shareholders on a Pro
Rata Basis as earned.
(e) Claims for Indemnification.
--------------------------
(i) Upon receipt by the Escrow Agent at any time on or before
the last day of the Escrow Period of an Officer's Certificate or upon resolution
of any claims identified in a Pending Claims Certificate, the Escrow Agent
shall, subject to the provisions of Section 7.3(f) hereof, deliver to Parent, as
--------------
promptly as practicable, Pro Rata from Merger Cash and Merger Shares in the
Escrow Fund an amount equal to such Losses (with the value of the Escrow Shares
as calculated based on the Closing Stock Price).
(ii) If Losses incurred or sustained by the Indemnified Parties
with respect to an Excluded Claim exceed the Escrow Fund then available, then an
Indemnified Party may make a claim directly against the Shareholders; provided,
that with respect to Losses arising from Fraud, then an Indemnified Party may
only make a claim directly against the Principal Shareholders. In the event an
Indemnified Party pursues indemnity directly against the Shareholders or
Principal
52
Shareholders, as the case may be, subject to the provisions of Sections 7.3(f)
---------------
and 7.5(b), each Shareholder shall promptly, and in no event later than thirty
------
(30) days after delivery of an Officer's Certificate or upon resolution of any
claims identified in a Pending Claims Certificate to the Shareholder
Representative, wire transfer to the Indemnified Party an amount equal to such
Shareholder's Pro Rata Basis of such Loss.
(iii) If the Shareholder Representative (as defined in Section
-------
7.4) does not object in writing within the thirty (30) day period after delivery
----
by the Parent of the Officer's Certificate, such failure to so object shall be
an irrevocable acknowledgment by the Shareholder Representative and Shareholders
(including the Principal Shareholders) that the Indemnified Party is entitled to
the full amount of the claim for Losses set forth in such Officer's Certificate.
(iv) Upon resolution of a Pending Claim, Parent promptly shall
deliver an Officer's Certificate with respect to such claim to the Shareholder
Representative and the Escrow Agent. If the Shareholder Representative (as
defined in Section 7.4) does not object in writing within the thirty (30) day
-----------
period after delivery by the Parent of the Officer's Certificate, such failure
to so object shall be an irrevocable acknowledgment by the Shareholder
Representative and Shareholders (including the Principal Shareholders) that the
Indemnified Party is entitled to the full amount of the claim for Losses set
forth in such Officer's Certificate.
(f) Objections to Claims against the Escrow Fund.
--------------------------------------------
(i) At the time of delivery of any Officer's Certificate or
Pending Claims Certificate to the Escrow Agent, a duplicate copy of such
certificate shall be delivered to the Shareholder Representative, and for a
period of thirty (30) days after such delivery, the Escrow Agent shall make no
delivery to Parent of any Escrow Amount pursuant to Section 7.3(e) unless the
--------------
Escrow Agent shall have received written authorization from the Shareholder
Representative to make such delivery. With respect to any Officer's Certificate,
after the expiration of such thirty (30) day period, the Escrow Agent shall make
delivery Pro Rata from Merger Cash and Merger Shares from the Escrow Fund equal
to the amount of Losses (with the value of the Escrow Shares as calculated based
on the Closing Stock Price) claimed in the Officer's Certificate; provided that
no such payment or delivery shall be made if the Shareholder Representative
objects in a written statement to the claim made in the Officer's Certificate,
and such statement shall have been delivered to the Escrow Agent and the Parent
prior to the expiration of such thirty (30) day period. With respect to any
Pending Claims Certificate, the Escrow Agent shall not release Escrow Funds in
an amount sufficient to satisfy the Pending Claims set forth therein, until such
time as either (x) an Officer's Certificate relating to such claims is delivered
and no timely objections are raised or timely objections are resolved, in each
case in accordance with this Article VII, or (y) timely objections to such
-----------
Pending Claims Certificate are resolved in favor of the Shareholder
Representative.
(ii) Notwithstanding the foregoing, the calculation of the
Deficit at Closing in accordance with the terms of Section 1.7 hereof shall be
-----------
conclusive and binding on all parties to this Agreement, and none of the Parent,
the Shareholder Representative, nor the Principal Shareholders shall have any
further right to challenge such calculation of the Deficit at Closing, whether
pursuant to the terms of this Section 7.3 or otherwise.
-----------
53
(g) Resolution of Conflicts; Arbitration.
------------------------------------
(i) In case the Shareholder Representative shall object in
writing to any claim or claims made in any Officer's Certificate or Pending
Claims Certificate within thirty (30) days after delivery of such certificate,
the Shareholder Representative and Parent shall attempt in good faith to agree
upon the rights of the respective parties with respect to each of such claims.
Shareholder Representative agrees during the sixty (60) day period following
delivery of the Shareholder Representative's objection to meet no less than
twice with an executive officer of Parent empowered with authority to settle
such matter and Parent agrees that such an executive officer of Parent shall
meet with the Shareholder Representative no less than twice during such period.
If the Shareholder Representative and Parent should so agree, a memorandum
setting forth such agreement shall be prepared and signed by both such parties
and, in the case of a claim against the Escrow Fund, shall be furnished to the
Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum
and make distributions from the Escrow Fund in accordance with the terms
thereof.
(ii) If no such agreement can be reached after good faith
negotiation and prior to ninety (90) days after delivery of an Officer's
Certificate or Pending Claims Certificate, either Parent or the Shareholder
Representative may demand arbitration of the matter unless the amount of the
Loss is at issue in pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or both
parties agree to arbitration, and in either such event the matter shall be
settled by arbitration conducted by one arbitrator mutually agreeable to Parent
and the Shareholder Representative. In the event that, within forty-five (45)
days after submission of any dispute to arbitration, Parent and the Shareholder
Representative cannot mutually agree on one arbitrator, then, within fifteen
(15) days after the end of such forty-five (45) day period, Parent and the
Shareholder Representative shall each select one arbitrator. The two arbitrators
so selected shall select a third arbitrator. If the Shareholder Representative
fails to select an arbitrator during this fifteen (15) day period, then the
parties agree that the arbitration will be conducted by one arbitrator selected
by Parent. If Parent fails to select an arbitrator during this fifteen (15) day
period then the parties agree that the arbitration will be conducted by one
arbitrator selected by the Shareholder Representative.
(iii) Any such arbitration shall be held in Orange County,
California under the rules then in effect of the American Arbitration
Association. The arbitrator(s) shall determine how all expenses relating to the
arbitration shall be paid, including without limitation, the respective expenses
of each party, the fees of each arbitrator and the administrative fee of the
American Arbitration Association. The arbitrator or arbitrators, as the case may
be, shall set a limited time period and establish procedures designed to reduce
the cost and time for discovery while allowing the parties an opportunity,
adequate in the sole judgment of the arbitrator or majority of the three
arbitrators, as the case may be, to discover relevant information from the
opposing parties about the subject matter of the dispute. The arbitrator, or a
majority of the three arbitrators, as the case may be, shall rule upon motions
to compel or limit discovery and shall have the authority to impose sanctions,
including attorneys' fees and costs, to the same extent as a competent court of
law or equity, should the arbitrators or a majority of the three arbitrators, as
the case may be, determine that
54
discovery was sought without substantial justification or that discovery was
refused or objected to without substantial justification. The decision of the
arbitrator or a majority of the three arbitrators, as the case may be, as to the
validity and amount of any claim in such Officer's Certificate or Pending Claims
Certificate shall be final, binding, and conclusive upon the parties to this
Agreement. Such decision shall be written and shall be supported by written
findings of fact and conclusions which shall set forth the award, judgment,
decree or order awarded by the arbitrator(s), and the Escrow Agent shall be
entitled to rely on, and make distributions from the Escrow Fund in accordance
with, the terms of such award, judgment, decree or order as applicable. Within
thirty (30) days of a decision of the arbitrator(s) requiring payment by one
party to another, such party shall make the payment to such other party.
(iv) Judgment upon any award rendered by the arbitrator(s) may
be entered in any court having jurisdiction. The forgoing arbitration provision
shall apply to any dispute between the Shareholders (including the Principal
Shareholders) and the Indemnified Party under this Article VII hereof, whether
-----------
relating to claims upon the Escrow Fund or to the other indemnification
obligations set forth in this Article VII.
-----------
(h) Third-Party Claims. In the event Parent becomes aware of a
------------------
third-party claim which Parent reasonably believes may result in a demand
against the Escrow Fund or for other indemnification pursuant to this
Article VII, Parent shall notify the Shareholder Representative of such claim,
-----------
and the Shareholder Representative shall be entitled on behalf of the
Shareholders, at its expense, to participate in, but not to determine or
conduct, the defense of such claim. Parent shall have the right in its sole
discretion to conduct the defense of, and to settle, any such claim; provided,
however, that any such claim shall not be compromised or settled without the
written consent of the Shareholder Representative, which consent shall not be
unreasonably withheld or delayed. In the event that the Shareholder
Representative has consented to any such settlement, the Shareholders (including
the Principal Shareholders) shall have no power or authority to object under any
provision of this Article VII to the amount of any claim by Parent against the
-----------
Escrow Fund or against the Shareholders directly, as the case may be, with
respect to such settlement.
7.4 Shareholder Representative.
--------------------------
(a) Each of the Shareholders (including each of the Principal
Shareholders) hereby appoints Xxxxxxx X. Xxxxxxx as its agent and attorney-
in-fact, as the Shareholder Representative (the "Shareholder Representative")
--------------------------
for and on behalf of the Shareholders (and with regard to Claims made against
the Shareholders directly, for and on behalf of the Shareholders and with regard
to Claims made against the Principal Shareholders directly, for and on behalf of
the Principal Shareholders) to give and receive notices and communications, to
authorize payment to Parent from the Escrow Fund in satisfaction of claims by
Parent, to object to such payments, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims, and to take all
other actions that are either (i) necessary or appropriate in the judgment of
either of the Shareholder Representative for the accomplishment of the foregoing
or (ii) specifically mandated by the terms of this Agreement. Such agency may be
changed by the Shareholders or the Principal Shareholders, as
55
the case may be, from time to time upon not less than thirty (30) days prior
written notice to Parent; provided, however, that the Shareholder Representative
may not be removed unless holders of a two-thirds (2/3rds) interest of the
Escrow Fund or, in the event there are no amounts remaining in the Escrow Fund,
by the holders of two-thirds (2/3rds) of the Merger Shares agree to such removal
and to the identity of the substituted agent. A vacancy in the position of
Shareholder Representative may be filled by the holders of a majority in
interest of the Escrow Fund or, in the event there are no amounts remaining in
the Escrow Fund, by the holders of two- thirds of the Merger Shares. No bond
shall be required of the Shareholder Representative, and the Shareholder
Representative shall not receive any compensation for its services. Notices or
communications to or from the Shareholder Representative shall constitute notice
to or from the Shareholders.
(b) The Shareholder Representative shall not be liable for any act
done or omitted hereunder as Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Shareholders on whose
behalf the Escrow Amount was contributed to the Escrow Fund shall indemnify the
Shareholder Representative and hold the Shareholder Representative harmless
against any loss, liability or expense incurred without negligence or bad faith
on the part of the Shareholder Representative and arising out of or in
connection with the acceptance or administration of the Shareholder
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Shareholder Representative.
(c) A decision, act, consent or instruction of the Shareholder
Representative, including but not limited to an amendment, extension or waiver
of this Agreement pursuant to Sections 8.3 and 8.4 hereof, shall constitute a
------------ ---
decision of all the Shareholders and shall be final, binding and conclusive upon
each of such Shareholders; and the Escrow Agent and Parent may rely upon any
such decision, act, consent or instruction of all the Shareholder Representative
as being the decision, act, consent or instruction of the Shareholders. The
Escrow Agent and Parent are hereby relieved from any liability to any person for
any acts done by them in accordance with such decision, act, consent or
instruction of the Shareholder Representative.
7.5 Maximum Payments; Remedy.
------------------------
(a) Subject to Section 7.5(b) and (c), the maximum amount an
-------------- ---
Indemnified Party may recover from each Shareholder pursuant to the indemnity
set forth in Section 7.2 hereof for Losses or for any claim whatsoever under
----------
this Agreement (except as provided in Section 7.5) shall be limited to the
-----------
Escrow Fund; provided, however, that, subject to Section 7.5(b) and (c) hereof,
-------------- ---
in the case of Excluded Claims, payment of the Deficit, or Dissenting Share
Payments, Losses shall be limited to a dollar amount equal to the Merger Cash
plus the aggregate proceeds from the sale of the Merger Shares plus the market
value of unsold Merger Shares, each as of the date of such claim is paid by
settlement or otherwise.
(b) Nothing herein shall limit the liability of any Principal
Shareholder in respect of Losses arising out actions or omissions constituting
fraud under applicable law with respect to the representations, warranties and
covenants contained herein ("Fraud") on the part of such Principal Shareholder.
-----
Notwithstanding anything in this Article VII to the contrary, only Principal
-----------
Shareholders shall be liable for Losses related to Fraud.
56
(c) Nothing herein shall limit the liability of the Company or the
Shareholders for any breach or inaccuracy of any representation, warranty or
covenant contained in this Agreement if the Merger does not close as a result of
such breach or inaccuracy; provided, that in the event the Merger does not
close, the aggregate liability of the Company and the Shareholders shall not
exceed five hundred thousand dollars ($500,000).
ARTICLE VIII
------------
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
8.1 Termination. Except as provided in Section 8.2 hereof, this Agreement
----------- -----------
may be terminated and the Merger abandoned at any time prior to the Closing:
(a) by mutual agreement of the Company and Parent;
(b) by Parent or the Company if the Closing Date shall not have
occurred on or before the thirtieth (30/th/) day following the date on which
Shareholder Approval of the transactions effectuated by this Agreement have been
obtained; provided, however, that if such thirtieth (30th) day is not a business
day in either California or Illinois, then the Closing Date may occur on the
next day that is a business day in both California and Illinois; provided,
however, that the right to terminate this Agreement under this Section 8.1(b)
--------------
shall not be available to any party whose action or failure to act has been a
principal cause of or resulted in the failure of the Merger to occur on or
before such date and such action or failure to act constitutes breach of this
Agreement;
(c) by Parent or the Company if the Closing Date shall not have
occurred by December 31, 2001;
(d) by Parent or the Company if: (i) there shall be a final non-
appealable order of a federal or state court in effect preventing consummation
of the Merger, or (ii) there shall be any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Closing by any
Governmental Entity that would make consummation of the Closing illegal;
(e) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any Governmental Entity, which would: (i) prohibit Parent's
ownership or operation of any portion of the business of the Company or (ii)
compel Parent or the Company to dispose of or hold separate all or any portion
of the business or assets of the Company or Parent as a result of the Merger ;
(f) by Parent if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement not otherwise qualified by materiality, or there
has been a breach of any representation, warranty, covenant or qualified by
materiality, of the Company or the Principal Shareholders contained in this
Agreement such that the conditions set forth in Section 6.2(a) hereof would not
be satisfied and such breach has not been cured within ten (10) calendar days
after written notice thereof to the Company and the applicable Principal
Shareholder; provided, however, that no cure
57
period shall be required for a breach which by its nature cannot be cured; and
provided further, that the right to terminate this Agreement under this Section
-------
8.1(f) shall not be available to Parent if any action or failure to act by
------
Parent has been a principal cause of any Company breach or the failure to cure
such breach within ten (10) calendar days after written notice; or
(g) by the Company if neither the Company nor any of the Principal
Shareholders is in material breach of their respective obligations under this
Agreement and there has been a material breach of any representation, warranty,
covenant or agreement not otherwise qualified by materiality, or there has been
a breach of any representation, warranty, covenant or agreement that is
qualified by materiality, of the Parent contained in this Agreement such that
the conditions set forth in Section 6.3(a) hereof would not be satisfied and
--------------
such breach has not been cured within ten (10) calendar days after written
notice thereof to Parent; provided, however, that no cure period shall be
required for a breach which by its nature cannot be cured; and provided further,
that the right to terminate this Agreement under this Section 8.1(g) shall not
--------------
be available to the Company if any action or failure to act by Company or the
Principal Stockholders has been a principal cause of any Parent breach or the
failure to cure such breach within ten (10) calendar days after written notice.
8.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 8.1, this Agreement shall forthwith become void and there
-----------
shall be no liability or obligation on the part of Parent, the Company or the
Principal Shareholders, or their respective officers, directors or shareholders,
if applicable; provided, however, that each party hereto shall remain liable for
any breaches of this Agreement prior to its termination; and provided further,
however, that, the provisions of Sections 5.4 (Confidentiality), 5.5 (Expenses)
------------ ---
and 5.6 (Public Disclosure), Article IX hereof and this Section 8.2 shall remain
--- ---------- -----------
in full force and effect and survive any termination of this Agreement pursuant
to the terms of this Article VIII.
------------
8.3 Amendment. This Agreement may be amended by the parties hereto at any
---------
time by execution of an instrument in writing signed on behalf of each of the
parties hereto. For purposes of this Section 8.3, the Shareholders agree that
-----------
any amendment of this Agreement signed by the Shareholder Representative shall
be binding upon and effective against each of the Shareholders whether or not
they have signed such amendment.
8.4 Extension; Waiver. At any time prior to the Closing, Parent, on the
-----------------
one hand, and the Company and the Shareholder Representative acting on behalf of
the Shareholders, on the other hand, may, to the extent legally allowed, (i)
extend the time for the performance of any of the obligations of the other party
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto, and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party. For purposes of this Section 8.4, the
-----------
Shareholders agree that any extension or waiver signed by the Shareholder
Representative shall be binding upon and effective against each of the
Shareholders whether or not they have signed such extension or waiver.
58
ARTICLE IX
----------
GENERAL PROVISIONS
------------------
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by nationally
recognized overnight commercial messenger or courier service for next business
day delivery, or mailed by registered or certified mail (return receipt
requested), in each case with all postage, costs and fees prepaid to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice); provided, however, that notices sent by mail or
messenger or courier will not be deemed given until received:
59
(a) if to Parent or Sub, to:
Lantronix, Inc.
00000 Xxxxxxxx Xxxxxxx
Xxxxxx, Xxxxxxxxxx 00000
Attention: Xxxxxx X. Xxxxxx
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
with a copy to:
Xxxxxx Xxxxxxx Xxxxxxxx & Xxxxxx
Professional Corporation
000 Xxxx Xxxx Xxxx
Xxxx Xxxx, Xxxxxxxxxx 00000
Attention: Xxxx X. Xxxxxxxx, Esq.
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
(b) if to the Company or the Shareholder Representative, to:
Synergetic Micro Systems, Incorporated
0000 Xxxxxxxxx Xxx.
Xxxxxxx Xxxxx, Xxxxxxxx 00000
Attention: Xxxxxxx Xxxxxxx
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
with a copy to:
Xxxxxxxx & Xxxxxx, Ltd.
00 Xxxxx Xxxxxx Xxxxx, 00xx xxxxx
Xxxxxxx, Xxxxxxxx 00000
Attention: Xxxxx X. Xxxxxxxxxx, Esq.
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
(c) If to the Principal Shareholders, to the addresses set forth in
Section 9.1 of the Disclosure Schedule.
-----------
9.2 Interpretation. The words "include," "includes" and "including" when
--------------
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
60
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto, the
----------------------------
Disclosure Schedule, the Confidential Disclosure Agreement, and the documents
and instruments and other agreements among the parties hereto referenced herein:
(i) 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,
(ii) are not intended to confer upon any other person any rights or remedies
hereunder, and (iii) shall not be assigned by operation of law or otherwise,
except that Parent may assign its rights and delegate its obligations hereunder
to its affiliates as long as Parent remains ultimately liable for all of
Parent's obligations hereunder.
9.5 Severability. In the event that any provision of this Agreement or the
------------
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
9.6 Other Remedies. Any and all remedies herein expressly conferred upon a
--------------
party will be deemed cumulative with and not exclusive of any other remedy
conferred hereby, or by law or equity upon such party, and the exercise by a
party of any one remedy will not preclude the exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Orange County, State of California, in connection
with any matter based upon or arising out of this Agreement or the matters
contemplated herein, agrees that process may be served upon them in any manner
authorized by the laws of the State of California for such persons and waives
and covenants not to assert or plead any objection which they might otherwise
have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefor, 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 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
--------------------
WAIVES ALL RIGHT TO TRIAL BY JURY FOR ANY ACTION,
61
PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE)
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY PARTY HERETO
IN NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.
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IN WITNESS WHEREOF, Parent, Sub, the Company, the Principal Shareholders
and the Shareholder Representative have caused this Agreement to be signed, all
as of the date first written above.
LANTRONIX, INC.
By: /s/ Xxxxxx X. Xxxxxx
-----------------------------------
Name: Xxxxxx X. Xxxxxx
Title: Chief Financial Officer
SYNERGETIC MICRO SYSTEMS, INCORPORATED
By: /s/ Xxxxxxx X. Xxxxxxx
-----------------------------------
Name: Xxxxxxx X. Xxxxxxx
Title: President
S COMPANY ACQUISITION CORPORATION
By: /s/ Xxxxxx X. Xxxxxx
-----------------------------------
Name: Xxxxxx X. Xxxxxx
Title: President
SHAREHOLDER REPRESENTATIVE
By: /s/ Xxxxxxx X. Xxxxxxx
-----------------------------------
Xxxxxxx X. Xxxxxxx, an individual
PRINCIPAL SHAREHOLDERS
By: /s/ Xxxxxxx X. Xxxxxxx
-----------------------------------
Xxxxxxx X. Xxxxxxx, an individual
By: /s/ J. Xxxxxx Xxxxx
-----------------------------------
J. Xxxxxx Xxxxx, an individual
By: /s/ Xxxxxxx X Xxxxxxxxx
-----------------------------------
Xxxxxxx X. Xxxxxxxxx, an individual
