EXHIBIT 2.1
EXECUTION COPY
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AGREEMENT AND PLAN OF MERGER
by and among
THE READER'S DIGEST ASSOCIATION, INC.
RD MERGER SUB, INC.,
XXXXXXXXXX.XXX, INC.
and
THE XXXXXXXXXX.XXX, INC. SHAREHOLDER REPRESENTATIVE
March 31, 2006
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TABLE OF CONTENTS
PAGE
1. DEFINITIONS.............................................................................................1
1.1. Certain Matters of Construction................................................................1
1.2. Certain Definitions............................................................................2
2. THE MERGER.............................................................................................12
2.1. The Merger....................................................................................12
2.2. Effective Time................................................................................13
2.3. Effect of the Merger..........................................................................13
2.4. Articles of Incorporation; Bylaws.............................................................13
2.5. Directors and Officers........................................................................13
2.6. The Merger Consideration; Effect on Outstanding Securities of the Company.....................13
2.7. Payment; Exchange of Certificates.............................................................16
2.8. Lost, Stolen or Destroyed Certificates........................................................17
2.9. Adjustment to Merger Price....................................................................18
2.10. Taking of Necessary Action; Further Action....................................................20
2.11. Tax Treatment.................................................................................20
2.12. Withholding...................................................................................21
2.13. Escrow Agreement; Delivery of Merger Price Escrow Amount and Indemnity Escrow Amount..........21
2.14. Shareholder Representative....................................................................21
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................................................22
3.1. Corporate Matters.............................................................................22
3.2. Financial Statements..........................................................................25
3.3. Change in Condition since Balance Sheet Date..................................................25
3.4. Environmental Matters.........................................................................27
3.5. Real and Personal Property....................................................................27
3.6. Intellectual Property Rights..................................................................28
3.7. Certain Contractual Obligations...............................................................31
3.8. Insurance.....................................................................................33
3.9. Litigation....................................................................................33
3.10. Compliance with Laws..........................................................................34
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TABLE OF CONTENTS
(CONTINUED)
PAGE
3.11. Tax Matters...................................................................................34
3.12. Employee Benefit Plans/Labor Matters..........................................................37
3.13. Accounts and Notes Receivable and Payable.....................................................39
3.14. Related Party Transactions....................................................................39
3.15. Certain Governmental Matters..................................................................39
3.16. Advertising Customers.........................................................................40
3.17. Brokers.......................................................................................40
4. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB................................................40
4.1. Corporate Matters.............................................................................40
4.2. Merger Consideration..........................................................................41
4.3. Litigation....................................................................................41
4.4. Brokers.......................................................................................41
4.5. Investigation; No Additional Representations; No Reliance.....................................41
5. CERTAIN AGREEMENTS OF THE PARTIES......................................................................42
5.1. Treatment of Transfer and Other Taxes.........................................................42
5.2. Operation of Business, Related Matters........................................................43
5.3. Preparation for Closing.......................................................................46
5.4. Confidentiality Agreement.....................................................................47
5.5. Intentionally deleted.........................................................................47
5.6. Directors' and Officers' Indemnification and Insurance........................................47
5.7. Further Assurances............................................................................48
5.8. Financial Reporting...........................................................................48
5.9. Exclusivity...................................................................................48
5.10. Access to Information.........................................................................49
6. CONDITIONS TO THE OBLIGATION TO CLOSE OF PARENT........................................................49
6.1. Representations and Warranties................................................................50
6.2. Performance of Agreements.....................................................................50
6.3. Legality; Governmental Authorization; Litigation..............................................50
6.4. Closing Certificate...........................................................................50
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TABLE OF CONTENTS
(CONTINUED)
PAGE
6.5. Termination of Certain Agreements.............................................................50
6.6. Dissenting Shares.............................................................................50
6.7. Consents......................................................................................50
6.8. Employment Agreements.........................................................................50
6.9. Legal Opinion.................................................................................51
6.10. Escrow Agreement..............................................................................51
6.11. No Material Adverse Effect....................................................................51
6.12. FIRPTA........................................................................................51
6.13. Financial Statements..........................................................................51
6.14. General.......................................................................................51
7. CONDITIONS TO THE OBLIGATION TO CLOSE OF THE COMPANY...................................................51
7.1. Representations and Warranties................................................................51
7.2. Performance of Agreements.....................................................................51
7.3. Legality; Government Authorization; Litigation................................................52
7.4. Closing Certificate...........................................................................52
7.5. Termination of Agreements.....................................................................52
7.6. Legal Opinion.................................................................................52
7.7. Escrow Agreement..............................................................................52
7.8. General.......................................................................................52
8. EMPLOYMENT AND EMPLOYEE BENEFITS ARRANGEMENTS..........................................................52
8.1. Compensation of Company Employees.............................................................52
8.2. Substantially Equivalent Benefits.............................................................52
8.3. Bonus Plans...................................................................................52
8.4. Recognition of Service........................................................................53
8.5. Welfare Plans.................................................................................53
8.6. Defined Contribution 401(k) Plan..............................................................53
8.7. WARN..........................................................................................53
8.8. Third-Party Rights............................................................................53
9. INDEMNIFICATION........................................................................................53
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TABLE OF CONTENTS
(CONTINUED)
PAGE
9.1. Company's Indemnification.....................................................................53
9.2. Monetary Limitations..........................................................................54
9.3. Limitations on Direct Company Equityholder Claims.............................................55
9.4. Loss Mitigation Limitations...................................................................55
9.5. Time Limitations..............................................................................55
9.6. Escrow Funds..................................................................................56
9.7. Third Party Claims............................................................................56
9.8. Certain Other Indemnity Matters...............................................................57
9.9. Tax Treatment of Indemnity Payments...........................................................57
10. CONSENT TO JURISDICTION; JURY TRIAL WAIVER.............................................................57
10.1. CONSENT TO JURISDICTION.......................................................................58
10.2. WAIVER OF JURY TRIAL..........................................................................58
11. TERMINATION............................................................................................58
11.1. Termination of Agreement......................................................................58
12. MISCELLANEOUS..........................................................................................60
12.1. Entire Agreement; Waivers.....................................................................60
12.2. Amendment or Modification.....................................................................60
12.3. Severability..................................................................................60
12.4. Successors and Assigns........................................................................60
12.5. Notices.......................................................................................61
12.6. Public Announcements..........................................................................62
12.7. Headings......................................................................................62
12.8. Disclosure....................................................................................62
12.9. Expenses......................................................................................62
12.10. Amounts Paid and Calculated in U.S. Dollars...................................................62
12.11. Third Party Beneficiaries.....................................................................62
12.12. Counterparts..................................................................................62
12.13. Governing Law.................................................................................63
12.14. Specific Performance..........................................................................63
12.15. Negotiation of Agreement......................................................................63
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SCHEDULES
---------
Schedule D
EXHIBITS
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Exhibit A-1 Certificate of Merger (Washington)
Exhibit A-2 Certificate of Merger (Delaware)
Exhibit A-3 Amended and Restated Articles of Surviving Corporation
Exhibit B Form of Letter of Transmittal
Exhibit C Escrow Agreement
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into
as of March 31, 2006, among THE READER'S DIGEST ASSOCIATION, INC., a Delaware
corporation ("Parent"), RD MERGER SUB, INC., a Delaware corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), XXXXXXXXXX.XXX, INC., a
Washington corporation (the "Company"), and the Shareholder Representative named
herein.
RECITALS
A. The respective Boards of Directors of the Company, Parent and
Merger Sub believe it advisable and in their respective best interests to effect
a merger of Merger Sub with and into the Company upon the terms and subject to
the conditions set forth in this Agreement (the "Merger"), such that Parent will
acquire 100% equity ownership of the Company.
B. The Board of Directors and shareholders of the Company have
approved this Agreement and the Merger as required by applicable law.
C. The Boards of Directors of Parent and Merger Sub and Parent, as
sole shareholder of Merger Sub, have each approved this Agreement and the Merger
as required by applicable law.
D. Concurrent with the execution and delivery of this Agreement, (1)
certain shareholders of the Company representing over 75% of the voting
interests in the Company have entered into a Support Agreement with Parent and
Merger Sub (the "Support Agreement") and (2) the employees listed on Schedule D
have entered into employment agreements with the Company and Parent providing
for continued employment with the Surviving Corporation, effective at the
Closing (the "Employment Agreements").
E. Pursuant to the Merger, each outstanding share of Company Stock
will be converted solely into the right to receive cash payment, as provided in
Section 2.6, upon the terms and subject to the conditions set forth in this
Agreement and each share of Merger Sub Stock shall be converted into one share
of common stock of the Surviving Corporation.
AGREEMENT
Therefore, in consideration of the foregoing and the mutual
agreements and covenants set forth below, Parent, Merger Sub and the Company
hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
1.1. Certain Matters of Construction. In addition to the definitions
referred to or set forth below in this Section 1:
(a) The words "hereof", "herein", "hereunder" and words of similar
import shall refer to this Agreement as a whole and not to any particular
Section or provision of this Agreement, and reference to a particular
Section of this Agreement shall include all subsections thereof;
(b) The words "party" and "parties" shall refer to the Company, Merger
Sub and Parent;
(c) Definitions shall be equally applicable to both the singular and
plural forms of the terms defined, and references to the masculine,
feminine or neuter gender shall include each other gender;
(d) Accounting terms used herein and not otherwise defined herein are
used herein as defined by Generally Accepted Accounting Principles (as
defined below) in effect as of the date hereof, consistently applied;
(e) All references in this Agreement to any Exhibit or Schedule shall,
unless the context otherwise requires, be deemed to be a reference to an
Exhibit or Schedule, as the case may be, as such may be amended in
accordance with Section 5.3.4 to this Agreement, all of which are made a
part of this Agreement; and
(f) The words "including" and "include" shall be read to be followed
by the words "without limitation" or words having similar import.
1.2. Certain Definitions. The following terms shall have the
following meanings:
1.2.1. "Accounting Referee" shall mean Xxxxx Xxxxxxxx LLP.
1.2.2. "Acquisition Transaction" is defined in Section 5.9.1.
1.2.3. "Action" shall mean any claim (including counterclaims),
action, cause of action or suit (in contract, tort or otherwise), mediation,
inquiry, proceeding or investigation by or before any Governmental Authority.
1.2.4. "Adjusted Merger Price" means a cash amount equal to the
Merger Consideration, less (i) the amount of any Estimated Company Debt, less
(ii) the Estimated Transaction Expenses, plus (iii) the amount of Estimated
Cash.
1.2.5. "Affiliate" shall mean, as to the Company (or other
specified Person), each Person, directly or indirectly, controlling, controlled
by or under common control with the Company (or such specified Person). For
purposes of this definition, the term "control" (including the terms
"controlling," "controlled by" and "under common control with") means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a Person, whether through ownership of voting
securities or otherwise. In the case of an individual, "Affiliate" includes that
individual's spouse, member of his immediate family (including parents, siblings
and children) and (iii) any Person that, directly or indirectly, is controlled
by any of the foregoing individuals.
1.2.6. "Agreement" is defined in the Preamble.
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1.2.7. "Balance Sheet" shall mean the unaudited balance sheet of
the Company as of December 31, 2005.
1.2.8. "Balance Sheet Date" shall mean December 31, 2005.
1.2.9. "Basket" is defined in Section 9.2.
1.2.10. "Broker" is defined in Section 3.17.
1.2.11. "Business" shall mean the business of the Company as
currently conducted and as conducted at any time in the past twelve (12) months.
1.2.12. "Business Day" shall mean any day on which banking
institutions in Seattle, Washington and New York, New York are customarily open
for the purpose of transacting business.
1.2.13. "By-laws" shall mean the corporate by-laws of a
corporation, as from time to time in effect.
1.2.14. "Cash Equivalents" shall mean all cash on hand in the
Company's bank, lock box or other deposit accounts less the amounts of any
checks, drafts and wire transfers issued on or prior to, but not yet settled as
of, the date of determination, and all marketable securities, calculated in
accordance with Generally Accepted Accounting Principles applied on a basis
consistent with the preparation of the Financial Statements, plus, except as set
forth on Schedule 1.2.14, the aggregate exercise price of all options and
warrants.
1.2.15. "Certificate of Merger" is defined in Section 2.2.
1.2.16. "Certificates" is defined in Section 2.7.2(a).
1.2.17. "Charter" shall mean the certificate or articles of
incorporation, organization or formation or other charter or organizational
documents of any Person (other than an individual), each as from time to time in
effect.
1.2.18. "Claim" is defined in Section 13.1.
1.2.19. "Closing" is defined in Section 2.1.2.
1.2.20. "Closing Cash" is defined in Section 2.9.2
1.2.21. "Closing Date" shall mean the date of the Closing.
1.2.22. "Closing Statement" is defined in Section 2.9.2.
1.2.23. "Closing Transaction Expenses" is defined in Section
2.9.2.
1.2.24. "Code" shall mean the federal Internal Revenue Code of
1986, as amended and as in effect as of the date hereof.
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1.2.25. "Common Base Number" shall mean the aggregate number of
shares of Common Stock outstanding immediately prior to the Effective Time,
assuming (a) conversion of all Preferred Stock in accordance with the terms of
the Company's Charter and (b) exercise of all In-the-Money Company Convertible
Securities outstanding immediately prior to the Effective Time, to the extent
exercisable or convertible for shares of Common Stock.
1.2.26. "Common Merger Consideration Per Share" shall mean the
dollar amount equal to (a) the Merger Consideration, minus the Preferred
Preferential Amount, divided by (b) the Common Base Number; provided, however,
that if as a result of clause (y) of Sections 2.6.1, 2.6.2 and 2.6.3, the
Preferred Stock is deemed to be converted into Common Stock, then "Common Merger
Consideration Per Share" shall mean the dollar amount equal to (a) the Merger
Consideration divided by (b) the Common Base Number.
1.2.27. "Common Stock" shall mean the shares of Common Stock of
the Company, no par value per share.
1.2.28. "Company" is defined in the Preamble.
1.2.29. "Company Debt" shall mean the sum of (a) the principal
amount of any indebtedness of the Company for borrowed money, including any
debentures, bonds and preferred stock (other than the Preferred Stock), together
with all prepayment premiums, unpaid fees or expenses, interest, dividends,
penalties and other amounts due or becoming due as a result of the Merger, (b)
all obligations under leases required to be capitalized in accordance with
Generally Accepted Accounting Principles, (c) any payment obligations of the
Company in respect of outstanding letters of credit which are not evidenced by
trade payables, (d) any liability of the Company with respect to outstanding
interest rate swaps, collars, caps and similar hedging obligations, (e) all
obligations of the Company issued or assumed as the deferred purchase price of
property, all conditional sale obligations, and all obligations under any title
retention agreement (but excluding trade accounts payable arising in the
Ordinary Course of Business); (f) any outstanding indebtedness of the type
referred to in clauses (a) through (e) above of any Person other than the
Company which is either guaranteed by, or secured by a security interest upon
any property owned by, the Company, and (g) any unpaid interest, prepayment
premiums or penalties accrued or owing as of the date of determination on any
such indebtedness of the Company.
1.2.30. "Company Employees" shall mean all employees of the
Company at the time of determination.
1.2.31. "Company Equityholder" shall mean each holder of Company
Securities immediately prior to the Effective Time.
1.2.32. "Company Plans" is defined in Section 3.12(a).
1.2.33. "Company Securities" shall mean (i) all shares of
Company Stock issued and outstanding immediately prior to the Effective Time,
(ii) all vested Options issued and outstanding immediately prior to the
Effective Time and (iii) all Warrants issued and outstanding immediately prior
to the Effective Time.
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1.2.34. "Company Stock" shall mean the issued and outstanding
shares of Common Stock, the Series B Preferred Stock, the Series C Preferred
Stock, the Series D Preferred Stock and the Series E Preferred Stock.
1.2.35. "Confidentiality Agreement" is defined in Section 5.4.
1.2.36. "Contracts" is defined in Section 3.7.
1.2.37. "Contractual Obligation" shall mean, with respect to any
Person, any contract, agreement, deed, mortgage, lease, license, indenture,
note, bond, document, instrument or other arrangement, understanding,
undertaking, commitment or obligation whether written or oral to which such
Person is legally bound.
1.2.38. "Copyrights" is defined in the definition of
Intellectual Property.
1.2.39. "Development" is defined in Section 5.3.3.
1.2.40. "DGCL" shall mean the Delaware General Corporation Law,
as the same may be from time to time amended.
1.2.41. "D&O Indemnified Parties" is defined in Section 5.6.1.
1.2.42. "Dissenting Shares" is defined in Section 2.6.9.
1.2.43. "Effective Time" is defined in Section 2.2.
1.2.44. "Enforceable" shall mean, with respect to any
Contractual Obligation, that such Contractual Obligation is the legal, valid and
binding obligation of the Person in question, enforceable against such Person in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws affecting creditors' rights
generally and general principles of equity (whether considered in a proceeding
at law or in equity).
1.2.45. "Environmental Laws" shall mean any Legal Requirement,
as now or hereafter in effect, in any way relating to (i) releases or threatened
releases of Hazardous Substances, (ii) the manufacture, handling, transport,
use, treatment, storage or disposal of Hazardous Substances or (iii) the
protection of human health and safety, the environment or natural resources.
1.2.46. "ERISA" shall mean the federal Employee Retirement
Income Security Act of 1974, as amended and as in effect as of the date hereof.
1.2.47. "Escrow Agent" shall mean [ ].
1.2.48. "Escrow Agreement" is defined in Section 2.13.
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1.2.49. "Estimated Cash" is defined in Section 2.9.1.
1.2.50. "Estimated Company Debt" is defined in Section 2.9.1.
1.2.51. "Estimated Transaction Expenses" is defined in Section
2.9.1.
1.2.52. "Financial Statements" is defined in Section 3.2.1.
1.2.53. "Fundamental Representations" is defined in Section 9.2.
1.2.54. "Generally Accepted Accounting Principles" shall mean
generally accepted accounting principles in the United States as in effect at
the time of preparation of the Financial Statements.
1.2.55. "Governmental Authority" shall mean any U.S. or non-U.S.
government and any state, commonwealth, territory, possession, county, or
municipality thereof, or the government of any political subdivision of any of
the foregoing, or any U.S. or non-U.S. entity, authority, agency, ministry or
other similar body exercising executive, legislative, judicial, regulatory or
administrative authority or functions of or pertaining to government, including
any authority or other quasi-governmental entity established to perform any of
such functions.
1.2.56. "Governmental Order" shall mean any order, injunction,
judgment, ruling, decree, stipulation, determination, writ, assessment or award
entered by any Governmental Authority.
1.2.57. "Government Contract" is defined in Section 3.15.
1.2.58. "Hazardous Substances" shall mean: (i) substances
defined in or regulated as toxic or hazardous under the following federal
statutes and their state counterparts, as well as these statutes' implementing
regulations, in each case, as amended: the Hazardous Materials Transportation
Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act, the Clean Water Act, the Safe Drinking
Water Act, the Asbestos Hazard Emergency Response Act, the Atomic Energy Act,
the Toxic Substances Control Act, the Federal Insecticide, Fungicide, and
Rodenticide Act, the Clean Air Act and the Occupational Safety and Health Act;
(ii) petroleum and petroleum products, including crude oil and any fractions
thereof; (iii) natural gas, synthetic gas and any mixtures thereof; (iv) PCBs;
and (v) asbestos.
1.2.59. "In-the-Money Company Convertible Securities" shall mean
all Options and Warrants the exercise price of which is less than the amount of
the Merger Consideration that the holder of such Options or Warrants would be
entitled to receive with respect to the underlying securities.
1.2.60. "Indemnity Escrow Amount" shall mean $4,950,000.
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1.2.61. "Intellectual Property" means all intellectual property
rights of the Company arising from or in respect of the following, whether
protected, created or arising under the laws of the United States or any other
jurisdiction: (i) all patents and applications therefor, including
continuations, provisionals, continuations-in-part, or reissues of patent
applications and patents issuing thereon, and all similar rights arising under
the Legal Requirements of any jurisdiction (collectively, "Patents"), (ii) all
trademarks, service marks, trade names, service names, brand names, trade dress
rights, logos, Internet domain names and corporate names and general intangibles
of a like nature, together with the goodwill associated with any of the
foregoing, and all applications, registrations and renewals thereof,
(collectively, "Marks"), (iii) all copyrights and registrations and applications
therefor, works of authorship and mask work rights (collectively, "Copyrights"),
(iv) all discoveries, concepts, ideas, research and development, know-how,
formulae, inventions, compositions, manufacturing and production processes and
techniques, technical data, procedures, designs, drawings, specifications,
databases, and other proprietary or confidential information, including customer
lists, supplier lists, pricing and cost information, and business and marketing
plans and proposals of the Company, in each case excluding any rights in respect
of any of the foregoing that comprise or are protected by Copyrights or Patents
(collectively, "Trade Secrets"), and (v) all Software and Technology of the
Company.
1.2.62. "Intellectual Property Licenses" means (i) any grant by
the Company to another Person of any right to use any of the Intellectual
Property, and (ii) any grant by another Person to the Company of a right to use
such Person's intellectual property rights included in the Intellectual
Property.
1.2.63. "Interim Financials" is defined in Section 3.2.1(b).
1.2.64. "IRS" means the United States Internal Revenue Service.
1.2.65. "Knowledge of the Company" shall mean those facts or
circumstances known by the Chief Executive Officer, all persons who report
directly to him, and the Chief Financial Officer, or any facts or circumstances
which should be known by such persons following reasonable inquiry in the
ordinary course of fulfilling their respective duties and responsibilities,
taking into account the size, nature and stage of development of the Company.
1.2.66. "Leases" is defined in Section 3.5.2.
1.2.67. "Legal Requirement" shall mean any federal, state, local
or foreign law (including common law), statute, ordinance, code, rule or
regulation, or any Governmental Order, or any license, franchise, consent,
approval, permit or similar right granted under any of the foregoing.
1.2.68. "Letter of Transmittal" is defined in Section 2.7.2(a).
1.2.69. "Liabilities" means any indebtedness, liability,
commitment, expense, claim, deficiency, guaranty or obligation of any type
(whether direct or indirect, absolute or contingent, known or unknown, accrued
or unaccrued).
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1.2.70. "Lien" shall mean any lien, pledge, mortgage, deed of
trust, security interest, claim, lease, charge, option, right of first refusal,
easement, servitude, proxy, voting trust or agreement, transfer restriction
under any shareholder or similar agreement, encumbrance or any other restriction
or limitation whatsoever, provided, however, that the term "Lien" shall not
include (i) statutory liens for Taxes not yet due, (ii) encumbrances in the
nature of zoning restrictions, easements, rights or restrictions of record on
the use of real property if the same do not materially detract from the value of
the property encumbered thereby or materially impair the use of such property in
the Business as currently conducted or proposed to be conducted and are shown on
title reports delivered to Parent prior to the date hereof, (iii) liens to
secure landlords, lessors or renters under leases or rental agreements confined
to the premises rented, (iv) deposits or pledges made in connection with, or to
secure payment of, worker's compensation, unemployment insurance, old age
pension programs mandated under applicable Legal Requirements, (v) liens in
favor of carriers, warehousemen, mechanics and materialmen, liens to secure
claims for labor, materials or supplies and other like liens in respect of
claims not yet due and (vi) restrictions on transfer of securities imposed by
applicable state and federal securities laws.
1.2.71. "Loss" shall mean any loss, liability, claim, damage or
expense (including costs of investigation and defense and reasonable attorneys'
fees), whether or not involving a third party claim.
1.2.72. "Marks" is defined in the definition of Intellectual
Property.
1.2.73. "Material Adverse Effect" shall mean any change, effect
or circumstance that, together with all other related changes, effects and
circumstances, is or could reasonably expected to be materially adverse to the
Business, assets, financial condition, or results of operations of the Company,
taken as a whole, or that materially and adversely affects the ability of the
Company to perform its obligations under this Agreement or to consummate the
transactions contemplated hereby; provided, however, that none of the following
shall be deemed in themselves (either alone or in combination) to constitute,
and none shall be taken into account in determining whether, there has been a
Material Adverse Effect: (i) any change, effect or circumstance that arises out
of or relates to a general deterioration in the economy or in the industries in
which the Company operates (but solely to the extent that any such change does
not (x) materially damage assets and properties or (y) have a disproportionate
effect on the Company as compared to its competitors); (ii) any change, effect
or circumstance that arises out of or relates to the outbreak or escalation of
hostilities involving the United States, the declaration by the United States of
a national emergency or war or the occurrence of any other calamity or crisis,
including an act of terrorism; (iii) any change, effect or circumstance that
arises out of or relates to a natural disaster or any other natural occurrence
beyond the control the Company (but solely to the extent that any such change
does not have a disproportionate effect on the Company as compared to their
competitors); (iv) any change, effect or circumstance that arises out of or
relates to the announcement or pendency of the transactions contemplated hereby
(including any cancellations of or delays in customer orders, any reduction in
sales, any disruption in supplier, distributor, partner or similar relationships
or any loss of employees); and (v) any adverse change, effect, event,
occurrence, state of facts or development that arises out of or relates to any
change in accounting requirements or principles imposed upon the Company or any
change in applicable laws, rules or regulations or the interpretation thereof.\
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1.2.74. "Merger" is defined in the Recitals.
1.2.75. "Merger Consideration" shall mean a cash amount equal to
the Merger Price, less (i) the Indemnity Escrow Amount and less (ii) the Merger
Price Escrow Amount.
1.2.76. "Merger Price" shall mean a cash amount equal to
$66,000,000 as adjusted in accordance with Section 2.9.
1.2.77. "Merger Price Escrow Amount" means $330,000.
1.2.78. "Merger Sub" is defined in the Preamble.
1.2.79. "Option" shall mean any outstanding vested and
exercisable option to purchase Common Stock.
1.2.80. "Option Plans" shall mean the Company's 1999 Stock Plan
and the Company's 2000 Stock Plan, each as amended from time to time.
1.2.81. "Ordinary Course of Business" shall mean the ordinary
and usual course of day-to-day operations of the business of the Company through
the date hereof consistent with past practice.
1.2.82. "Parent" is defined in the Preamble.
1.2.83. "Parent Indemnitee" is defined in Section 9.1.
1.2.84. "Patents" is defined in the definition of Intellectual
Property.
1.2.85. "Paying Agent" means [JPMorgan Chase].
1.2.86. "Permits" is defined in Section 3.10.
1.2.87. "Person" shall mean any individual, partnership,
corporation, limited liability company, association, trust, joint venture,
unincorporated organization or other entity other than any Governmental
Authority.
1.2.88. "Personalty Leases" is defined in Section 3.5.1.
1.2.89. "Preferred Preferential Amount" shall mean the sum of
(i) the total of the Series B Preferred Preferential Amount received by holders
of Series B Preferred Stock pursuant to this Agreement, plus (ii) the total of
the Series C Preferred Preferential Amount received by holders of Series C
Preferred Stock pursuant to this Agreement, plus (iii) the total of the Series D
Preferred Preferential Amount received by holders of Series D Preferred Stock
pursuant to this Agreement, plus (iv) the total of the Series E Preferred
Preferential Amount received by holders of Series E Preferred Stock pursuant to
this Agreement.
9
1.2.90. "Preferred Stock" shall mean, collectively, the Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and
the Series E Preferred Stock.
1.2.91. "Real Property" is defined in Section 3.5.2.
1.2.92. "Related Persons" is defined in Section 3.14.
1.2.93. "Representatives" is defined in Section 5.9.1.
1.2.94. "Series B Preferred Stock" shall mean the shares of
Series B Preferred Stock of the Company, no par value per share.
1.2.95. "Series B Preferred Preferential Amount" shall mean with
respect to each share of Series B Preferred Stock outstanding immediately prior
to the Effective Time, an amount per share equal to $0.52174 plus an amount
equal to all declared and unpaid dividends, if any, on such share of Series B
Preferred Stock as of the Effective Time.
1.2.96. "Series C Preferred Stock" shall mean the shares of
Series C Preferred Stock of the Company, no par value per share.
1.2.97. "Series C Preferred Preferential Amount" shall mean with
respect to each share of Series C Preferred Stock outstanding immediately prior
to the Effective Time, an amount per share equal to $0.52174 plus an amount
equal to all declared and unpaid dividends, if any, on such share of Series C
Preferred Stock as of the Effective Time.
1.2.98. "Series D Preferred Stock" shall mean the shares of
Series D Preferred Stock of the Company, no par value per share.
1.2.99. "Series D Preferred Preferential Amount" shall mean with
respect to each share of Series D Preferred Stock outstanding immediately prior
to the Effective Time, an amount per share equal to $0.20 plus an amount equal
to all declared and unpaid dividends, if any, on such share of Series D
Preferred Stock as of the Effective Time.
1.2.100. "Series E Preferred Stock" shall mean the shares of
Series E Convertible Preferred Stock of the Company, no par value per share.
1.2.101. "Series E Preferred Preferential Amount" shall mean
with respect to each share of Series E Preferred Stock outstanding immediately
prior to the Effective Time, an amount per share equal to $0.0926 plus an amount
equal to all declared and unpaid dividends, if any, on such share of Series E
Preferred Stock as of the Effective Time.
10
1.2.102. "Shares" shall mean, collectively, the issued and
outstanding Common Stock, the Series B Preferred Stock, the Series C Preferred
Stock, the Series D Preferred Stock and the Series E Preferred Stock.
1.2.103. "Shareholder" shall mean the holder of shares of
Company Stock.
1.2.104. "Shareholder Representative" shall mean Xxxxx Xxxxx.
1.2.105. "Shareholders Agreement" shall mean the Company's
Second Amended and Restated Shareholders Agreement, dated as of September 24,
2003, as amended from time to time.
1.2.106. "Software" means any and all (i) computer programs,
including any and all software implementations of algorithms, models and
methodologies, whether in source code or object code, (ii) databases and
compilations, including any and all data and collections of data, whether
machine readable or otherwise, (iii) descriptions, flow-charts and other work
product used to design, plan, organize and develop any of the foregoing,
screens, user interfaces, report formats, firmware, development tools,
templates, menus, buttons and icons, and (iv) all documentation including user
manuals and other training documentation related to any of the foregoing.
1.2.107. "Straddle Period" is defined in Section 5.1.3.
1.2.108. "Surviving Corporation" is defined in Section 2.1.1.
1.2.109. "Tax" shall mean any (and in the plural "Taxes" shall
mean all) federal, state, local or foreign income, gross receipts, franchise,
estimated, alternative minimum, add-on minimum, sales, use, transfer,
registration, value added, excise, severance, stamp, occupation, premium,
profit, windfall profit, customs, duties, real property, personal property,
capital stock, social security, employment, unemployment, disability, payroll,
license, employee, and other taxes arising under or imposed by any Legal
Requirement, including all interest, penalties and additions with respect to any
of the foregoing and any liability in respect of any of the foregoing payable by
reason of Contract, assumption, transferee liability or operation of law,
including by reason of a combined, unitary or consolidated tax obligation such
as Treasury Regulation Section 1.1502-6 (or any predecessor or successor thereof
or any analogous or similar provision under law), or otherwise.
1.2.110. "Tax Benefit" shall mean any reduction in Tax realized
by any Person attributable, as the context may require, to any specified matter
or event, which Tax Benefit shall be determined after first taking into account
all other items of income, gain, loss, deduction or credit of such Person.
1.2.111. "Tax Return" shall mean all federal, state, local, and
foreign Tax returns, Tax reports, claims for refund of Tax, and declarations of
estimated Tax, and any schedules or attachments to any of the foregoing or
amendments thereto, in each case filed or required to be filed with a
Governmental Authority.
11
1.2.112. "Technology" means, collectively, all designs,
formulae, algorithms, procedures, methods, techniques, know-how, technical data,
programs, subroutines, tools, materials, specifications, processes, inventions
(whether patentable or unpatentable and whether or not reduced to practice),
apparatus, creations, improvements, works of authorship and other similar
materials, and all recordings, graphs, drawings, reports, analyses, and other
writings, and other tangible embodiments of the foregoing, in any form whether
or not specifically listed herein, and all related technology, that are used by
the Company.
1.2.113. "Trade Secrets" is defined in the definition of
Intellectual Property.
1.2.114. "Transaction Expenses" means all unpaid fees, expenses
and other obligations of the Company relating to the transactions contemplated
by this Agreement, including without limitation one-half of the one time
administration escrow fee under the Escrow Agreement, legal, accounting, tax and
investment banking fees; reasonable expenses relating to closing celebrations
for employees and members of the Company's Board of Directors; change in control
bonuses; management incentive plan obligations; stay-bonus commitments or
similar required payments to be made to eligible members of management.
1.2.115. "Updated Schedules" is defined in Section 5.3.3.
1.2.116. "Warrants" shall mean the Common Stock warrant
certificates issued by the Company and in effect on the date hereof.
1.2.117. "WBCA" shall mean the Washington Business Corporation
Act, as the same may from time to time be amended.
2. THE MERGER.
2.1. The Merger.
2.1.1. The Merger. (a) At the Effective Time, and upon the terms
and subject to the conditions of this Agreement, the WBCA and the DGCL, Merger
Sub shall be merged with and into the Company, the separate corporate existence
of Merger Sub shall cease, and the Company shall continue as the surviving
corporation (the Company, as the surviving corporation after the Merger, is
sometimes referred to in this Agreement as the "Surviving Corporation"), and (b)
from and after the Effective Time, the Merger shall have all the effects of a
merger under the laws of the State of Washington, the State of Delaware and
other applicable law.
2.1.2. Closing. Unless this Agreement shall have been terminated
pursuant to Section 11.1, and subject to the satisfaction (or to the extent
permitted, the waiver) of the conditions set forth in Section 7, the closing of
the transactions contemplated by this Agreement (the "Closing") shall take place
at 10:00 a.m. local time at the offices of Xxxxxxx Coie LLP, 0000 Xxxxx Xxxxxx,
00xx Xxxxx, Xxxxxxx, Xxxxxxxxxx, as soon as practicable, but in no event, no
later than the third Business Day after the satisfaction or waiver of the
conditions set forth in Section 7 (excluding conditions that, by their terms,
cannot be satisfied until the Closing, but the Closing shall be subject to the
satisfaction or waiver of those conditions), or at such other place or on such
other date as Parent and the Company may mutually agree.
12
2.2. Effective Time. At the Closing, the parties hereto shall cause
the Merger to be consummated by executing and filing articles of merger, in
substantially the forms attached hereto as Exhibit A-1 and Exhibit A-2, with the
Secretary of State of the State of Washington and the Secretary of State of the
State of Delaware, respectively, as required by, and executed in accordance with
the relevant provisions of, the WBCA and the DGCL, respectively (collectively,
the "Certificate of Merger"), the time of acceptance by both the Secretary of
State of Washington and the Secretary of State of Delaware of such filing, or
such later time as may be agreed to by the parties set forth in the Certificate
of Merger, being referred to in this Agreement as the "Effective Time."
2.3. Effect of the Merger. At and after the Effective Time, the
effect of the Merger shall be as provided in this Agreement, the Certificate of
Merger the applicable provisions of the WBCA and the DGCL. Without limiting the
generality of the foregoing and subject thereto, at the Effective Time, all the
property, rights, privileges, powers and franchises of the Company and Merger
Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
2.4. Articles of Incorporation; Bylaws.
2.4.1. Immediately following the Effective Time, the Articles of
Incorporation of the Company in effect immediately prior to the Effective Time
shall be amended in their entirety as set forth in Exhibit A-3 to this
Agreement, and as so amended shall be the Articles of Incorporation of the
Surviving Corporation, until duly amended in accordance with applicable law.
2.4.2. At and after the Effective Time, the Bylaws of the
Company, as in effect immediately prior to the Effective Time, shall be the
Bylaws of the Surviving Corporation until thereafter duly amended in accordance
with applicable law, the Articles of Incorporation of the Surviving Corporation
and such Bylaws.
2.5. Directors and Officers. The directors of Merger Sub immediately
prior to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation, and the officers of the
Merger Sub immediately prior to the Effective Time shall be the initial officers
of the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified in the manner provided in the Articles
of Incorporation and Bylaws of the Surviving Corporation and in accordance with
applicable law.
2.6. The Merger Consideration; Effect on Outstanding Securities of
the Company. On the terms and subject to the conditions of this Agreement, at
the Effective Time, by virtue of the Merger and without any action on the part
of Parent, the Company or the holder of any Company Securities, the following
shall occur, in the order listed (except as specifically provided):
13
2.6.1. Treatment of Series E Preferred Stock. Each share of
Series E Preferred Stock issued and outstanding immediately prior to the
Effective Time will be canceled and extinguished, and each such share of Series
E Preferred Stock which is issued and outstanding immediately prior to the
Effective Time shall be automatically converted into solely the right to receive
in cash, without interest, (a) the Series E Preferred Preferential Amount prior
and in preference to the consideration payable in respect of the issued and
outstanding Series D Preferred Stock, the Series C Preferred Stock, the Series B
Preferred Stock and the Common Stock, plus (b) the Common Merger Consideration
Per Share; provided, however, that (x) the total amount of cash payable in
respect of each share of Series E Preferred Stock shall in no event exceed two
times the Series E Preferred Preferential Amount and, (y) if conversion of the
Series E Preferred Stock to Common Stock in accordance with the Company's
Charter immediately prior to the Effective Time would yield a larger amount of
cash per share payable in respect of such shares of Common Stock than would
otherwise be payable under this paragraph without such conversion, such shares
of Series E Preferred Stock shall be deemed to be converted into Common Stock
immediately prior to the Effective Time without any further action by the
holders thereof and shall be treated as issued and outstanding shares of Common
Stock under this Section 2.6.
2.6.2. Treatment of Series D Preferred Stock and Series C
Preferred Stock. Each share of Series D Preferred Stock and Series C Preferred
Stock issued and outstanding immediately prior to the Effective Time will be
canceled and extinguished, and each such share of Series D Preferred Stock and
Series C Preferred Stock which is issued and outstanding immediately prior to
the Effective Time shall be automatically converted into solely the right to
receive in cash, without interest, (a) the Series D Preferred Preferential
Amount or the Series C Preferred Preferential Amount, as the case may be, prior
and in preference to the consideration payable in respect of the issued and
outstanding Series B Preferred Stock and the Common Stock, plus (b) the Common
Merger Consideration Per Share; provided, however, that (x) the total amount of
cash payable in respect of each share of Series D Preferred Stock and Series C
Preferred Stock shall in no event exceed two times the Series D Preferred
Preferential Amount or Series C Preferred Preferential Amount, respectively and,
(y) if conversion of the Series D Preferred Stock and Series C Preferred Stock
to Common Stock in accordance with the Company's Charter immediately prior to
the Effective Time would yield a larger amount of cash per share payable in
respect of such shares of Common Stock than would otherwise be payable under
this paragraph without such conversion, such shares of Series D Preferred Stock
and Series C Preferred Stock shall be deemed to be converted into Common Stock
immediately prior to the Effective Time without any further action by the
holders thereof and shall be treated as issued and outstanding shares of Common
Stock under this Section 2.6.
2.6.3. Treatment of Series B Preferred Stock. Each share of
Series B Preferred Stock issued and outstanding immediately prior to the
Effective Time will be canceled and extinguished and each such share of Series B
Preferred Stock which is issued and outstanding immediately prior to the
Effective Time shall be automatically converted into solely the right to receive
in cash, without interest, (a) the Series B Preferred Preferential Amount prior
and in preference to the consideration payable in respect of the issued and
14
outstanding Common Stock, plus (b) the Common Merger Consideration Per Share;
provided, however, that (x) the total amount of cash payable in respect of each
share of Series B Preferred Stock shall in no event exceed two times the Series
B Preferred Preferential Amount, and (y) if conversion of the Series B Preferred
Stock to Common Stock in accordance with the Company's Charter immediately prior
to the Effective Time would yield a larger amount of cash per share payable in
respect of such shares of Common Stock than would otherwise be payable under
this paragraph without such conversion, such shares of Series B Preferred Stock
shall be deemed to be converted into Common Stock immediately prior to the
Effective Time without any further action by the holders thereof and shall be
treated as issued and outstanding shares of Common Stock under this Section 2.6.
2.6.4. Treatment of Common Stock.
(a) Each share of Common Stock issued and outstanding
immediately prior to the Effective Time will be canceled and extinguished at the
Effective Time, and each share of Common Stock which is issued and outstanding
immediately prior to the Effective Time (other than any shares of Common Stock
to be canceled pursuant to Section 2.6.5) shall be automatically converted into
solely the right to receive in cash, without interest, the Common Merger
Consideration Per Share.
(b) Each Option or Warrant to purchase shares of Common Stock
issued and outstanding immediately prior to the Effective Time will be canceled
and extinguished at the Effective Time. Each of the In-the-Money Company
Convertible Securities which is issued and outstanding immediately prior to the
Effective Time shall, to the extent exercisable immediately prior to the
Effective Time, be automatically converted into solely the right to receive in
cash, without interest, the Common Merger Consideration Per Share multiplied by
the number of shares of Common Stock for which such Option or Warrant is then
exercisable, minus the aggregate exercise price of the portion of the Option or
Warrant then exercisable (net of any applicable withholding Taxes).
2.6.5. Cancellation of Company-Owned Stock. Each share of
Company Stock owned by the Company immediately prior to the Effective Time shall
be automatically canceled and extinguished without any exchange thereof and
without any further action on the part of Parent, Merger Sub or the Company.
2.6.6. Common Stock of Merger Sub. Each share of common stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any shares shall continue to
evidence ownership of such shares of capital stock of the Surviving Corporation.
2.6.7. Company Convertible Securities. Prior to the Effective
Time, the Company's Board of Directors (or, if appropriate, any committee
thereof) shall adopt appropriate resolutions and take all other actions
necessary to (i) provide for the cancellation or exercise, effective at the
Effective Time, of all the outstanding Options and Warrants, in exchange for the
payments provided for in this Section 2.6 and (ii) terminate the Option Plans as
of the Effective Time. Each Option and Warrant, to the extent unexercised as of
the Effective Time, shall on and thereafter no longer be exercisable but shall
entitle each holder thereof, in cancellation and settlement therefore, to the
payment in cash of an amount determined in accordance with Section 2.6.4(b).
15
2.6.8. Allocation of Merger Consideration. Attached hereto is
Schedule 2.6.8 which sets forth the Company Equityholders, the aggregate Company
Stock, Options or Warrants owned thereby, and the pro rata portion of the
Adjusted Merger Price allocable to such Company Equityholder calculated in
accordance with the assumptions relating to the Estimated Company Debt,
Estimated Cash and Estimated Transaction Expenses set forth therein.
2.6.9. Dissenters' Rights. The holders of Company Stock that
have complied with all the requirements for perfecting rights as dissenting
shares, as required under the WBCA, shall be entitled to their rights as holders
of dissenting shares under Washington Law with respect to such shares (the
"Dissenting Shares"). Notwithstanding the foregoing, if any holder of Dissenting
Shares shall effectively withdraw or lose (through failure to perfect or
otherwise) such holder's rights as a holder of Dissenting Shares, 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 portion of the Adjusted Merger Price to which such holder is then
entitled under this Agreement, without interest thereon and upon surrender of
the certificate representing such shares in accordance with this Agreement, and
an allocable share of any Merger Price Escrow Amount and/or Indemnity Escrow
Amount to which the Company Equityholders may become entitled pursuant to the
terms of this Agreement. Notwithstanding any provision of this Agreement to the
contrary, any Dissenting Shares held by a shareholder who has perfected such
shareholder's rights as a holder of dissenting shares for such shares in
accordance with Washington Law shall not be converted into the right to receive
any portion of the Merger Consideration pursuant to this Section 2.6.
2.7. Payment; Exchange of Certificates.
2.7.1. Merger Consideration; Merger Price Escrow Amount and
Indemnity Escrow Amount.
(a) On the Closing Date, Parent shall (i) deduct from the Merger
Consideration an amount equal to the Common Merger Consideration Per Share
multiplied by the number of Dissenting Shares and shall deposit the remainder of
the Merger Consideration with the Paying Agent for exchange and payment in
accordance with this Section 2, and (ii) deposit the Merger Price Escrow Amount
and the Indemnity Escrow Amount with the Escrow Agent which shall be held in
escrow pursuant to the Escrow Agreement as provided in Section 2.13. Payments of
Merger Consideration shall be made by the Paying Agent to the Company
Equityholders only against delivery of a Certificate, together with a Letter of
Transmittal, duly completed and validly executed in accordance with the
instructions thereto, as hereinafter provided.
16
2.7.2. Exchange Procedures.
(a) Parent, as Paying Agent, will provide for payment to the
Company Equityholders pursuant to this Section 2 not later than thirty (30) days
following receipt by the Paying Agent of a Certificate, together with a Letter
of Transmittal, duly completed and validly executed in accordance with the
instructions thereto. As soon as practicable after the Effective Time, the
Paying Agent shall cause to be mailed to each holder of record of a certificate
or certificates, which represented Company Stock immediately prior to the
Effective Time, (the "Certificates") and which Company Shares are exchanged for
and represent the right to receive a portion of the Merger Consideration
pursuant to Section 2.6, (i) a letter of transmittal in the form attached hereto
as Exhibit B (the "Letter of Transmittal") and (ii) a cover letter in a form
that is customary and is reasonably acceptable to the Paying Agent and to
Parent.
(b) Upon surrender of a Certificate for cancellation to Paying
Agent or to such other agent or agents as may be appointed by Parent, together
with such Letter of Transmittal, duly completed and validly executed in
accordance with the instructions thereto, after the Effective Time, the holder
of such Certificate shall be entitled to receive in exchange therefor an amount
to which such holder is entitled pursuant to Section 2.6, and the Certificate so
surrendered shall be canceled. Until surrendered, each outstanding Certificate
that, prior to the Effective Time, represented Company Stock will be deemed from
and after the Effective Time to evidence the ownership of the portion of the
Merger Consideration as provided in Section 2.6 without any interest thereon.
2.7.3. Remaining Funds. At any time following one (1) year after
the Effective Time, the Surviving Corporation shall be entitled to require the
Paying Agent to deliver to it any funds (including any interest received with
respect thereto) which had been made available to the Paying Agent and which
have not been disbursed to holders of Certificates. Thereafter, such holders
shall be entitled to look to the Surviving Corporation (subject to abandoned
property, escheat or other similar laws) only as a general creditor thereof with
respect to the Merger Consideration payable upon surrender of their
Certificates, without any interest thereon. None of Parent, the Surviving
Corporation or the Paying Agent shall be liable to any holder of a Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
2.7.4. No Further Ownership Rights in Company Securities. The
portion of the Merger Consideration paid upon the surrender for exchange of
shares of Company Stock in accordance with the terms hereof shall be deemed to
have been paid in full satisfaction of all rights pertaining to such shares of
Company Stock, and there shall be no further registration of transfers on the
records of the Company of shares of Company Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Section 2.
2.8. Lost, Stolen or Destroyed Certificates. In the event any
Certificates evidencing shares of Company Stock shall have been lost, stolen or
destroyed, Parent shall cause the Paying Agent to pay the portion of the Merger
Consideration applicable to such shares or options in exchange for such lost,
17
stolen or destroyed Certificates, upon the making of an affidavit of that fact
by the holder thereof; provided, however, that Parent or Paying Agent may, in
its discretion and as a condition precedent to the payment thereof, require the
owner of such lost, stolen or destroyed Certificates to provide and to deliver a
bond or indemnity agreement in such amount as it may reasonably direct as
indemnity against any claim that may be made against Parent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
2.9. Adjustment to Merger Price.
2.9.1. Not later than five (5) Business Days prior to the
Closing Date, the Company shall provide Parent with (i) a pay-off letter in
customary form from all holders of Company Debt specifying the amount necessary
to be paid to each holder on the Closing Date to fully satisfy and discharge the
Company Debt (the "Estimated Company Debt"), (ii) a good faith estimate of the
Company's Cash Equivalents on hand as of the Closing ("Estimated Cash") and
(iii) a good faith estimate of unpaid Transaction Expenses as of the Closing
("Estimated Transaction Expenses") and underlying documentation supporting the
Estimated Cash and Estimated Transaction Expenses, which shall be reasonably
acceptable to Parent. The determination of the Estimated Company Debt, Estimated
Cash and Estimated Transaction Expenses shall be binding on the Company, on the
one hand, and Parent, on the other hand, for purposes of determining the dollar
amount of the Adjusted Merger Price at the Closing.
(a) The Merger Price shall be increased by the amount of Estimated
Cash.
(b) The Merger Price shall be decreased by the amount of Estimated
Company Debt and Estimated Transaction Expenses.
2.9.2. As promptly as practicable, but no later than sixty (60)
days after the Closing Date, Parent shall cause to be prepared and delivered to
the Shareholder Representative (i) a statement (the "Closing Statement")
presenting the Cash Equivalents ("Closing Cash"), Company Debt ("Closing Company
Debt") and Transaction Expenses ("Closing Transaction Expenses") as of the
opening of business on the Closing Date and (ii) a certificate based on such
Closing Statement that sets forth the Company's calculation of Closing Cash,
Closing Company Debt and Closing Transaction Expenses and (c) data supporting
the determination of the Closing Cash, Closing Company Debt and Closing
Transaction Expenses.
2.9.3. During the thirty (30) day period following delivery of
the Closing Statement to the Shareholder Representative, the Shareholder
Representative shall have the right, upon reasonable notice to the Surviving
Corporation, to reasonable access to the Surviving Corporation's books and
records, appropriate staff members and such other information as the Shareholder
Representative shall reasonably request in order to review the Closing
Statement. If the Shareholder Representative disagrees with Parent's calculation
of Closing Cash, Closing Company Debt or Closing Transaction Expenses delivered
pursuant to Section 2.9.2, the Shareholder Representative may, within thirty
(30) days after delivery of the Closing Statement, deliver a notice to Parent
18
disagreeing with such calculation and setting forth the Shareholder
Representative's calculation of such amount. Any such notice of disagreement
shall specify (i) those items or amounts as to which the Shareholder
Representative disagrees, and the Shareholder Representative shall be deemed to
have agreed with all other items and amounts contained in the Closing Statement
and (ii) the calculation of Closing Cash, Closing Company Debt or Closing
Transaction Expenses, as the case may be, prepared by the Shareholder
Representative.
2.9.4. If a notice of disagreement shall be duly delivered
pursuant to Section 2.9.3, Parent and the Shareholder Representative shall,
during the fifteen (15) days following such delivery, use their commercially
reasonable efforts to reach agreement on the disputed items or amounts in order
to determine the amount of Closing Cash, Closing Company Debt or Closing
Transaction Expenses, as the case may be. If during such period, Parent and the
Shareholder Representative are unable to reach such agreement, they shall
promptly thereafter cause the Accounting Referee to review this Agreement and
the disputed items or amounts for the purpose of calculating Closing Cash,
Closing Company Debt or Closing Transaction Expenses, as the case may be. In
making such calculation, the Accounting Referee shall (a) act as an expert and
not as an arbiter, (b) consider only (i) those items or amounts in the Closing
Statement, and (ii) Parent's calculation of Closing Cash, Closing Company Debt
or Closing Transaction Expenses, as the case may be, as to which the Shareholder
Representative has disagreed and (c) not assign a value to any item greater than
the greatest value for such item claimed by either party or less than the
smallest value for such item claimed by either party. The Accounting Referee
shall deliver to Parent and the Shareholder Representative, as promptly as
practicable (but in any case no later than thirty (30) days from the date of
engagement of the Accounting Referee), a report setting forth a calculation of
Closing Cash, Closing Company Debt or Closing Transaction Expenses, as the case
may be, which amount shall not be less than the amount thereof shown in Parent's
calculation delivered pursuant to Section 2.9.2 nor more than the amount thereof
shown in the Shareholder Representative's calculation delivered pursuant to
Section 2.9.3. Such report shall be final and binding upon Parent and the
Shareholder Representative. The fees, costs and expenses of the Accounting
Referee shall be allocated to and borne by Parent and the Shareholder
Representative based on the inverse of the percentage that the Accounting
Referee's determination (before such allocation) bears to the total amount of
the total items in dispute as originally submitted to the Accounting Referee.
For example, should the items in dispute total in amount to $1,000 and the
Accounting Referee awards $600 in favor of the Shareholder Representative's
position, 60% of the costs of its review would be borne by Parent and 40% of the
costs would be borne by the Shareholder Representative.
2.9.5. Parent and the Shareholder Representative shall cooperate
and assist in the preparation of the Closing Statement and the calculation of
Closing Cash, Closing Company Debt and Closing Transaction Expenses and in the
conduct of the review referred to in this Section 2.9, including, without
limitation, the making available to the extent necessary of books, records, work
papers and personnel.
2.9.6. (a) If Closing Cash exceeds Estimated Cash, Parent shall
pay to the Company Equityholders through the Paying Agent, in the manner
provided in Section 2.9.7, the amount by which Closing Cash exceeds Estimated
Cash as an adjustment to the dollar amount of the Merger Price. If Estimated
Cash exceeds Closing Cash, Parent shall be entitled to receive out of the Merger
19
Price Escrow Amount (and, if the amount therein is insufficient, such additional
amount as may be necessary from the Indemnity Escrow Amount) the amount by which
Estimated Cash exceeds Closing Cash as an adjustment to the dollar amount of the
Merger Price.
(b) If Estimated Company Debt exceeds Closing Company Debt, Parent
shall pay to the Company Equityholders through the Paying Agent, in the
manner provided in Section 2.9.7, the amount by which Estimated Company
Debt exceeds Closing Company Debt as an adjustment to the dollar amount of
the Merger Price. If Closing Company Debt exceeds Estimated Company Debt,
Parent shall be entitled to receive out of the Merger Price Escrow Amount
(and, if the amount thereof is insufficient, such additional amount as may
be necessary from the Indemnity Escrow Amount) the amount by which Closing
Company Debt exceeds Estimated Company Debt.
(c) If Estimated Transaction Expenses exceed Closing Transaction
Expenses, Parent shall pay to the Company Equityholders through the Paying
Agent, in the manner provided in Section 2.9.7, the amount by which
Estimated Transaction Expenses exceed Closing Transaction Expenses as an
adjustment to the dollar amount of the Merger Price. If Closing Transaction
Expenses exceed Estimated Transaction Expenses, Parent shall be entitled to
receive out of the Merger Price Escrow Amount (and, if the amount thereof
is insufficient, such additional amount as may be necessary from the
Indemnity Escrow Amount) the amount by which Closing Transaction Expenses
exceed Estimated Transaction Expenses.
2.9.7. Any payment pursuant to Sections 2.9.6 shall be made at a
mutually convenient time and place within three (3) Business Days (x) after
delivery of Parent's calculation pursuant to Section 2.9.2 if no notice of
disagreement with respect thereto is duly delivered pursuant to Section 2.9.3 or
(y) if such a notice of disagreement is delivered, (A) as agreed by Parent and
the Shareholder Representative pursuant to Section 2.9.4 or (B) in the absence
of such agreement, as shown in the Accounting Referee's calculation delivered
pursuant to Section 2.9.4., by wire transfer out of the Merger Price Escrow
Amount (and, if the amount therein is insufficient, such additional amount as
may be necessary from the Indemnity Escrow Amount) to an account designated by
Parent, in case the adjustment is in Parent's favor, or from Parent, in the case
the adjustment is in the Shareholders' favor, of immediately available funds to
the account of the Company Equityholders with the Paying Agent.
2.10. 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 or to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company, the officers and directors of the
Surviving Corporation and Parent are fully authorized to take, and will use
their reasonable efforts to take, all lawful and reasonable action.
2.11. Tax Treatment. The Merger shall constitute a taxable
transaction under the Code.
20
2.12. Withholding. Parent shall be entitled to deduct and withhold,
or to cause the Paying Agent to deduct and withhold, from the Merger
Consideration otherwise payable to the Company Equityholders, on behalf of the
Surviving Corporation or Parent (as applicable), such amounts as may be required
to be deducted and withheld under the Code and any other applicable Tax laws, as
determined by Parent after reasonable consultation with the Company. To the
extent amounts are so withheld and paid to any appropriate taxing authority,
Parent shall be treated as though it had paid, from the Merger Consideration
from which withholding was required, an appropriate amount otherwise payable
directly to such Company Equityholder.
2.13. Escrow Agreement; Delivery of Merger Price Escrow Amount and
Indemnity Escrow Amount. In connection with Merger Price adjustments and the
indemnification obligations contemplated in this Agreement, as of the Closing
Date, Parent, the Shareholder Representative and the Escrow Agent shall enter
into an escrow agreement in substantially the form attached hereto as Exhibit C
("Escrow Agreement"), to be administered by the Escrow Agent on behalf of the
persons entitled to receive any portion of the Merger Price Escrow Amount or the
Indemnity Escrow Amount. At the Closing, Parent shall deposit the Merger Price
Escrow Amount with the Escrow Agent, to be held in escrow as a source of funds
for any Merger Price adjustment to be paid to Parent and Parent shall deposit
the Indemnity Escrow Amount with the Escrow Agent, to be held in escrow as a
source of funds for any of the Company's indemnity obligations under Section 9
of this Agreement, and to be disbursed in accordance with the terms of the
Escrow Agreement. If any portion of the Merger Price Escrow Amount or the
Indemnity Escrow Amount is determined to be payable to the Company Equityholders
pursuant to the terms hereof and the applicable escrow agreement, such amount
shall be deemed to be added to and made a part of the Merger Consideration, the
amounts otherwise payable to Company Equityholders under this Agreement shall be
recalculated accordingly, and such additional amounts shall be paid on the terms
and at the time provided in the Escrow Agreement.
2.14. Shareholder Representative.
2.14.1. By approving the Merger at a special meeting of the
Shareholders or by written consent of the Shareholders and/or by executing and
delivering the Support Agreement, and/or a Letter of Transmittal and accepting a
portion of the Merger Consideration, each Company Equityholder shall have
irrevocably authorized and appointed the Shareholder Representative and any
replacement representative appointed pursuant to Section 2.14.2, with full power
of substitution and resubstitution, as his, her or its representative and true
and lawful attorney-in-fact and agent to act in his, her or its name, place and
stead with respect to all matters arising in connection with this Agreement,
including, without limitation, the power and authority, in his sole discretion,
to:
(a) take any action contemplated to be taken by the Company
Equityholders under this Agreement, including, without limitation, pursuant
to Section 9 of this Agreement;
21
(b) negotiate, determine, defend and settle any disputes that may
arise under or in connection with this Agreement, including, without
limitation, with respect to any indemnification claim pursuant to Section
9; and
(c) make, execute, acknowledge and deliver any releases, assurances,
receipts, requests, instructions, notices, agreements, certificates and any
other instruments, and generally do any and all things and take any and all
actions that may be requisite, proper or advisable in connection with this
Agreement, including, without limitation, pursuant to Section 9.
2.14.2. The appointment of the Shareholder Representative may
not be revoked except in accordance with this Section 2.14.2.
(a) The Shareholder Representative may resign at any time on five (5)
Business Days' written notice to Parent and the Company Equityholders. The
Shareholder Representative may be replaced from time to time (including
following resignation of the Shareholder Representative) by majority vote
of those Company Equityholders entitled to receive any portion of the
Merger Consideration based upon their relative interests in the Merger
Consideration, upon notice given to Parent, which replacement shall be
effective one (1) Business Day after receipt of such notice by Parent. If
at the time of any such replacement the deadline hereunder for Parent to
provide notice to the Shareholder Representative with respect to any
indemnification claim or action to be taken in connection with this
Agreement is within fifteen (15) days, then such deadline shall be extended
such number of days that is fifteen (15) days after Parent's receipt of
such notice of replacement.
(b) In performing the functions specified in this Agreement, the
Shareholder Representative will not be liable to any Person including,
without limitation, for any actions or omissions taken by the Shareholder
Representative, in the absence of fraud or willful misconduct on the part
of the Shareholder Representative. By approving the Merger or receiving a
portion of the Merger Consideration, the Company Equityholders have
accepted the limitations on the Shareholder Representative's liability set
forth in this Section 2.14.2(b). The Shareholder Representative shall not
be entitled to any fee, commission or other compensation for the
performance of services as Shareholder Representative, but any
out-of-pocket costs and expenses incurred by the Shareholder Representative
in connection with actions taken by the Shareholder Representative pursuant
to the terms of this Agreement (including the hiring of legal counsel and
the incurring of legal fees and costs) shall be reimbursed to the
Shareholder Representative by the Company Equityholders on a pro rata
basis.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to Parent and Merger Sub that, except as set forth in the Schedules to
this Agreement:
3.1. Corporate Matters.
22
3.1.1. Organization, Power and Standing of the Company. The
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Washington, and the Company has the
corporate power and authority to own, operate or lease its properties and to
carry on its Business in all material respects as currently conducted. The
Company is duly qualified or authorized to do business as a foreign corporation
and is in good standing under the laws of each jurisdiction in which it owns or
leases real property and each other jurisdiction in which the conduct of its
business or the ownership of its properties requires such qualification or
authorization, except where the failure to be so qualified, authorized or in
good standing would not have a Material Adverse Effect.
3.1.2. Approvals. The Company has all necessary corporate power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder and to consummate the transactions. The Company's Board of
Directors, at a meeting duly called and held, has unanimously approved and
declared advisable this Agreement and the transaction contemplated herein,
including the Merger, and Shareholders holding a majority of the Company Stock
have approved and declared advisable this Agreement and the Merger. No other
corporate action on the part of the Company is necessary to authorize the
execution, delivery and performance by the Company of this Agreement and the
consummation by it of the transaction contemplated herein. This Agreement has
been duly executed and delivered by the Company, and is Enforceable against the
Company.
3.1.3. Non-Contravention. Except for items listed on Schedule
3.1.3, neither the execution, delivery or performance of this Agreement nor the
consummation of the Closing hereunder in accordance with the terms and
conditions of this Agreement does or will constitute, result in or give rise to
(a) a breach, violation or default under any Legal Requirement applicable to the
Company, (b) a breach of or default under any Charter or By-law provision of the
Company, (c) the imposition of any Lien upon any properties or assets of the
Company, (d) a breach of or default under (or the acceleration of the time for
performance of any material obligation under), or result in the termination or a
right of termination or cancellation under any Contractual Obligation, Permit of
the Company, or (e) the loss or impairment of the Surviving Corporation's right
to own or use any of the Intellectual Property other than, in the cases of
clauses (a), (c), (d) and (e), any breach, violation, default, imposition of
Lien or loss or impairment that would not reasonably be expected to have a
Material Adverse Effect. Except as set forth on Schedule 3.1.3, no approval,
consent, waiver, authorization or other order of, and no notice declaration,
filing, registration, qualification or recording with, any Governmental
Authority is required to be obtained or made by or on behalf of the Company in
connection with the execution, delivery or performance of this Agreement and the
consummation of the Closing hereunder in accordance with the terms and
conditions of this Agreement, except (i) for those which shall have been
obtained or made on or prior to, and shall be in full force and effect at, the
Closing Date and (ii) where failure to obtain such approval, consent, waiver,
authorization or other order, to give such notice or to make such declaration,
filing, registration, qualification or recording would not materially and
adversely affect the Company or its ability to consummate the Closing hereunder
in accordance with the terms and conditions of this Agreement and perform its
obligations under this Agreement.
23
3.1.4. Capitalization.
(a) The entire authorized capital stock of the Company is set forth on
Schedule 3.1.4(a). The issued and outstanding shares of Common Stock are
duly authorized, validly issued, fully paid and nonassessable and were
issued free of preemptive rights. The issued and outstanding shares of
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock are duly authorized, validly issued,
fully paid and nonassessable and were issued free of preemptive rights.
(b) Schedule 3.1.4(b) sets forth the name of each Shareholder, as well
as the number of shares of Company Securities held by such holder.
(c) Except for the Options, the Warrants, the Shareholders Agreement
and as set forth on Schedule 3.1.4(c), there is no Contractual Obligation
pursuant to which the Company has granted any option, warrant or other
right to any Person to acquire, and there are no other outstanding
securities convertible into or exchangeable for, the shares of Common
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or any other securities of, or
voting or equity interests in, the Company, including any representing the
right to purchase or otherwise receive any Company Common Stock. There are
no outstanding obligations of the Company to repurchase, redeem or
otherwise acquire any shares of capital stock, voting securities or equity
interests (or any options, warrants or other rights to acquire any shares
of capital stock, voting securities or equity interests) of the Company.
(d) The Company has no Company Debt outstanding as of the date hereof
except as set forth on Schedule 3.1.4(d). For each such item of Company
Debt, Schedule 3.1.4(d) correctly sets forth the debtor, the principal
amount of the Company Debt as the date of this Agreement, the creditor, the
maturity date, the collateral, if any, securing the Company Debt.
3.1.5. Subsidiaries. The Company does not have any wholly or
partially owned subsidiaries. The Company does not, directly or indirectly, own,
hold, or control any interest in any person (whether of record, beneficially, or
equitably). The Company is not a direct or indirect participant in any joint
venture, partnership, co-development, cost-sharing or other similar arrangement.
3.1.6. Charter and By-laws. The Company has heretofore delivered
or made available to Parent true and complete copies of the Charter and By-laws
of the Company, in each case as in effect on the date hereof. The minute books
of the Company previously made available to Parent contain true, correct and
substantially complete records of all meetings and accurately reflect all other
corporate action of the shareholders and Board of Directors (including
committees thereof) of the Company. The stock certificate books and stock
transfer ledgers of the Company previously made available to Parent are true,
correct and complete. All stock transfer Taxes levied, if any, or payable with
respect to all transfers of shares of the Company prior to the date hereof have
been paid and appropriate transfer Tax stamps affixed.
24
3.2. Financial Statements.
3.2.1. Financial Information. Parent has been furnished with
each of the following:
(a) The audited balance sheets of the Company as of December 31, 2004
and 2003 and the related audited statements of operations, changes in
shareholders equity and cash flows for the fiscal years then ended,
accompanied by the notes thereto and the audit report thereon (together
with the Interim Financials (as defined in paragraph (b) below), the
"Financial Statements").
(b) The unaudited balance sheet of the Company as of the Balance Sheet
Date (the "Balance Sheet") and the related unaudited statements of
operations, shareholders' equity and cash flows for the twelve month period
then ended (collectively, the "Interim Financials"), which are those
Interim Financials attached to an officer's Certificate delivered by the
Company prior to the date hereof.
3.2.2. Character of Financial Information. The Financial
Statements were prepared in accordance with Generally Accepted Accounting
Principles consistently applied throughout the periods specified therein and
present fairly, in all material respects, the consolidated financial position
and results of operations of the Company as of the dates and for the periods
specified therein in accordance with Generally Accepted Accounting Principles,
subject in the case of the Interim Financials to the absence of footnotes and
normal year-end adjustments.
3.2.3. Undisclosed Liabilities. The Company does not have any
Liabilities that are required to be reflected on a balance sheet prepared in
accordance with Generally Accepted Accounting Principles or in the notes thereto
or any "off-balance sheet arrangements" that would be required to be disclosed
under Item 303(a)(4) of Regulation S-K promulgated under the Securities Act,
except for (i) Liabilities disclosed, reflected or reserved against on the
Balance Sheet, (ii) Liabilities incurred since the date of the Balance Sheet in
the Ordinary Course of Business, (iii) the matters disclosed in or arising out
of matters set forth on Schedule 3.2.3, (iv) immaterial Liabilities of the
Company, (v) liabilities arising under the Contractual Obligations listed on
Schedule 3.7 or entered into after the date hereof to the extent that executory
contracts have obligations to be performed after the date of this Agreement, and
only to the extent that such Contractual Obligations are in effect and such
Liabilities are not the result of a breach by the Company, and (vi) Liabilities
under this Agreement.
3.3. Change in Condition since Balance Sheet Date. Except for matters
set forth on Schedule 3.3, since the Balance Sheet Date:
3.3.1. The Company has not:
25
(a) entered into any Contractual Obligation other than this Agreement
relating to (A) the sale of any capital stock or equity interest in the
Company, (B) the purchase of assets constituting a business or otherwise
outside of the Ordinary Course of Business or (C) any merger, consolidation
or other business combination;
(b) mortgaged, pledged or subjected to any Lien any of their assets
other than (A) conditional sales or similar security interests granted in
connection with the lease or purchase of equipment or supplies in the
Ordinary Course of Business, (B) Liens disclosed on Schedule 3.5.1 and (C)
Liens that are not material to the Company;
(c) sold, leased, transferred or exchanged any material property
outside of the Ordinary Course of Business or for less than the fair value
thereof;
(d) awarded or paid any bonuses to employees of the Company with
respect to the fiscal year ended December 31, 2005 or thereafter, except in
the case of awards or payments with respect to fiscal year ended December
31, 2005, to the extent accrued on the Balance Sheet, or entered into any
employment, deferred compensation, severance or similar agreement (nor
amended any such agreement) or agreed to increase the compensation payable
or to become payable by it to any of the Company's directors, officers,
employees, agents or representatives or agreed to increase the coverage or
benefits available under any severance pay, termination pay, vacation pay,
company awards, salary continuation for disability, sick leave, deferred
compensation, bonus or other incentive compensation, insurance, pension or
other employee benefit plan, payment or arrangement made to, for or with
such directors, officers, employees, agents or representatives;
(e) entered into any material Contractual Obligation other than in the
Ordinary Course of Business;
(f) made any change in accounting or Tax reporting principles, methods
or policies;
(g) made, changed or rescinded any material election relating to
Taxes, settled or compromised any claim relating to income or other
material Taxes, amended any income or other material Tax Return or
surrendered any right to claim a refund of any Taxes;
(h) made or committed to make any capital expenditures or capital
additions or betterments in excess of $25,000 individually or $100,000 in
the aggregate or failed to make any capital expenditure budgeted to have
made since the Balance Sheet Date;
(i) issued, created, incurred, assumed, guaranteed, endorsed or
otherwise become liable or responsible with respect to (whether directly,
contingently, or otherwise) any Company Debt in an amount in excess of
$100,000 in the aggregate;
(j) granted any license or sublicense of any rights under or with
respect to any Intellectual Property except in the Ordinary Course of
Business;
26
(k) instituted or settled any Action resulting in a loss of revenue in
excess of $100,000 in the aggregate; or
(l) made any loans, advances or capital contributions to, or
investments in, any Person or paid any fees or expenses to any Shareholder
or any director, officer, partner, stockholder or Affiliate of any
Shareholder;
3.3.2. the Company has not entered into any Contractual
Obligation to do any of the actions referred to in Section 3.3.1. above;
3.3.3. the Business has been conducted only in the Ordinary
Course of Business (except as otherwise required or permitted by the terms of
this Agreement);
3.3.4. there has not been any Material Adverse Effect; and
3.3.5. there has not been any damage, destruction or loss,
whether or not covered by insurance, with respect to the property and assets of
the Company having a replacement cost of more than $10,000 for any single loss
or $100,000 for all such losses.
3.4. Environmental Matters. Except as set forth on Schedule 3.4 or as
has not had and could not reasonably be expected to have had a Material Adverse
Effect, (a) the Company is, and has been, in compliance with all Environmental
Laws and (b) there is no Action pending or, to the Knowledge of the Company,
threatened against the Company in respect of (i) noncompliance by the Company
with any Environmental Laws or (ii) the release or threatened release into the
environment of any Hazardous Substance by the Company or (iii) the handling,
storage, use, transportation or disposal of any Hazardous Substance by the
Company. To the Knowledge of the Company, no facts, circumstances or conditions
exist with respect to the Company or any property currently or, formerly owned,
operated or leased by the Company or any property to or at which the Company
transported or arranged for the disposal or treatment of Hazardous Substances
that could reasonably be expected to result in the Company incurring liability
under Environmental Laws.
3.5. Real and Personal Property.
3.5.1. Except as set forth on Schedule 3.5.1, the Company has
valid title to, or a valid leasehold interest in, all of its personal property,
and such personal property is not subject to any Lien except as set forth on
Schedule 3.5.1. All such items of tangible personal property which, individually
or in the aggregate, are material to the operation of the business of the
Company are in good condition and in a state of good maintenance and repair
(ordinary wear and tear excepted). All leases and licensing agreements for
personal property ("Personalty Leases") leased or licensed by the Company are
valid and in full force and effect and those involving annual payments in excess
of $10,000 are listed on Schedule 3.5.1. The Company has performed in all
material respects all obligations required to be performed by them under the
Personalty Leases; and no event or condition exists which constitutes or, with
the giving of notice or the passage of time or both, would constitute a material
default by the Company as lessee or licensee under the Personalty Leases. To the
Knowledge of the Company, no other party is in default thereof, and no party to
the Personalty Leases has exercised any termination rights with respect thereto.
27
3.5.2. The Company does not and has never owned any real
property. Schedule 3.5.2 sets forth a list of all real property currently leased
to the Company (collectively, the "Real Property"). All leases (the "Leases") of
Real Property currently leased to the Company are valid and in full force and
effect; the Company has performed in all material respects all obligations
required to be performed by them under such Leases; and no event or condition
exists which constitutes or, with the giving of notice or passage of time or
both, would constitute a material default by the Company as lessee under such
Lease. To the Knowledge of the Company, no other party is in default thereof,
and no party to the Leases has exercised any termination rights with respect
thereto. All prior leases of real property of the Company were for premises
consisting of office space in commercial office buildings.
3.5.3. The Company has delivered to Parent true, correct and
complete copies of (i) all Personalty Leases and (ii) all Leases, together with
all amendments, modifications or supplements, if any, thereto. The Company
properties are not subject to any leases, rights of first refusal, options to
purchase or rights of occupancy, except the Leases.
3.5.4. The Company has all certificates of occupancy and Permits
of any Governmental Authority necessary or useful for the current use and
operation of each Company property, and the Company is in compliance with all
material conditions of the Permits applicable to it. No default or violation, or
event that with the lapse of time or giving of notice or both would become a
default or violation, has occurred in the due observance of any Permit.
3.6. Intellectual Property Rights.
(a) Schedule 3.6(a) sets forth an accurate and complete list of all
Patents owned or licensed by the Company and all registered Copyrights and
Marks, including Copyrights and Marks that are the subject of an
application for registration, in each case that are owned by the Company.
Schedule 3.6(a) lists the jurisdictions in which each such item of
Intellectual Property has been issued or registered or in which any such
application for such issuance and registration has been filed by the
Company.
(b) Except as disclosed in Schedule 3.6(b), the Company is the sole
and exclusive owner of all right, title and interest, or otherwise has
sufficient license or other rights, in and to (i) all of the Patents and
the Marks used by the Company, (ii) all registered Copyrights, including
Copyrights that are the subject of an application for registration, used by
the Company and (iii) each of the other Copyrights in any works of
authorship prepared by or for the Company that resulted from or arose out
of any work performed for the Company by any of its employees, officers,
consultants or contractors, in each case free and clear of all Liens or
obligations to others. Other than with respect to infringement matters
discussed in the following paragraph, the Company is the sole and exclusive
owner of, or has valid and continuing rights to use, sell or license, as
the case may be, all other Intellectual Property used, sold or licensed by
the Company in its Businesses, free and clear of all Liens or obligations
to others (except for those specified licenses included in Schedule
3.6(f)).
28
(c) The Intellectual Property owned, used, practiced or otherwise
commercially exploited by the Company, the development, manufacturing,
licensing, marketing, importation, offer for sale, sale or use of services,
products or Technology in connection with the business as presently
conducted and as currently proposed to be conducted, and the Company's
present and currently proposed business practices and methods, (i) do not
infringe, violate or constitute an unauthorized use or misappropriation of
any Patent or Xxxx and (ii) do not infringe, violate or constitute an
unauthorized use or misappropriation of any Copyright or Trade Secret or
other similar right, of any Person (including pursuant to any
non-disclosure agreements or obligations to which the Company or any of its
present or former employees is a party, and including any Intellectual
Property that might exist with respect to open software or other
Intellectual Property publicly available for certain types of use). The
Intellectual Property owned by or licensed to the Company includes all of
the intellectual property rights used by the Company to conduct its
Business.
(d) The Company has the unfettered right to use, reproduce, publish,
sell, publicly perform, distribute, modify, and prepare derivative works
from, any content visible on the Company's web site xxx.xxxxxxxxxx.xxx,
throughout the world, by all means, in all media now known or hereafter
developed (and to do any of the foregoing with respect to such
modifications or derivative works), without further consent by or
consideration to any third party except as described in Section 3.6(e) or
as listed or described on Schedule 3.6(d). Notwithstanding the foregoing,
this provision is not intended to cover software databases or other systems
used to operate the Company's web site.
(e) Except (i) with respect to licenses of commercial off-the-shelf
Software, (ii) pursuant to the Intellectual Property Licenses listed in
Schedule 3.6(e), and (iii) with respect to any obligation to provide
attribution by name to contributors of recipes or other content (x) that
have consented to use of their names for such attribution and (y) for which
the Company has adequate records to identify which recipes or other content
should be attributed with which names, the Company is not required,
obligated, or under any liability whatsoever, to make any payments by way
of royalties, fees or otherwise or provide any other consideration of any
kind, to any owner or licensor of, or other claimant to, any Intellectual
Property, or any other Person, with respect to the use thereof or in
connection with the conduct of the Business.
(f) Schedule 3.6(f) sets forth a complete and accurate list of all
Contracts (i) to which the Company is a party to any Intellectual Property
Licenses, (ii) containing a covenant not to compete or otherwise limiting
the Company's ability to use any of the Intellectual Property or (iii)
containing an agreement by the Company to indemnify any other Person
29
against any claim of infringement, violation, misappropriation or
unauthorized use of any Intellectual Property. The Company has delivered to
Purchaser true, correct and complete copies of each Contract set forth on
Schedule 3.6(f), together with all amendments, modifications or supplements
thereto.
(g) Each of the Intellectual Property Licenses is in full force and
effect and is the legal, valid and binding obligation of the Company,
enforceable against it in accordance with its terms. The Company is not in
default under any Intellectual Property License, nor, to the Knowledge of
the Company, is any other party to any Intellectual Property License in
default thereunder, and no event has occurred that with the lapse of time
or the giving of notice or both would constitute a default thereunder. No
party to any of the Intellectual Property Licenses has exercised any
termination rights with respect thereto.
(h) No Trade Secret of the Company has been authorized to be disclosed
or has been actually disclosed by the Company to any employee or any third
party other than pursuant to a written non-disclosure agreement including
restrictions on the disclosure and use of the Intellectual Property
consistent with best practices in the industry in which the Company
operates. The Company has taken reasonable security measures to protect the
secrecy, confidentiality and value of all the Trade Secrets of the Company,
including invention disclosures, not the subject of any patents owned or
patent applications filed by the Company, which measures are consistent
with best practices in the industry in which the Company operates. Each
employee, consultant and independent contractor of the Company has entered
into a written non-disclosure and invention assignment agreement with the
Company in a form provided to Parent.
(i) Except as set forth on Schedule 3.6(i), as of the date hereof, the
Company is not the subject of any pending or, to the Knowledge of the
Company, threatened Action which involve a claim of infringement,
misappropriation, unauthorized use, or violation of any intellectual
property rights by any Person against the Company or challenging the
ownership, use, validity or enforceability of any Intellectual Property
owned or exclusively licensed by the Company. Except as set forth on
Schedule 3.6(i), the Company has not received notice of any such threatened
claim and, to the Knowledge of the Company, there are no facts or
circumstances that could form the basis for any claim of infringement,
unauthorized use, misappropriation or violation of any intellectual
property rights by any Person against the Company, or challenging the
ownership, use, validity or enforceability of any material Intellectual
Property. All of the Company's rights in and to material Intellectual
Property are valid and enforceable.
(j) To the Knowledge of the Company, no Person is infringing,
violating, misusing or misappropriating any material Intellectual Property
of the Company, and no such claims have been made against any Person by the
Company.
30
(k) There are no Governmental Orders to which the Company is a party
or by which the Company is bound which restrict, in any material respect,
the right to use any of the Intellectual Property.
(l) No present or former employee has any right, title, or interest,
directly or indirectly, in whole or in part, in any material Intellectual
Property owned or used by the Company. To the Knowledge of the Company, no
employee, consultant or independent contractor of the Company is, as a
result of or in the course of such employee's, consultant's or independent
contractor's engagement by the Company, in default or breach of any
material term of any employment agreement, non-disclosure agreement,
assignment of invention agreement or similar agreement.
(m) Schedule 3.6(m) sets forth a complete and accurate list of (i) all
computer programs and databases included in the Software that are owned
exclusively by the Company and are material to the operation of the
Business and (ii) all computer programs and databases included in the
Software that are used by the Company in the Business and are not
exclusively owned by the Company, excluding Software available on
reasonable terms through commercial distributors or in consumer retail
stores for a license fee of no more than $5,000.
(n) Except as set forth on Schedule 3.6(n), no open source or public
library Software, including, but not limited to, any version of any
Software licensed pursuant to any GNU public license, was used in the
development or modification of any Software owned or used by the Company
that is incorporated into or utilized by any of the products or services of
the Company where, as a result of the use of such open source or public
library Software or as a condition of its use, the Company is obligated to
make available to third parties the source code for the proprietary
Software owned or used by the Company that is incorporated into such
products.
3.7. Certain Contractual Obligations. Set forth on Schedule 3.7 is a
true and complete list of all of the following Contractual Obligations of the
Company:
(a) All collective bargaining agreements and all material written
employment or consulting agreements pursuant to which services are rendered
to the Company (other than the Company Plans), in each case which are
likely to involve payments by or on behalf of the Company in excess of
$100,000 per year;
(b) All Contractual Obligations under which the Company is or will
after the Closing be restricted from competing in any line of business or
with any Person in any geographical area or soliciting or hiring any
person;
(c) All Contractual Obligations (but excluding the Options) to sell or
otherwise dispose of any assets having a fair market value in excess of
$100,000 except in the Ordinary Course of Business;
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(d) All Contractual Obligations between the Company on the one hand,
any Shareholder or Affiliate thereof or any current officer, director,
shareholder or Affiliate of the Company or on the other hand;
(e) All Contractual Obligations (including partnership and joint
venture agreements) under which (i) the Company has any liability or
obligation for Company Debt or constituting or giving rise to a guarantee
of any liability or obligation of any Person (other than the Company) or
(ii) any Person has any liability or obligation constituting or giving rise
to a guarantee of any liability or obligation of the Company, in either
case involving in excess of $100,000 individually;
(f) All joint ventures, strategic alliances, partnerships, licensing
arrangements (including all Intellectual Property Licenses, but excluding
licensing Intellectual Property Licenses off-the-shelf software available
on commercially reasonable terms through distributions, manufactures or
consumer retail stores for a license fee of less than $5,000), or sharing
of profits or proprietary information;
(g) All Contractual Obligations providing for severance, retention,
change in control or other similar payments;
(h) All material management agreements and Contractual Obligations
with independent contractors or consultants (or similar arrangements) that
are not cancelable without penalty or further payment and without more than
30 days' notice;
(i) All Contractual Obligations entered into since the Balance Sheet
Date in connection with any (i) acquisition or disposition of assets
constituting a business or securities representing a controlling interest
in any Person, (ii) merger, consolidation or other business combination or
(iii) series or group of related transactions or events of a type specified
in subclauses (i) and (ii);
(j) All Contractual Obligations pursuant to which the Company may be
expected to perform services with a value in excess of $100,000 per year
and which cannot be canceled by the Company within thirty (30) days, except
for customer purchase orders received in the Ordinary Course of Business;
(k) All Contractual Obligations pursuant to which the Company may be
obligated to pay for goods and services to be delivered or performed in
excess of $100,000 per year and which cannot be canceled by the Company
within thirty (30) days, except for purchase orders issued in the Ordinary
Course of Business; and
(l) All Contractual Obligations pursuant to which the Company is
obligated to keep any information confidential in such a manner that
materially inhibits the Business.
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Each of the Contractual Obligations listed on Schedule 3.7, as in effect on the
date hereof, shall be referred to herein collectively as the "Contracts". No
breach or default in performance by the Company under any of the Contracts has
occurred and is continuing, and no event has occurred which with notice or lapse
of time or both would constitute such a breach or default, other than any breach
or default which has not had a Material Adverse Effect. To the Knowledge of the
Company, no breach or default by any other Person under any of the Contracts has
occurred and is continuing, and no event has occurred which with notice or lapse
of time or both would constitute such a breach or default, except a breach or
default which has not had and is not reasonably likely to have a Material
Adverse Effect. No party to any of the Contracts has exercised any termination
rights with respect thereto, and no party has given notice of any significant
dispute with respect to any Contract. The Company has delivered to Parent true,
correct and complete copies of all of the Contracts, together with all
amendments, modifications or supplements thereto.
3.8. Insurance. Schedule 3.8 contains a list of all policies of fire,
liability, workers' compensation, property, casualty and other forms of
insurance currently owned or held by the Company, including named insureds,
coverage scope and limits, deductibles and premiums and other costs. Schedule
3.8 also lists all insured losses, if any made and insurance proceeds received,
since January 1, 2002 in excess of $50,000. The Company has insurance policies
in full force and effect for such amounts as are sufficient to comply with all
Legal Requirements and all contractual requirements specifically requiring
insurance to which the Company is a party or by which it is bound. The Company
has delivered or made available to Parent true and accurate copies of all such
policies or binders or summaries thereof as in effect on the date hereof. To the
Knowledge of the Company, the Company is not in material default with respect to
its obligations under any of such policies. Except as set forth on Schedule 3.8,
to the Knowledge of the Company, no event relating to the Company has occurred
which could reasonably be expected to result in a retroactive upward adjustment
in premiums under any such insurance policies or which could reasonably be
expected to result in a prospective upward adjustment in such premiums.
Excluding insurance policies that have expired and been replaced in the Ordinary
Course of Business, no insurance policy has been cancelled within the last two
years and, to the Knowledge of the Company, no threat has been made to cancel
any insurance policy of the Company during such period. To the Knowledge of the
Company, no event has occurred, including the failure by the Company to give any
notice or information or the Company giving any inaccurate or erroneous notice
or information, which limits or impairs the rights of the Company under any such
insurance policies.
3.9. Litigation. Except as set forth on Schedule 3.9 or as would not
reasonably be expected to have a Material Adverse Effect on the Company, there
is and since January 1, 2002 there has been no Action against the Company
pending, and to the Knowledge of the Company, there is no Action threatened
against the Company, or to which the Company is otherwise a party before any
Governmental Authority. Except as set forth on Schedule 3.9, the Company is not
subject to any Governmental Order, and is not in breach or violation of any
Governmental Order. Except as set forth on Schedule 3.9, the Company is not
engaged in any legal Action to recover monies due it or for damages sustained by
it. There is no Action pending, or to the Knowledge of the Company, threatened,
which seeks rescission of or seeks to enjoin the consummation of this Agreement
or any of the transactions contemplated hereby.
33
3.10. Compliance with Laws. The operations, Business and assets of
the Company are and, for the last five (5) years have been, in compliance in all
material respects with applicable Legal Requirements, except as set forth on
Schedule 3.10 and except as would not reasonably be expected to have a material
and adverse effect on the Company. In the last five (5) years, the Company has
not received any written notice of or been charged in writing with the violation
of any Legal Requirements. To the Knowledge of the Company, the Company is not
under investigation with respect to the violation of any Legal Requirements
except as would not reasonably be expected to have a material and adverse effect
on the Company. The Company has been granted all licenses, permits, consents,
approvals, franchises and other authorizations under any Legal Requirement
necessary for and material to the conduct of the Business (collectively, the
"Permits"), except where the failure to obtain such Permits would not reasonably
be expected to have a material and adverse effect on the Company, and the
Company has not received any notice that any Governmental Authority or other
licensing authority will revoke, cancel, rescind, materially modify or refuse to
renew in the ordinary course any of the Permits. There are no Actions pending
or, to the Knowledge of the Company, threatened, relating to the suspension,
revocation or modification of any Permit.
3.11. Tax Matters.
Except as set forth on Schedule 3.11:
(a) The Company has duly and timely filed or has had filed (after
giving effect to extensions) on its behalf all income and other material
Tax Returns that it was required to file on or before the date hereof (or
the Closing Date), all such Tax Returns are true, complete and accurate in
all material respects, and the Company has paid or had paid on its behalf
all Taxes owed by the Company (other than any Taxes not yet due and payable
or for which reserves have been established in accordance with Generally
Accepted Accounting Principles on the Balance Sheet). No written claim has
been made by any Governmental Authority in a jurisdiction in which the
Company does not file Tax Returns that it may be required to file Tax
Returns in, or is subject to taxation by, that jurisdiction;
(b) there are no actions, suits, investigations or audits by any
Governmental Authority in progress with respect to Taxes of or relating to
the Company, and the Company has not received any written notice of any
outstanding audit, claim or deficiency pending or proposed with respect to
Taxes of the Company;
(c) the Company is not a party to any written agreements or waivers
extending the statutory period of limitation applicable to any Taxes of the
Company which is currently in effect;
(d) the Company has not been a member of an affiliated group filing a
consolidated, combined or unitary Tax Return (other than a group the common
parent of which was the Company);
34
(e) the Company has complied in all material respects with all
applicable laws relating to the filing of Tax Returns and the payment and
withholding of Taxes, and has duly and timely withheld and paid over to the
appropriate Governmental Authority all amounts required to be so withheld
and paid under all applicable laws;
(f) the Company (i) has no liability for the Taxes of any other Person
as a transferee or successor, or by contract or otherwise, and (ii) is not
a party to any Tax sharing, allocation, indemnity or similar agreement or
arrangement (whether or not written);
(g) the Company has not constituted either a "distributing
corporation" or a "controlled corporation" (within the meaning of Section
355(a)(1)(A) of the Code) in a distribution of stock qualifying for
tax-free treatment under Section 355 of the Code (A) in the two (2) years
prior to the date of this Agreement or (B) 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
transactions contemplated by this Agreement;
(h) the Company has made available to Parent true and complete copies
of all (i) audit reports issued with respect to the six year period prior
to the date of this Agreement relating to any Taxes due from or with
respect to the Company and (ii) material Tax Returns of the Company for all
taxable periods ending on or after December 31, 2000;
(i) the Company has not granted to any Person any power of attorney
that is currently in force with respect to any Tax matter;
(j) no Liens for Taxes exist with respect to any of the assets or
properties of the Company;
(k) there is no taxable income of the Company that was received or
accrued prior to the Closing that will be required under applicable Tax law
to be reported for a taxable period beginning after the Closing Date that
is attributable to a transaction (such as an installment sale) that
occurred prior to the Closing;
(l) the Company has (i) neither agreed to nor is required to make any
adjustments pursuant to Section 481(a) of the Code or any similar provision
of state, local or foreign law, (ii) no knowledge that any Governmental
Authority has proposed any such adjustment, and (iii) no application
pending with any Governmental Authority requesting permission for any
changes in accounting methods;
(m) the Company has not executed or entered into any written agreement
with, or obtained or applied for any written consents or written clearances
or any other Tax rulings from, nor has there been any written agreement
executed or entered into on its behalf with any Governmental Authority,
relating to material Taxes, including any IRS private letter rulings or
comparable rulings of any Governmental Authority and closing agreements
pursuant to Section 7121 of the Code or any predecessor provision thereof
or any similar provision of any law;
35
(n) the Company does not have, nor has ever had, a permanent
establishment in any country other than the United States. The Company is
not, nor has ever been, subject to tax in a jurisdiction outside the United
States;
(o) the Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A) of the Code;
(p) the Company has obtained a shareholder vote or written consent
approving the right of any "disqualified individual" (as defined in Section
280G(c) of the Code) to receive or retain any and all payments that could
be deemed "parachute payments" under Section 280G of the Code and there is
no Contract covering any person that, individually or collectively, could
give rise to the payment of any amount that would not be deductible by the
Company or Parent (or Affiliates of Parent) by reason of Section 280G of
the Code;
(q) the Company has not engaged in any "reportable transactions" as
defined in Treasury Regulation Section 1.6011-4(b);
(r) none of the assets of the Company was acquired from a "related
person" as defined in Section 197 of the Code;
(s) Schedule 3.11(s) lists (i) all types of income and other material
Taxes paid, and all types of income and other material Tax Returns filed,
by or on behalf of the Company and (ii) all jurisdictions that impose such
Taxes and/or duty to file such Tax Returns;
(t) no issue has been raised by a Governmental Authority as to
material Taxes either in writing or to the Knowledge of the Company in any
prior examination of the Company which, by application of the same or
similar principles, could reasonably be expected to result in a material
proposed deficiency for any subsequent taxable period;
(u) to the Knowledge of the Company, the Company has not, within the
scope of Section 999 of the Code, participated in or cooperated with any
international boycott or has been requested to do so in connection with any
transaction or proposed transaction;
(v) Schedule 3.11(v) sets forth the following information with respect
to the Company as of the end of the most recent taxable year: (i) the
amount of any net operating losses for federal income tax purposes and the
date such losses will expire and (ii) all applicable limitations on any
such losses under Sections 382 and 383 of the Code; and
36
(w) Each Company Plan that is a "nonqualified deferred compensation
plan" (as defined in Code Section 409A(d)(1)) has been operated since
January 1, 2005 in good faith compliance with Code Section 409A and
Internal Revenue Service Notice 2005-1 and the Proposed Regulations
promulgated under Code Section 409A. No Company Plan that is a
"nonqualified deferred compensation plan" has been materially modified (as
determined under Notice 2005-1 and the Proposed Regulations) after October
3, 2004. As to each Option, the timing and the amount of any taxable income
realized with respect to such Option will be determined in accordance with
Treasury Regulation Section 1.83-7.
For purposes of this Section 3.11, any reference to the Company shall be deemed
to include any Person that merged with or was liquidated into the Company.
3.12. Employee Benefit Plans/Labor Matters.
(a) Schedule 3.12(a) lists each severance plan and agreement,
retention plan, "employee benefit plan" within the meaning of section 3(3)
of ERISA, and all other employee benefit and compensation plans, programs,
policies or arrangements, including, without limitation, stock-based ,
bonus, incentive or other fringe benefit plans, consulting or other
compensation agreements, deferred compensation arrangements, sick leave,
vacation pay, salary continuation for disability, hospitalization, medical
insurance, and life insurance that the Company maintains or to which the
Company contributes or has an obligation to contribute or has any other
liability with respect to Company Employees or former Company Employees or
directors of the Company or their beneficiaries (collectively, "Company
Plans").
(b) With respect to each of the Company Plans, the Company has made
available to Parent a current, accurate and complete copy (or, to the
extent no such copy exists, an accurate description) thereof and, to the
extent applicable: (i) any related trust agreement, annuity contract or
other funding instrument; (ii) the most recent summary plan description, if
any; (iii) the most recent annual Form 5500 and all schedules thereto, if
any, and the most recent actuarial report, if any with respect to such
Company Plans; and (iv) if such Company Plan is intended to be a qualified
single employer plan under section 401(a) of the Code, the most recent
favorable determination letter received from the Internal Revenue Service,
if any.
(c) (i) Each Company Plan has been maintained, in all material
respects, in accordance with its terms and in compliance with the
applicable provisions of law, including ERISA and the Code; (ii) the
Company has complied in all material respects with the health care
continuation requirements of section 601, et seq. of ERISA to the extent
applicable to it; (iii) except as set forth on Schedule 3.12, the Company
has no obligations under any Company Plan to provide health benefits to
former Company Employees except as specifically required by law; and (iv)
all contributions required to have been made under any Company Plan or by
law to any funds or trusts established thereunder or in connection
therewith have been made, or the amount of such payment or contribution
obligation has been reflected on the Balance Sheet.
37
(d) Neither the Company nor any employer that would be considered to
be a single employer with the Company under ERISA Section 4001(a)(14) has,
within the last six years, maintained, contributed to, or had any
obligation to contribute to, or has any liability (fixed or contingent)
with respect to any "multiemployer plan" (as such term is defined in
section 3(37) of ERISA) or any "defined benefit plan" (as such term is
defined in section 3(35) of ERISA).
(e) There are no pending, or to the Knowledge of the Company,
threatened actions, claims or controversies which have been asserted or
instituted against the Company Plans, the assets of any of the trusts under
such plans or the plan sponsor or, to the Knowledge of the Company, any
plan administrator or fiduciary of the Company Plans with respect to the
operation of the Company Plans (other than routine benefit claims).
(f) Each of the Company Plans intended to qualify under Section 401 of
the Code (i) is the subject of an unrevoked favorable determination letter
issued by the IRS, (ii) has remaining a period of time under the Code or
applicable Treasure regulations or IRS pronouncement in which to request,
and make any amendments necessary to obtain, such a letter from the IRS, or
(iii) is a prototype plan that is permitted to rely on the opinion or
advisory letter issued to the prototype plan sponsor. To the Knowledge of
the Company, nothing has occurred with respect to the operation of any such
Company Plans which could reasonably be expected to result in the loss of
such qualification.
(g) Except as set forth on Schedule 3.12(g), neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will (i) result in any payment becoming due to any
Company Employee or former Company Employee, (ii) increase any benefits
otherwise payable under any Company Plan or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
(h) Schedule 3.12(h) sets forth a list of each collective bargaining
agreement with any labor union representing Company Employees. There is no
labor strike, dispute, slowdown, or stoppage pending or, to the Knowledge
of the Company, threatened against the Company. No collective bargaining
agreement is currently being negotiated and, to the Knowledge of the
Company, no organizing effort is currently being made with respect to the
Company Employees. The Company is and has been in material compliance with
all applicable laws relating to employment practices, terms and conditions
of employment (including termination of employment), wages, hours of work
and occupational safety and health, and worker classification. The Company
is in compliance with WARN and any similar state or local "mass layoff" or
"plant closing" law. There is no unfair labor practice complaint pending
or, to the Knowledge of the Company, threatened against the Company before
the National Labor Relations Board.
38
3.13. Accounts and Notes Receivable and Payable.
(a) All accounts and notes receivable of the Company have arisen from
bona fide transactions in the Ordinary Course of Business consistent with
past practice and are payable on ordinary trade terms. All accounts and
notes receivable of the Company reflected on the Balance Sheet are good and
collectible at the aggregate recorded amounts thereof, which were
calculated in a manner consistent with past practice and in accordance with
Generally Accepted Accounting Principles consistently applied. All accounts
and notes receivable arising after the Balance Sheet Date are good and
collectible at the aggregate recorded amounts thereof, which reserves were
calculated in a manner consistent with past practice and in accordance with
Generally Accepted Accounting Principles consistently applied. None of the
accounts or the notes receivable of the Company (i) are subject to any
setoffs, counterclaims or allowances for unplaced advertising or otherwise
or (ii) represent obligations for goods sold on consignment, on approval or
on a sale-or-return basis or subject to any other repurchase or return
arrangement.
(b) All accounts payable of the Company reflected in the Balance Sheet
or arising after the date thereof are the result of bona fide transactions
in the Ordinary Course of Business and have been paid or are not yet due
and payable.
3.14. Related Party Transactions. No employee, officer, director or
shareholder of the Company or any of their respective Affiliates ("Related
Persons") (i) owes any amount to the Company nor does the Company owe any amount
to, or has the Company committed to make any loan or extend or guarantee credit
to or for the benefit of, any Related Person, other than accrued salary, wages
or bonuses, (ii) except for employment arrangements or offices and directorships
disclosed in this Agreement, is involved in any business arrangement or other
relationship with the Company (whether written or oral), (iii) owns any property
or right, tangible or intangible, that is used by the Company, (iv) has any
claim or cause of action against the Company or (v) to the Knowledge of the
Company, owns any direct or indirect interest of any kind in, or controls or is
a director, officer, employee or partner of, or consultant to, or lender to or
borrower from or has the right to participate in the profits of, any Person
which is a competitor, supplier, customer, landlord, tenant, creditor or debtor
of the Company.
3.15. Certain Governmental Matters. The Company has not received from
any U.S. Governmental Authority or any prime contractor or subcontractor from a
U.S. Governmental Authority any special, preferential or advantageous treatment
in the award of a Government Contract, or in any other manner, including as a
"small business concern," "small disadvantaged business" (or "minority-owned
business"), "women-owned" concern, or any other socially and economically
disadvantaged classification, as defined in the Small Business Act (15 U.S.C.
Sec. 631, et. seq.), the Federal Property and Administrative Services Act (41
U.S.C. Sec. 252), section 7102 of the Federal Acquisition Streamlining Act of
1994 (Public Law 103-355), 10 U.S.C. Sec 2323, Executive Order 12138, May 18,
1979, or regulations implementing these requirements, including the Federal
Acquisition Regulations. "Government Contract" means any prime contract with a
U.S. Governmental Authority and any subcontract with a prime contractor or
higher tier subcontractor under a prime contract with a U.S. Governmental
Authority.
39
3.16. Advertising Customers. Schedule 3.16 sets forth a list of the
twenty (20) largest advertisers of the Company, as measured by the dollar amount
of ad purchases therefrom for cash for each of the fiscal years ended December
31, 2003, 2004 and 2005, showing the total receipts from each advertiser and any
allowance, credits or rebates. Since the Balance Sheet Date, no advertiser
listed on Schedule 3.16 has terminated its relationship with the Company, except
as specified on Schedule 3.16. Except as specified therein, no advertiser listed
on Schedule 3.16 has notified the Company, and the Company does not otherwise
have Knowledge, that such advertiser intends to terminate or materially reduce
its level of advertising or modify its pricing or other terms.
3.17. Brokers. Except for payments included in the Company's
Transaction Expenses, no broker, finder, investment bank or similar agent (a
"Broker") is entitled to any brokerage or finder's fee from the Company in
connection with the transactions contemplated by this Agreement based upon
agreements or arrangements made by or on behalf of the Company.
4. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB. Parent and the
Merger Sub jointly and severally represent and warrant to the Company that,
except as set forth in the Schedules to this Agreement:
4.1. Corporate Matters.
4.1.1. Organization, Power and Standing of Parent and Merger
Sub. Parent is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of Delaware, and Parent has full power and
authority, corporate and otherwise, to enter into this Agreement, to carry out
and perform its obligations hereunder and to consummate the transactions
contemplated hereby, and to own, operate or lease its properties and to carry on
its business as currently conducted. Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is a wholly owned subsidiary of Parent. Since the date of its incorporation
Merger Sub has not (i) engaged in any business (ii) conducted any operations,
(iii) incurred any liabilities or (iv) entered into any agreements or
arrangements, other than, in each case, in connection with this Agreement and
the transactions contemplated by this Agreement.
4.1.2. Authorization and Enforceability. This Agreement has been
duly authorized, executed and delivered by, and is Enforceable against, Parent
and Merger Sub.
4.1.3. Non-Contravention. Neither the execution, delivery and
performance of this Agreement by Parent and Merger Sub nor the consummation by
Parent and Merger Sub of the Closing hereunder in accordance with the terms and
conditions of this Agreement does or will constitute, result in or give rise to
(a) a breach, violation or default under any Legal Requirement applicable to
Parent or Merger Sub, (b) a breach of or default under any Charter or By-laws
40
provision of Parent or Merger Sub or (c) a breach of or default under (or the
acceleration of the time for performance of any material obligation under) any
Contractual Obligation of Parent or Merger Sub. No approval, consent, waiver,
authorization or other order of, and no declaration, filing, registration,
qualification or recording with, any Governmental Authority is required to be
obtained or made by or on behalf of Parent or Merger Sub in connection with the
execution, delivery or performance of this Agreement and the consummation of the
transactions contemplated hereby, except (a) for items which shall have been
obtained or made on or prior to, and shall be in full force and effect at, the
Closing Date and (b) where failure to obtain such approval, consent, waiver,
authorization or other order, or to make such declaration, filing, registration,
qualification or recording would not materially and adversely affect Parent's or
Merger Sub's ability to consummate the Closing hereunder in accordance with the
terms and conditions of this Agreement and would not prevent Parent or Merger
Sub from performing in all material respects any of its obligations under this
Agreement.
4.2. Merger Consideration. Parent currently has available, and at the
Effective Time of the Merger will continue to have available, sufficient cash
and cash equivalents to enable it to perform its obligations under this
Agreement; and Parent will use or make such cash available to Merger Sub and the
Surviving Corporation to allow them to fulfill all such obligations.
4.3. Litigation. As of the date hereof, there is no Action pending
or, to the knowledge of Parent, threatened (a) against Parent, Merger Sub or any
of their respective Affiliates which has had or could reasonably be expected to
have a material adverse effect on the ability of Parent or Merger Sub to perform
their obligations under this Agreement or (b) which seeks rescission of or seeks
to enjoin the consummation of this Agreement or any of the transactions
contemplated hereby.
4.4. Brokers. No Broker is entitled to any brokerage or finder's fee
in connection with the transactions contemplated by this Agreement based upon
agreements or arrangements made by or on behalf of Parent, Merger Sub, nor any
of their respective Affiliates.
4.5. Investigation; No Additional Representations; No Reliance.
Parent acknowledges that the Company has not made nor shall it be deemed to have
made any representation, warranty, covenant or agreement, express or implied,
with respect to the Company, the Business or the transactions contemplated by
this Agreement, other than those explicitly set forth herein. Parent
acknowledges and agrees that it (a) has made its own inquiry and investigation
into, and based thereon has formed an independent judgment concerning, the
Business and the Company, (b) has been furnished with or given adequate access
to such information about the Business and the Company as it has requested, (c)
to the extent it has deemed appropriate, has addressed in this Agreement any
matters arising out of its investigation and the information provided to it and
(d) will not assert, except to the extent provided in Section 9 or in the case
of a claim of fraud, any claim against the Company or its directors, officers,
employees, advisors, agents, shareholders, consultants, investment bankers,
brokers, representatives or controlling persons, or any Affiliate of any of the
foregoing, or hold the Company or any such persons liable, for any inaccuracies,
misstatements or omissions with respect to information furnished by the Company
or such persons concerning the Business, the Company, this Agreement or the
transactions contemplated hereby.
41
5. CERTAIN AGREEMENTS OF THE PARTIES.
5.1. Treatment of Transfer and Other Taxes.
5.1.1. All stock transfer Taxes, real property transfer Taxes,
sales Taxes, documentary stamp Taxes, recording charges and other similar Taxes,
if any, arising in connection with the transactions contemplated by this
Agreement shall be Transaction Expenses.
5.1.2. Each of the parties hereto shall fully cooperate
(including by maintaining and making available to each other all relevant
records) with each other party with respect to the preparation and filing of any
Tax Returns pursuant to Sections 5.1.1, 5.1.4 and 5.2(i), and resolving any
audit, investigation, litigation or other proceeding relating to Taxes of the
Company for any taxable period ending on or before the Closing Date or the
portion ending at the close of business on the Closing Date of any Straddle
Period.
5.1.3. The Company will, unless prohibited by applicable law,
close the taxable year of the Company as of the close of business on the Closing
Date; provided, however, that no election will be made under Treasury Regulation
Section 1.1502-76(b)(2)(ii)(D). If applicable law does not permit the Company to
close its taxable year on the Closing Date, the Taxes, if any, attributable to a
taxable period of the Company that includes (but does not end on) the Closing
Date (a "Straddle Period") shall be allocated (i) to the period up to and
including the close of business on the Closing Date, and (ii) to the period
subsequent to the Closing Date. Any allocation of income or deductions required
to determine any Taxes attributable to a Straddle Period shall be made pursuant
to the following methodology: (x) Taxes, other than those referred to in clause
(y) below, shall be allocated by means of a closing of the books and records of
the Company as of the close of the Closing Date, provided that exemptions,
allowances or deductions that are calculated on an annual basis (including
depreciation and amortization deductions) shall be allocated between the period
ending on the Closing Date and the period after the Closing Date in proportion
to the number of days in each such period, and (y) property Taxes and ad valorem
Taxes shall be allocated between the period ending on the Closing Date and the
period after the Closing Date in proportion to the number of days in each such
period; provided, however, that any Taxes resulting from any action, omission,
transaction or event that occurs on the Closing Date but after the Closing and
which is not in the Ordinary Course of Business shall be allocated to the period
subsequent to the Closing Date. Notwithstanding anything in this Agreement to
the contrary, the parties acknowledge and agree that any and all compensation
deductions attributable to the transactions contemplated in Section 2.6.4 shall
be allocated to the taxable period of the Company ending on the Closing Date or
the portion ending at the close of business on the Closing Date of any Straddle
Period.
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5.1.4. Parent shall prepare or cause to be prepared all Tax
Returns of the Company for all taxable periods ending on or before the Closing
Date required to be filed after the Closing Date and for all Straddle Periods.
Such returns shall be prepared in a manner consistent with the past practice of
the Company, except to the extent Parent reasonably believes such practice does
not comply with applicable law. Parent shall provide Shareholder Representative
with a copy of all such Tax Returns (together with supporting papers) at least
ten Business Days prior to the due date thereof for Shareholder Representative
to review and approve (such approval not to be unreasonably withheld or
delayed).
5.1.5. Any Tax refund that is received by a Parent Indemnitee
(or with respect to which a Parent Indemnitee is entitled to credit against
Taxes otherwise payable by the Company or Parent Indemnitee) that relates to
Taxes of the Company for taxable periods ending on or before the Closing Date or
the portion ending at the close of business on the Closing Date of any Straddle
Period shall be for the account of the Company Equityholders, except for refunds
attributable to any carryback of a loss or credit (or a portion thereof)
resulting from the carryback of net operating losses incurred during a taxable
period beginning after the Closing Date or the portion ending after the Closing
Date of any Straddle period. Parent shall pay over or cause to be paid over to
Shareholder Representative any such refund or the amount of any such credit
within five Business Days after receipt or entitlement thereto, less (x) any
reasonable out-of-pocket expenses incurred by any Parent Indemnitee to collect
such refund or credit and (y) any Tax payable by any Parent Indemnitee as the
result of receipt of such refund or credit.
5.2. Operation of Business, Related Matters. From the date hereof
through the earlier of the date this Agreement is terminated pursuant to Section
12 and the Closing Date, except as otherwise permitted or required by this
Agreement, the Company will (a) conduct the Business in the Ordinary Course of
Business and substantially as presently operated, (b) use reasonable efforts to
maintain the value of the Business as a going concern, (c) comply in all
material respects with all applicable Legal Requirements, and (d) use reasonable
efforts to (i) preserve the present business operations, organization (including
officers and employees) and goodwill of the Company and (ii) preserve the
present relationships with Persons having business dealings with the Company
(including customers and suppliers). Except as set forth on Schedule 5.2, from
the date hereof and prior to the Closing Date, the Company will not, without the
prior written consent of Parent which, as to subsections (g), (j), (s) and (t)
below, will not be unreasonably withheld or delayed:
(a) enter into any transactions other than on an arms' length basis
with any Affiliate of the Company (other than as contemplated by this
Agreement and transactions in the Ordinary Course of Business);
(b) pay to any director, officer or employee increased salary or other
compensation;
(c) issue, create, incur, assume, guarantee, endorse or otherwise
become liable or responsible with respect to (whether directly,
contingently or otherwise) any Company Debt (including any capital lease);
43
(d) amend the Charter or Bylaws of the Company or sell, lease or
otherwise dispose of any material assets (except for sales or other
dispositions of advertising or inventory in the Ordinary Course of
Business);
(e) enter into or agree to enter into any merger or consolidation with
any Person, and not engage in any business other than the Business;
(f) make any capital expenditure in excess of $50,000, except in the
Ordinary Course of Business consistent with the Company's capital
expenditure budget previously disclosed to Parent;
(g) pay any dividend or other distribution with respect to its capital
stock, or repurchase or otherwise retire for value any shares of its
capital stock or Options or Warrants or effect any recapitalization,
reclassification, stock split, combination or like change in the
capitalization of the Company, or amend the terms of any outstanding
securities of the Company;
(h) make any change in its accounting or Tax reporting principles,
methods, policies or practices;
(i) (i) make, change or revoke any material Tax election or settle or
compromise any income or other material Tax claim or liability, (ii)
prepare or file any income or other material Tax Return (or any amendment
thereof) unless such Tax Return shall have been prepared in a manner
consistent with past practice, except to the extent the Company reasonably
believes such practice does not comply with applicable law, and the Company
shall have provided Parent a copy thereof (together with supporting papers)
at least ten Business Days prior to the due date thereof for Parent to
review and approve (such approval not to be unreasonably withheld or
delayed) or (iii) surrender any right to claim a refund of any Taxes;
(j) except in the Ordinary Course of Business, grant any severance or
termination pay (other than pursuant to policies or agreements in effect as
of the date hereof) or increase the benefits payable under its severance or
termination pay policies or agreements in effect on the date hereof;
(k) issue, sell or otherwise dispose of any capital stock or grant any
option or warrant or other right to purchase or obtain any of its capital
stock, other than issuances of Common Stock (i) upon the exercise of the
Options and Warrants in accordance with their terms and (ii) upon
conversion of the Preferred Stock in accordance with the Company's Charter;
(l) make any capital investment in, any loan to, or any acquisition of
the securities or assets constituting a business of, any other Person;
(m) enter into any employment contract or consulting agreement or
amend in any material respect the terms of any such existing contract or
agreement;
44
(n) adopt or amend in any material respect any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or other
arrangement for the benefit or welfare of any employee, other than as
required by Legal Requirements or in the Ordinary Course of Business;
(o) enter into any equipment lease involving annual payments in excess
of $25,000;
(p) mortgage, pledge or otherwise subject to a Lien any property or
assets other than conditional sales or similar security interests granted
in connection with the lease or purchase of equipment or supplies in the
Ordinary Course of Business;
(q) enter into any transaction or enter into, modify or renew any
Contract which by reason of its size, nature or otherwise is not in the
Ordinary Course of Business;
(r) enter into any Contractual Obligation that restrains, restricts,
limits or impedes the ability of the Company to compete with or conduct any
business or line of business in any geographic area or solicit the
employment of any persons;
(s) terminate, amend, restate, supplement or waive any rights under
any (A) material Contractual Obligation, Lease, Personalty Lease or
Intellectual Property License, other than in the Ordinary Course of
Business or (B) material Permit;
(t) settle or compromise any pending or threatened Action or any claim
or claims for, or that would result in a loss of revenue of, an amount that
could, individually or in the aggregate, reasonably be expected to be
greater than $50,000;
(u) take any action which would adversely affect the ability of the
parties to consummate the transactions contemplated by this Agreement;
(v) enter into any transaction or Contractual Obligation, whether in
the Ordinary Course of Business or otherwise, that (i) is with a publishing
company or (ii) involves a print publishing product, other than sales of
web-based advertising inventory in the Ordinary Course of Business; and
(w) enter into any Contractual Obligation to do any of the actions
referred to in this Section 5.2.
Parent and Merger Sub shall respond with reasonable promptness to any
and all requests by the Company for consent(s) for the Company to take any of
the actions specified in this Section 5.2.
45
5.3. Preparation for Closing. Parent and Merger Sub on the one hand
and the Company on the other hand will each use all reasonable efforts to bring
about the fulfillment of each of the conditions precedent to the obligations of
the other set forth in this Agreement, subject to the following:
5.3.1. Intentionally deleted.
5.3.2. Consents. Prior to the Closing Date, the Company shall
use reasonable efforts in securing written consents or waivers from, and provide
all notices to, all Persons specified in Schedule 3.1.3, in connection with, the
transactions contemplated by this Agreement (except for such matters covered by
Section 5.3.1). All such consents, waivers, approvals and notices shall be in
writing and in form and substance reasonably satisfactory to Parent, and
executed counterparts of such consents, waivers and approvals shall be delivered
to Parent promptly after receipt thereof, and copies of such notices shall be
delivered to Purchaser promptly after the making thereof. Notwithstanding
anything to the contrary in this Agreement, neither Parent nor any of its
Affiliates (which for purposes of this sentence shall include the Company) shall
be required to pay any amounts in connection with obtaining any consent, waiver
or approval.
5.3.3. Updating of Disclosure Schedules; Waiver of Claims.
Subject to the provisions of this Section 5.3.3, not less than five (5) Business
Days prior to the proposed Closing Date , the Company shall have the right to
update the Schedules (either by amending the existing Schedules or by adding new
Schedules thereto) with respect to any events, facts or circumstances first
arising or occurring after the date hereof by delivery of such amended or
supplemental disclosure schedules to the Parent (the "Updated Schedules") all of
which Updated Schedules shall be delivered on a single occasion. In the event
that the Company delivers the Updated Schedules to Parent, and the aggregate
amount of Losses reasonably likely to be incurred by the Parent Indemnitees
based upon or resulting from the matters set forth in the Updated Schedules
exceeds $1,500,000, then such disclosure shall be deemed to have disclosed the
occurrence of a Material Adverse Effect for purposes of Sections 3.3.4, 6.1 and
6.4 and Parent shall have the option, in its sole and absolute discretion, to
terminate this Agreement pursuant to Section 11.1(f) by delivery of written
notice to the Company within five (5) Business Days of its receipt of the
Updated Schedules. If Parent elects not to terminate this Agreement in such
circumstance, upon Closing, the Updated Schedules shall have the effect of
amending and supplementing, as applicable, the Schedules as if such amendment or
supplement were set forth on the Schedules delivered on the date of this
Agreement, and the Parent Indemnitees shall have no right to indemnification
with respect to Losses relating to such event, fact or circumstance. In the
event that the aggregate amount of Losses reasonably likely to be incurred by
the Parent Indemnitees based upon or resulting from the matters set forth in the
Updated Schedules is less than $1,500,000, the Updated Schedules shall have the
effect of (1) disclosing breaches that do not have a Material Adverse Effect,
(2) their existence shall not constitute a basis for Parent to terminate this
agreement pursuant to Section 11.1(f) and (3) the occurrence of the closing
shall not waive any rights that the Parent Indemnitees may have for failure of
the representations and warranties to be true and correct at closing in
accordance with Section 6.1 or Section 9. Except for the purpose of this Section
5.3.3 and the matters specifically contemplated herein, the parties to this
Agreement acknowledge and agree that the amount of $1,500,000 shall not create
any presumption that a fact, event, occurrence, condition or development
constitutes a Material Adverse Effect for other purposes under this Agreement.
46
5.3.4. Notification of Certain Events. From the date hereof
through the Closing, the Company shall give prompt notice to Parent and Parent
shall give prompt notice to the Company of (a) the occurrence, or failure to
occur, of any event which occurrence or failure would be likely to cause any of
the Company's or Parent's respective representations or warranties contained in
this Agreement to be untrue or inaccurate in any material respect and (b) any
material failure of the Company or Parent to comply with or satisfy any of its
respective covenants, conditions or agreements to be complied with or satisfied
by it under this Agreement; provided, however, that such disclosure shall not be
deemed to cure any breach of a representation, warranty, covenant or agreement,
or to satisfy any condition.
5.4. Confidentiality Agreement. The Confidentiality Agreement dated
November 14, 2005, (the "Confidentiality Agreement"), by and between Parent and
the Company is hereby confirmed and acknowledged as a continuing obligation of
the parties and each of the parties hereto agrees to, and to cause each of its
Affiliates (including with respect to Parent following the closing, the Company)
to, keep any information provided hereunder or in connection with this Agreement
or the transactions contemplated hereby confidential in accordance with the
terms hereof.
5.5. Intentionally deleted.
5.6. Directors' and Officers' Indemnification and Insurance.
5.6.1. From the Effective Time through the sixth anniversary of
the date on which the Effective Time occurs, the Surviving Corporation shall,
and Parent shall cause the Surviving Corporation to, indemnify and hold harmless
each present (as of the Effective Time) and former officer or director of the
Company (the "D&O Indemnified Parties"), against all Losses incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of actions taken
by them in their capacity as officers or directors at or prior to the Effective
Time (including this Agreement and the transactions and actions contemplated
hereby), whether asserted or claimed prior to, at or after the Effective Time,
to the fullest extent permitted under applicable law. Each D&O Indemnified Party
will be entitled to advancement of reasonable expenses incurred in the defense
of any claim, action, suit, proceeding or investigation from the Surviving
Corporation to the same extent such persons are entitled to advancement of
expenses pursuant to the Charter or Bylaws of the Company as in effect on the
date hereof; provided that the person to whom expenses are advanced provides an
undertaking to repay such advances if either (i) to the extent required by
applicable Legal Requirements or (ii) if it is ultimately determined that such
person is not entitled to indemnification.
5.6.2. The Charter and By-laws of the Surviving Corporation or
any successor shall contain provisions that are no less favorable with respect
to indemnification, advancement of expenses and exculpation of former or present
directors and officers as are set forth in the Company's Articles of
Incorporation and By-laws as of the date of this Agreement.
47
5.6.3. The Surviving Corporation shall maintain, at no expense
to the beneficiaries, in effect for six years from the Effective Time, the
current directors' and officers' liability insurance policies maintained by the
Company (provided that Parent or the Surviving Corporation may (i) substitute
therefor policies of at least the same coverage containing terms and conditions
which are, in the aggregate, no less advantageous to any beneficiary thereof or
(ii) arrange for "tail" coverage for such six (6)-year period under the
Company's current directors' and officers' liability insurance policies) with
respect to matters existing or occurring prior to the Effective Time; provided,
however, that during this period, the Surviving Corporation shall not be
required to maintain any coverage in excess of the amount that can be obtained
for a premium of 200% of the current annual premium paid by the Company for its
existing coverage.
5.7. Further Assurances. Each party, upon the request from time to
time of any other party hereto after the Closing, and at the expense of the
requesting party but without further consideration, will do each and every act
and thing as may be necessary or reasonably requested to consummate the
transactions contemplated hereby in an orderly fashion.
5.8. Financial Reporting. The Company will deliver to Parent promptly
upon availability following each month end after the date of this Agreement, but
no later than forty-five (45) days thereafter, an unaudited balance sheet as of
such month end and statements of operations, shareholders' equity and cash
flows.
5.9. Exclusivity.
5.9.1. Unless this Agreement shall have been terminated in
accordance with its terms, the Company shall not, directly or indirectly,
through any Affiliate, officer, director, Shareholder, agent or otherwise (the
"Representatives"): (a) solicit, initiate, discuss or encourage the submission
of any proposal or offer from any person relating to (i) any acquisition or
purchase of all or a majority of the equity ownership or assets of the Company
or (ii) any business combination with the Company involving a change in control
of the equity ownership or assets of the Company (collectively, an "Acquisition
Transaction"); or (b) participate in any negotiations regarding, discuss with or
furnish to any other person any information with respect to, or otherwise
cooperate or negotiate in any way with, or assist or participate in, facilitate
or encourage, any effort or attempt by any other person to do or seek any of the
foregoing.
5.9.2. The Company shall notify Parent orally and in writing
promptly (but in no event later than 24 hours) after receipt by the Company of
any proposal or offer (oral or in writing) from any Person other than Parent to
effect an Acquisition Transaction or any request for non-public information
relating to the Company or for access to the properties, books or records of the
Company by any Person other than Parent. Such notice shall indicate the identity
of the Person making the proposal or offer, or intending to make a proposal or
48
offer or requesting non-public information or access to the books and records of
the Company, the material terms of any such proposal or offer, or modification
or amendment to such proposal or offer and copies of any written proposals or
offers or amendments or supplements thereto. The Company shall keep Parent
informed, on a current basis, of any material changes in the status and any
material changes or modifications in the material terms of any such proposal,
offer, indication or request.
5.9.3. The Company shall (and the Company shall cause its
Representatives to) immediately cease and cause to be terminated any existing
discussions or negotiations with any Persons (other than Parent) conducted
heretofore with respect to any Acquisition Transaction. The Company agrees not
to release any third party from the confidentiality and standstill provisions of
any agreement to which the Company is a party.
5.10. Access to Information. The Company shall afford to Parent and
its accountants, counsel, financial advisors and other representatives,
reasonable access, during normal business hours upon reasonable notice
throughout the period prior to the Closing, to the Company's properties and
facilities (including all owned or leased real property and the buildings,
structures, fixtures, appurtenances and improvements erected, attached or
located thereon), books, financial information (including working papers and
data in the possession of the Company's independent public accountants, internal
audit reports, and "management letters" from such accountants with respect to
the Company's systems of internal control), Contractual Obligations and records
of the Company and, during such period, shall furnish promptly such information
concerning the businesses, properties and personnel of the Company as Parent
shall reasonably request; provided, however, such investigation shall not
unreasonably disrupt the Company's operations. Prior to the Closing, the Company
shall generally keep Parent informed as to all material matters involving the
operations and businesses of the Company. The Company shall authorize and direct
the appropriate directors, managers and employees to discuss matters involving
the operations and business of the Company with representatives of Parent. All
nonpublic information provided to, or obtained by, Parent in connection with the
transactions contemplated hereby shall be "Confidential Information" for
purposes of the Confidentiality Agreement; provided that Purchaser and the
Company may disclose such information as may be necessary in connection with
seeking necessary consents and approvals as contemplated hereby. Notwithstanding
the foregoing, the Company shall not be required to disclose any information if
such disclosure would contravene any applicable Legal Requirement or violate the
confidentiality provisions of any Contractual Obligation; provided that the
Company shall use commercially reasonable efforts to obtain a waiver of any such
provision. Subject to Section 5.3.3, no information provided to or obtained by
Parent pursuant to this Section 5.10 shall limit or otherwise affect the
remedies available hereunder to Parent (including Parent's right to seek
indemnification pursuant to Section 9), or the representations or warranties of,
or the conditions to the obligations of, the parties hereto.] Prior to the
Closing, (i) Parent and Merger Sub may contact any suppliers to, or customers
of, the Company and (ii) Parent and Merger Sub may perform investigations of the
properties or facilities of the Company.
6. CONDITIONS TO THE OBLIGATION TO CLOSE OF PARENT. The obligations
of Parent to consummate the Closing under this Agreement are subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
compliance with which, or the occurrence of which, may be waived prior to the
Closing by Parent in its sole discretion:
49
6.1. Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and of the Shareholders in
the Support Agreement shall be true and correct (disregarding all materiality or
Material Adverse Effect qualifications and exceptions or any similar standard or
qualification contained therein) as of the date of this Agreement and as of the
Closing as if made at and as of that time (except for representations and
warranties made only as of a specified date, which shall be true and correct as
of the specified date), except to the extent that all failures of such
representations and warranties to be so true and correct (disregarding all
materiality or Material Adverse Effect qualifications and exceptions or any
similar standard or qualification contained therein), individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect or
prevent, materially delay or materially impede the ability of the Company to
timely consummate the Merger or the other transactions contemplated by this
Agreement.
6.2. Performance of Agreements. The Company shall have performed and
satisfied all covenants and agreements required by this Agreement to be
performed or satisfied by them at or prior to the Closing.
6.3. Legality; Governmental Authorization; Litigation. The
acquisition of the Shares and the consummation of the other transactions
contemplated hereby, shall not be prohibited by any Legal Requirement. No Action
shall have been instituted at or prior to the Closing by any Person other than
by Parent, Merger Sub or any Affiliate thereof, or instituted by any
Governmental Authority, relating to this Agreement or any of the transactions
contemplated hereby, which has a reasonable likelihood of success and the result
of which would prevent or make illegal the consummation of any such transaction.
6.4. Closing Certificate. The Company shall have delivered to Parent
a certificate to the effect that each of the conditions specified in Sections
6.1, 6.2 and 6.3 has been satisfied in all respects.
6.5. Termination of Certain Agreements. The Shareholders Agreement
and the Investors' Rights Agreement among the Company and certain Shareholders
shall have been terminated and shall be of no further force and effect.
6.6. Dissenting Shares. The number of Dissenting Shares as of the
Closing Date shall not exceed 5% of the total number of Company Shares.
6.7. Consents. The Company shall have obtained those consents listed
on Schedule 3.1.3 in form and substance satisfactory to Parent and copies
thereof shall have been delivered to Parent.
6.8. Employment Agreements. The Employment Agreements by the
employees set forth on Schedule D shall be in full force and effect and shall
not have been repudiated by any such employee as of Closing. Each employee
listed on Schedule D shall have affirmed in writing its representations and
agreements thereunder and all of such employees shall be willing and able to
perform in accordance with such employment agreements.
50
6.9. Legal Opinion. Parent shall have received from Xxxxxxx Coie LLP,
counsel to the Company, a legal opinion in reasonable and customary form.
6.10. Escrow Agreement. The parties to the Escrow Agreement other
than Parent shall have executed and delivered counterpart signature pages to
Parent of the Escrow Agreements in substantially the form or Exhibit C.
6.11. No Material Adverse Effect. There shall not have been or
occurred any event, change, occurrence or circumstance that, individually or in
the aggregate with any other events, changes, occurrences or circumstances, has
had or could reasonably be expected to have a Material Adverse Effect since the
Balance Sheet Date.
6.12. FIRPTA. Parent shall have received from the Company a statement
that complies with Treasury Regulation Section 1.1445-2(c)(3).
6.13. Financial Statements. The Company shall have delivered the
audited balance sheet of the Company as at December 31, 2005 and the related
audited statements of income and cash flows for the year then ended, and the
accompanying report of the Company's independent auditors shall not be qualified
in any material respect.
6.14. General. All corporate proceedings required to be taken on the
part of the Company in connection with the transactions contemplated by this
Agreement shall have been taken. Parent shall have received copies of such
officers' certificates, good standing certificates, incumbency certificates and
other customary closing documents as Parent may reasonably request in connection
with the transactions contemplated hereby.
7. CONDITIONS TO THE OBLIGATION TO CLOSE OF THE COMPANY. The
obligations of the Company consummate the Closing under this Agreement are
subject to the satisfaction, at or prior to the Closing, of all of the following
conditions, compliance with which, or the occurrence of which, may be waived
prior to the Closing by the Company in its sole discretion:
7.1. Representations and Warranties. The representations and
warranties of Parent and Merger Sub contained in this Agreement shall be true
and correct (disregarding all materiality or material adverse effect
qualifications and exceptions or any similar standard or qualification contained
therein) as of the date of this Agreement and as of the Closing Date as if made
at and as of that time (except for representations and warranties made only as
of a specified date, which shall be true and correct as of the specified date),
except to the extent that all failures of such representations and warranties to
be so true and correct (disregarding all materiality or material adverse effect
qualifications and exceptions or any similar standard or qualification contained
therein), individually or in the aggregate, would not reasonably be expected to
have a material adverse effect or prevent, materially delay or materially impede
the ability of Parent or Merger Sub to timely consummate the Merger or the other
transactions contemplated by this Agreement.
7.2. Performance of Agreements. Parent and Merger Sub shall have
performed and satisfied all covenants and agreements required by this Agreement
to be performed or satisfied by Parent and Merger Sub at or prior to the
Closing.
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7.3. Legality; Government Authorization; Litigation. The Company's
consummation of the transactions contemplated hereby shall not be prohibited by
any Legal Requirement. No Action shall have been instituted at or prior to the
Closing by any Person other than by the Company, or instituted by any
Governmental Authority, relating to this Agreement or any of the transactions
contemplated hereby, which has a reasonable likelihood of success and the result
of which would prevent or make illegal the consummation of any such transaction.
7.4. Closing Certificate. Parent shall have delivered to the Company
a certificate to the effect that each of the conditions specified in Sections
7.1, 7.2 and 7.3 has been satisfied in all respects.
7.5. Termination of Agreements. The Shareholders Agreement shall have
been terminated and shall be of no further force and effect. All outstanding
letters of credit shall be cancelled and replaced with letters of credit of
Parent.
7.6. Legal Opinion. The Shareholders Representative shall have
received from the General Counsel to Parent, a legal opinion in reasonable and
customary form.
7.7. Escrow Agreement. The parties to the Escrow Agreement other than
the Company shall have executed and delivered counterpart signature pages to the
Company of the Escrow Agreement in substantially the form of Exhibit C.
7.8. General. All corporate proceedings required to be taken by
Parent and Merger Sub in connection with the transactions contemplated by this
Agreement shall have been taken. The Company shall have received copies of such
officers' certificates, good standing certificates, incumbency certificates and
other customary closing documents as the Company may reasonably request in
connection with the transactions contemplated hereby.
8. EMPLOYMENT AND EMPLOYEE BENEFITS ARRANGEMENTS.
8.1. Compensation of Company Employees. The Parent shall cause the
Surviving Corporation to employ on the Closing Date, at the same rate of pay as
in effect immediately preceding the Closing Date, all Company Employees.
8.2. Substantially Equivalent Benefits. With respect to the Company
Plans in effect immediately prior to the Closing Date, Parent shall for a period
of not less than one (1) year following the Closing Date continue to provide or
cause to be provided such plans, programs, agreements or arrangements on behalf
of the Company Employees so as to provide, in the aggregate, employee benefits
which are substantially equivalent to the benefits provided to such individuals
under the Company Plans immediately prior to the Closing Date; provided,
however, that the foregoing shall not limit the obligation of the Company to
maintain a Company Plan which, pursuant to an existing contract, must be
maintained for a period longer than a year.
8.3. Bonus Plans. Parent agrees to honor, or shall cause its
subsidiaries (including the Surviving Corporation) to honor, from and after the
Effective Time any bonus payments for the period of Company's 2006 fiscal year
ending on June 30, 2006 under the bonus plans set forth on Schedule 3.12
(without regard to the Company's performance after the Closing).
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8.4. Recognition of Service. For all purposes with respect to the
401(k) Partnership of The Reader's Digest Association, Inc. and Parent's
vacation program, Parent shall recognize, or shall cause its subsidiaries
(including the Surviving Corporation) to recognize, each Company Employee's
service with the Company prior to the Effective Time for purposes of such plans
provided, however, that such recognition shall not result in a duplication of
benefits.
8.5. Welfare Plans. With respect to any welfare plan in which
employees of the Company are eligible to participate after the Effective Time,
Parent shall, or shall cause its subsidiaries (including the Surviving
Corporation) to (i) waive all limitations as to preexisting conditions,
exclusions and waiting periods with respect to participation and coverage
requirements applicable to such employees to the extent such conditions were
satisfied under the welfare plans of the Company prior to the Effective Time and
(ii) provide each such employee with credit for any co-payments and deductibles
paid prior to the Effective Time in satisfying any analogous deductible or
out-of-pocket requirements to the extent applicable under any such plan.
8.6. Defined Contribution 401(k) Plan. Prior to the Effective Time,
the Company shall, if requested to do so by Parent, terminate its defined
contribution 401(k) plan. Parent shall provide, or shall cause its subsidiaries
(including the Surviving Corporation) to provide, that the Company Employees are
eligible to participate in a defined contribution 401(k) plan immediately
following the Effective Time and that such defined contribution plan shall
accept "eligible rollover distributions" for Company Employees from a terminated
Company defined contribution 401(k) plan.
8.7. WARN. The Parent shall be responsible for any Losses which may
be incurred under WARN or under any state or local law with respect to plant
closing, layoff or relocation or the like or with respect to any obligation to
provide notice, payment or any other benefit as a result of or arising out of
any termination of employment.
8.8. Third-Party Rights. No provision of this Section 8 shall create
any third-party beneficiary rights in any Company Employee or other Person
(including without limitation any heir, beneficiary, executor, administrator or
representative of a Company Employee or any other Person claiming through a
Company Employee) or the Company with respect to employment or any term or
condition thereof.
9. INDEMNIFICATION.
9.1. Company's Indemnification. Subject to the limitations set forth
in this Section 9, from and after the Closing, Parent, the Surviving Corporation
and each of its stockholders, members, officers, directors, employees, agents
and Affiliates (collectively, the "Parent Indemnitees") shall be indemnified and
held harmless by the Company Equityholders, to the fullest extent permitted by
law, from, against and in respect of Losses arising from or related to any of
the following:
(a) any breach or default in performance by the Company, the
Shareholder Representative or any Company Equityholder of any covenant or
agreement contained in this Agreement, the Support Agreement or in any
Letter of Transmittal or any claim by any Broker against any Parent
Indemnitee in connection with its claimed engagement by the Company or any
Company Equityholder in connection with the Merger (other than for amounts
included as Transaction Expenses);
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(b) any breach of, or any inaccuracy in, any representation or
warranty when made by the Company in this Agreement, by any Shareholder in
the Support Agreement or, in either case, as of the Closing or in any
certificate, instrument or other document delivered by the Company or any
Company Equityholder (including in such Company Equityholder's Letter of
Transmittal) pursuant thereto;
(c) the exercise of any Company Equityholder of any rights relating to
Dissenting Shares;
(d) any matter listed on Schedule 9.1(d);
(e) any and all Taxes (or the non-payment thereof) of the Company (or
any predecessor thereof) (i) for any taxable period of the Company ending
on or prior to the Closing Date and (ii) for the portion ending at the
close of business on the Closing Date of any Straddle Period (determined in
accordance with Section 5.1.3); or
(f) any claim by any Company Equityholder that the Merger
Consideration paid to such Company Equityholder is less than what such
Company Equityholder is entitled to receive in accordance with the
Company's Charter and the WBCA.
Notwithstanding anything in this Agreement to the contrary, Parent Indemnitees
shall be indemnified for a breach of, or inaccuracy in, the representations and
warranties set forth in Section 3.11(v) only to the extent that the amount of
any net operating losses for federal income tax purposes or the applicable
limitations on any such losses under Sections 382 and 383 of the Code is
determined to be 90% or less of the amount set forth on Schedule 3.11(v)(i) or
(ii), as the case may be.
9.2. Monetary Limitations. Except as for matters set forth in Section
9.1(d) and (e) and as provided below, the aggregate amount for which Parent
Indemnitees shall be indemnified for Losses under Section 9.1 shall in no event
exceed the Indemnity Escrow Amount. Notwithstanding the foregoing, Parent
Indemnitees shall be indemnified only to the extent that the aggregate of all
such individual Losses incurred or sustained by Parent Indemnitees with respect
to which Parent Indemnitees are entitled to indemnification under Section 9.1(b)
(or Section 9.1(a), solely with respect to a breach of any covenant in Section
5.2) exceeds $660,000 (the "Basket") and, in such event, the indemnifying party
shall be required to pay the entire amount of all such Losses above $330,000;
provided, however, that the Indemnity Escrow Amount and the Basket limitations
shall not apply to Losses related to the failure to be true and correct of any
of the representations and warranties set forth in Section 3.1.2 (Approvals),
Section 3.1.4. (Capitalization), Section 3.11 (Taxes), and the representations
54
and warranties as to capitalization, title and ownership of Company Securities
made by each Company Equityholder in the Support Agreement or their respective
Letters of Transmittal (collectively, the "Fundamental Representations"). For
purposes of determining the breach of any representation or warranty for
purposes of Section 9.1(b), any covenant in Section 5.2, or the amount of any
Loss suffered by a Patent Indemnitee, "materiality", "Material Adverse Effect"
and similar qualifications in Section 3, the Support Agreement or any Letter of
Transmittal or other certificate or document shall be ignored.
9.3. Limitations on Direct Company Equityholder Claims.
Notwithstanding any other provision of this Agreement, in no event shall: (i) a
Company Equityholder be liable for a breach of any other Company Equityholder's
representations or warranties or covenants contained in the Support Agreement or
its Letter of Transmittal or (ii) any Company Equityholder's liability for
indemnification under this Agreement exceed such Company Equityholder's pro rata
share of the Merger Consideration actually paid to such Company Equityholder
pursuant to this Agreement.
9.4. Loss Mitigation Limitations. The amount of Losses otherwise
eligible for indemnification under this Section 9 shall be reduced by (a) the
amount of any insurance proceeds actually recovered by any Parent Indemnitee in
excess of Losses as to which such Parent Indemnitee is not fully indemnified
hereunder; provided that any increased premiums or other costs incurred as a
result of making a claim under any such insurance shall also constitute Losses
hereunder, and provided further that no Parent Indemnitee shall be obligated to
make a claim for insurance recovery if there is a reasonable risk that Parent
Indemnitee will become un-insurable for any risks as a result, (b) any Tax
Benefits any Parent Indemnitee is reasonably expected to realize as a result of
the incurrence of such Losses no later than the end of the fifth taxable year
following the taxable year in which any such Loss is incurred using an
appropriate discount rate to reflect benefits reasonably expected to be realized
in future years by reason of such Losses, in each case computed by reference to
the highest federal and applicable state income tax rates reasonably expected to
be applicable to the Parent Indemnitee in such future years and (c) any actual
recovery from third parties (less the fees and expenses incurred to obtain such
proceeds) in excess of Losses as to which any Parent Indemnitee is not fully
indemnified hereunder. If any Losses are paid to Parent Indemnitee from the
Indemnity Escrow Amount before any such insurance proceeds are received, the
insurance proceeds as to which the Shareholders are entitled to the benefits
hereunder shall be promptly deposited by the Surviving Corporation with the
Escrow Agent and paid out in accordance with the Escrow Agreement. The
Shareholder Representative and the Shareholders waive any rights to claim
subrogation to any rights of any Parent Indemnitee.
9.5. Time Limitations. Regardless of any investigation made at any
time by or on behalf of any party hereto or of any information any party may
have in respect thereof, and except as set forth herein, no claim may be made or
suit instituted pursuant to Section 9.1(b) (or under Section 9.1(a) with respect
to breach of any covenant set forth in Section 5.2) after the earlier of (a)
eighteen (18) months following the Closing Date or (b) thirty (30) days after
the Parent's independent accountants have delivered their Report of the
Independent Auditors to the Parent for the fiscal year ended June 30, 2007;
provided, however, that each Fundamental Representation shall survive the
Closing until ninety (90) days following the expiration of the applicable
statute of limitations with respect to the particular matter that is the subject
matter thereof and; provided further that the representations and warranties set
55
forth in Sections 3.6(b)(i) and 3.6(c)(i) as to Patents and Marks shall survive
until twelve (12) months following the Closing Date. For purposes of this
Section 9, any claim for indemnification shall be duly made by delivering
written notice of such claim describing with reasonable specificity (in light of
the facts then known) the amount and basis of such claim to the Shareholder
Representative prior to the applicable limitation date specified in this Section
9.5.
9.6. Escrow Funds. Parent agrees that, except with respect to
breaches of Fundamental Representations, any and all amounts payable by the
Company Equityholders as a result of any claim by Parent Indemnitee for
indemnification under Section 9.1(b) (or Section 9.1(a), solely with respect to
breach of any covenant set forth in Section 5.2) shall be paid out of the
Indemnity Escrow Amount established in accordance with the terms of the Escrow
Agreement and, except with respect to breaches of Fundamental Representations,
the Indemnity Escrow Amount shall be Parent Indemnitee's sole and exclusive
source of payment for any and all claims for indemnification under Section
9.1(b) (or Section 9.1(a) solely with respect to breach of any covenant set
forth in Section 5.2) from and after the Closing. Unless Parent reasonably
believes that the Indemnity Escrow Amount will not be sufficient to satisfy
anticipated indemnification claims that must be satisfied exclusively from the
Indemnity Escrow Amount, Parent Indemnitees shall have the right to be paid for
breach of Fundamental Representations or for indemnification in Section 3 of the
Support Agreement from the Indemnity Escrow Amount, other than for breaches by
any Company Equityholder contained in the Support Agreement or a Letter of
Transmittal. Parent Indemnitees shall be obligated to pursue any claim for
Losses for breaches of Fundamental Representations or pursuant to Section 2.9.7
once the Merger Price Escrow Amount is reduced to zero, first from the Indemnity
Escrow Amount until such amount is no longer available or exhausted, and only
then from the Company Equityholders, subject to the limits in Section 9.3.
9.7. Third Party Claims. Promptly after the receipt by any Parent
Indemnitee of notice of the commencement of any action against such Parent
Indemnitee by a third party, such Parent Indemnitee shall give the Shareholder
Representative written notice thereof in reasonable detail in light of the
circumstances then known to such Parent Indemnitee. The failure to give such
notice shall not relieve the Shareholder Representative from any obligation
hereunder except where, and then solely to the extent that, such failure
actually and materially prejudices the rights of the Shareholder Representative.
If the claim (x) (I) is subject to the Basket and in excess thereof and (II) is
not more than (or is not reasonably expected to be more than) 110% of the
then-remaining Indemnity Escrow Amount or (y) is not subject to the Basket or
limited by the Indemnity Escrow Amount, the Shareholder Representative shall
have the right to defend such claim, with such costs to be deducted from the
Indemnity Escrow and with counsel of its choice reasonably satisfactory to
Parent Indemnitee, provided that (i) such claim does not seek an injunction or
other equitable relief as a primary remedy, and is not a criminal claim and (ii)
the Shareholder Representative conducts the defense of such claim actively and
diligently. If the Shareholder Representative assumes the defense of such claim,
Parent Indemnitee agrees to reasonably cooperate in such defense so long as
Parent Indemnitee is not materially prejudiced thereby. So long as the
Shareholder Representative is conducting the defense of such claim actively and
diligently, Parent Indemnitee may retain separate co-counsel at its sole cost
and expense and may participate in the defense of such claim. Neither the
56
Shareholder Representative nor any Parent Indemnitee will consent to the entry
of any judgment or enter into any settlement with respect to such claim without
the prior written consent of the other (which consent will not be unreasonably
withheld or delayed, provided that such consent shall be granted in connection
with any settlement (A) containing a full release of the party from whom such
consent is so requested and (B) in the case of a consent from a Parent
Indemnitee, involving only monetary damages fully paid by the Shareholders or
from the Indemnity Escrow Amount). Notwithstanding the foregoing, a Parent
Indemnitee shall be entitled to participate with separate counsel at the expense
of the Company Equityholders if (i) so requested by Shareholder Representative
or (ii) in the reasonable opinion of counsel to Parent Indemnitee, a conflict or
potential conflict exists between the Company Equityholders and Parent
Indemnitee. In the event the claim is subject to recovery only from the
Indemnity Escrow Amount but is more than (or is reasonably expected to be more
than) 110% of the amount then remaining thereunder, or Shareholder
Representative does not or ceases to conduct the defense of such claim actively
and diligently, Parent Indemnitee may defend against and, with the prior written
consent of the Shareholder Representative (which consent shall not be
unreasonably withheld or delayed), consent to the entry of any judgment or enter
into any settlement with respect to, such claim. Regardless of which party shall
assume the defense of such claim, each party shall provide to the other parties
on request all information and documentation reasonably necessary to support and
verify any Losses which give rise to such claim for indemnification and shall
provide reasonable access to all books, records and personnel in their
possession or under their control which would have a bearing on such claim.
9.8. Certain Other Indemnity Matters. The sole and exclusive remedies
of Parent Indemnitees as against any Company Equityholder from and after the
Closing with respect to any and all claims of any kind whatsoever relating to
breaches of representations and warranties under this Agreement or in any Letter
of Transmittal shall be pursuant to the indemnification provisions set forth in
this Section 9 and the Indemnity Escrow Amount, except in connection with any
claim of fraud. In furtherance of the foregoing, Parent hereby waives, to the
fullest extent permitted under applicable law, and agrees not to assert and to
cause each of the other Parent Indemnitees not to assert in any action or
proceeding of any kind, any and all rights, claims and causes of action it may
now or hereafter have against any party hereto and any of their respective
Affiliates and their respective members, partners, stockholders, officers,
directors, employees, agents and representatives and their respective Affiliates
relating to breaches of representations and warranties in this Agreement or in
any Letter of Transmittal, other than claims for indemnification asserted as
permitted by and in accordance with the provisions set forth in this Section 9
(including any such rights, claims or causes of action arising under or based
upon common law or other Legal Requirements) or in connection with any claim of
fraud. In no event shall any party be liable for punitive damages by reason of a
breach of any representation, warranty, covenant or other provision contained in
this Agreement or in any Schedule or certificate or other agreement delivered
pursuant hereto. Any and all expenses incurred by the Shareholder Representative
in connection with claims for indemnification under this Section 9 shall be paid
exclusively from and limited to the Indemnity Escrow Amount.
9.9. Tax Treatment of Indemnity Payments. The Company Equityholders
and Parent agree to treat any indemnity payment made pursuant to this Section 9
as an adjustment to the Purchase Price for all income Tax purposes, except as
may otherwise be required by law.
10. CONSENT TO JURISDICTION; JURY TRIAL WAIVER.
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10.1. CONSENT TO JURISDICTION. WITH RESPECT TO ANY ACTION OR CLAIM
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY, THE PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY (i) AGREE AND
CONSENT TO BE SUBJECT TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES
DISTRICT COURT LOCATED IN SEATTLE, WASHINGTON (AND IN THE ABSENCE OF FEDERAL
JURISDICTION, THE PARTIES CONSENT TO BE SUBJECT TO THE EXCLUSIVE JURISDICTION OF
THE STATE COURTS LOCATED IN KING COUNTY, WASHINGTON), (ii) AGREE NOT TO BRING
ANY ACTION RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY IN
ANY OTHER COURT (EXCEPT TO ENFORCE THE JUDGMENT OF SUCH COURTS), (iii) AGREE NOT
TO OBJECT TO VENUE IN SUCH COURTS OR TO CLAIM THAT SUCH FORUM IS INCONVENIENT
AND (iv) AGREE THAT NOTICE OR THE SERVICE OF PROCESS IN ANY PROCEEDING SHALL BE
PROPERLY SERVED OR DELIVERED IF DELIVERED IN THE MANNER CONTEMPLATED BY SECTION
12.5.
10.2. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY
APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF THE PARTIES HERETO HEREBY WAIVES
AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR
OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR
ACTION CLAIM , CAUSE OF ACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE),
INQUIRY, PROCEEDING OR INVESTIGATION ARISING OUT OF OR BASED UPON THIS AGREEMENT
OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW
EXISTING OR HEREAFTER ARISING. PARENT ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY
THE COMPANY THAT THIS SECTION 11.2 CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH
THE COMPANY IS RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT AND ANY
OTHER AGREEMENTS RELATING HERETO OR CONTEMPLATED HEREBY. ANY PARTY HERETO MAY
FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 11.2 WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO
TRIAL BY JURY.
11. TERMINATION.
11.1. Termination of Agreement. This Agreement may be terminated by
the parties only as provided below:
(a) Parent, Merger Sub and the Company may terminate this Agreement by
mutual written consent at any time prior to the Closing.
(b) Either Parent or Merger Sub may terminate this Agreement by
delivering written notice to the Company at any time prior to the Closing
in the event (i) the Company or the Shareholder Representative is in
material breach of any representation, warranty, covenant or agreement
contained in this Agreement, (ii) any Shareholder is in material breach of
the Support Agreement or (iii) the Company or any employee of the Company
listed on Schedule D is in material breach of his or her Employment
Agreement, Parent has notified the Company of the breach and such breach
has continued without cure for a period of thirty (30) days after delivery
of such notice of breach, and there is a reasonable likelihood that such
breach will result in an inability of the Company to satisfy the conditions
set forth in Section 6.
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(c) The Company may terminate this Agreement by delivering written
notice to Parent at any time prior to the Closing in the event Parent or
Merger Sub is in material breach of any representation, warranty, covenant
or agreement contained in this Agreement, the Company has notified Parent
of the breach and such breach has continued without cure for a period of
thirty (30) days after delivery of such notice of breach, and there is a
reasonable likelihood that such breach will result in an inability of
Parent to satisfy the conditions set forth in Section 7.
(d) At any time on or after May 31, 2006 if the Closing of the
transactions contemplated by this Agreement shall not have occurred by such
date, the Company may terminate this Agreement by delivering written notice
to Parent, and Parent or Merger Sub may terminate this Agreement by
delivering written notice to the Company; provided, however, that no party
may terminate this Agreement pursuant to this Section 11.1(d) if the
failure to consummate the transactions contemplated by this Agreement on or
before such date resulted from such party's breach of any representation or
warranty made by it herein or the failure of such party to fulfill any
covenant that is required to be fulfilled by it prior to Closing; and
provided further that if the failure to consummate the Closing by such date
is due to the failure to satisfy the condition set forth in Section 7.3, in
which event, so long as the failure to satisfy such condition is not due to
any action or failure to act by Parent, Parent may at its option extend
such date for an additional period of up to one month.
(e) By the Company or Parent if there shall be in effect a final
nonappealable Governmental Order of a Governmental Authority of competent
jurisdiction restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated hereby; it being agreed that,
subject to the last sentence of Section 5.3.1. hereof, the parties hereto
shall promptly appeal any adverse determination which is not nonappealable
(and pursue such appeal with reasonable diligence); provided, however, that
the right to terminate this Agreement under this Section 12.1(e) shall not
be available to a party if such Governmental Order was primarily due to the
failure of such party to perform any of its obligations under this
Agreement.
(f) By written notice from Parent to the Company that there has been
an event, change, occurrence or circumstance, individually or in the
aggregate with any such events, changes, occurrences or circumstances that
has had or could reasonably be expected to have a Material Adverse Effect.
59
11.1.2. Effect of Termination. In the event of the termination
of this Agreement pursuant to Section 11.1, all obligations of the parties
hereunder (other than obligations under Section 11, which shall survive
termination) shall terminate without any liability of any party to any other
party; provided, however, that no termination by a party pursuant to clause (b),
(c), (e) or (f) of Section 11.1 shall relieve either party from any liability
arising from or relating to any breach of any representation, warranty, covenant
or agreement by such party prior to termination.
12. MISCELLANEOUS.
12.1. Entire Agreement; Waivers. This Agreement constitutes the
entire agreement among the parties hereto pertaining to the subject matter
hereof and supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written, of the parties with
respect to such subject matter, other than the Confidentiality Agreement (which
shall survive execution and delivery of this Agreement and shall survive any
termination of this Agreement but shall terminate upon consummation of the
Closing). No waiver of any provision of this Agreement shall be deemed or shall
constitute a waiver of any other provision hereof (whether or not similar),
shall constitute a continuing waiver unless otherwise expressly provided nor
shall be effective unless in writing and executed (a) by Parent in the case of a
waiver by Parent, (b) by Merger Sub in the case of a waiver by Merger Sub and
(c) by the Company in the case of a waiver by the Company.
12.2. Amendment or Modification. Except as set forth in Section
5.3.4, the parties hereto may not amend or modify this Agreement except in such
manner as may be agreed upon by a written instrument executed by Parent, Merger
Sub and the Company.
12.3. Severability. In the event that any provision hereof would,
under applicable law, be invalid or unenforceable in any respect, such provision
shall (to the extent permitted under applicable law) be construed by modifying
or limiting it so as to be valid and enforceable to the maximum extent
compatible with, and possible under, applicable law. The provisions hereof are
severable, and in the event any provision hereof should be held invalid or
unenforceable in any respect, it shall not invalidate, render unenforceable or
otherwise affect any other provision hereof.
12.4. Successors and Assigns. All of the terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective permitted transferees and assigns (each of which
transferees and assigns shall be deemed to be a party hereto for all purposes
hereof). (a) No transfer or assignment by any party hereto shall be permitted
without the prior written consent of the other parties hereto and any such
attempted transfer or assignment without consent shall be null and void;
provided that no consent shall be required to an assignment of the rights of
Parent or the Surviving Corporation hereunder in connection with a sale of the
Surviving Corporation, or of all or substantially all of the assets of the
Surviving Corporation or a pledge of any assets of Parent or Surviving
Corporation as collateral security and, (b) other than as contemplated in clause
(a) above, no transfer or assignment by any party shall relieve such party of
any of its obligations hereunder.
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12.5. Notices. Any notices or other communications required or
permitted hereunder shall be deemed to have been properly delivered if in
writing and delivered personally or sent by facsimile, Federal Express, or
registered or certified mail, postage prepaid, addressed as follows:
(a) if to Parent or Merger Sub or, if after the Closing to the
Surviving Corporation, to:
The Reader's Digest Association, Inc.
Reader's Xxxxxx Xxxx
Xxxxxxxxxxxxx, Xxx Xxxx 00000-0000
Attention: General Counsel
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
with a copy to:
Weil, Gotshal & Xxxxxx LLP
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxxxxxx Xxxxx, Esq.
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
(b) if to the Company, to:
Xxxxxxxxxx.xxx, Inc.
0000 Xxxxx Xxx. X., Xxxxx X
Xxxxxxx, Xxxxxxxxxx 00000
Attention: President
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
with a copy to:
Xxxxxxx Coie LLP
0000 Xxxxx Xxxxxx, Xxxxx 0000
Xxxxxxx, Xxxxxxxxxx 00000-0000
Attention: Xxxxx X. Xxxxxx, Esq.
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
(c) if to the Shareholder Representative, to:
Mr. Xxxxx Xxxxx
X.X. Xxx 0000
Xxxxxxx, Xxxxxxxxxx 00000
Telephone No.: (000) 000-0000
Facsimile No.: (000) 000-0000
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Unless otherwise specified herein, such notices or other communications shall be
deemed given and delivered (a) on the date delivered, if delivered personally,
(b) two (2) Business Days after being sent by Federal Express, if sent by
Federal Express, (c) one (1) Business Day after being sent, if sent by facsimile
and (d) three (3) Business Days after being sent, if sent by registered or
certified mail. Each of the parties hereto shall be entitled to specify a
different address by delivering notice as aforesaid to each of the other parties
hereto.
12.6. Public Announcements. At all times no party hereto will issue
or make any reports, statements or releases to the public with respect to this
Agreement or the transactions contemplated hereby without the consent of the
other parties hereto, which consent shall not be unreasonably withheld unless,
in the sole judgment of Parent, disclosure is otherwise required by applicable
Legal Requirements or by the applicable rules of any stock exchange on which
Parent lists securities, provided that, to the extent required by applicable
Legal Requirements, the party intending to make such release shall use its
commercially reasonable efforts consistent with such applicable Legal
Requirements to consult with the other party with respect to the text thereof.
Each party hereto will also obtain the prior approval by the other parties
hereto of any press release to be issued announcing the consummation of the
transactions contemplated by this Agreement.
12.7. Headings. Section and subsection headings are not to be
considered part of this Agreement, are included solely for convenience, are not
intended to be full or accurate descriptions of the content thereof and shall
not affect the construction hereof.
12.8. Disclosure. Any item listed or referred to in any Schedule
pursuant to any Section of this Agreement shall be deemed to have been listed in
or incorporated by reference into each other Schedule where such listing or
description would be appropriate.
12.9. Expenses. Regardless of whether the Merger and transactions
contemplated by this Agreement are consummated, all costs and expenses incurred
in connection with this Agreement and the Merger and the transactions
contemplated hereby shall be borne by the party incurring such expenses, except
as otherwise expressly set forth herein.
12.10. Amounts Paid and Calculated in U.S. Dollars. Any amounts which
are contemplated to be calculated or paid or determined hereunder shall be
calculated and paid in United States Dollars.
12.11. Third Party Beneficiaries. Except as pursuant to Section 5.6
hereof, nothing in this Agreement is intended or shall be construed to entitle
any Person other than the parties, their respective transferees and assigns
permitted hereby to any claim, cause of action, remedy or right of any kind.
12.12. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
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12.13. Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic substantive laws of the State of
Washington, without giving effect to any choice or conflict of law provision or
rule that would cause the application of the laws of any other jurisdiction
except for provisions which by their terms shall governed by the corporate law
of Delaware or Washington.
12.14. Specific Performance. Each of the parties acknowledges and
agrees that the other parties would be damaged irreparably in the event any of
the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached or violated. Accordingly, each of the
parties agrees that, without posting bond or other undertaking, the other
parties will be entitled to an injunction or injunctions to prevent breaches or
violations of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any Action instituted in any
court of the United States or any state thereof having jurisdiction over the
parties and the matter in addition to any other remedy to which it may be
entitled, at law or in equity. Each party further agrees that, in the event of
any action for specific performance in respect of such breach or violation, it
will not assert that the defense that a remedy at law would be adequate.
12.15. Negotiation of Agreement. Each of the Company, Parent and
Merger Sub acknowledges that it has been represented by independent counsel of
its choice throughout all negotiations that have preceded the execution of this
Agreement and that it has executed the same with consent and upon the advice of
said independent counsel. Each party and its counsel cooperated in the drafting
and preparation of this Agreement and the documents referred to herein, and any
and all drafts relating thereto shall be deemed the work product of the parties
and may not be construed against any party by reason of its preparation.
Accordingly, any rule of law or any legal decision that would require
interpretation of any ambiguities in this Agreement against the party that
drafted it is of no application and is hereby expressly waived. The provisions
of this Agreement shall be interpreted in a reasonable manner to effect the
intentions of the parties and this Agreement.
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63
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be executed, as of the date first above
written by their respective officers thereunto duly authorized.
COMPANY: XXXXXXXXXX.XXX, INC.
By: /s/ Xxxxxxx X. Xxxxx
----------------------------------
Name: Xxxxxxx X. Xxxxx
Title: Chief Executive Officer and
President
PARENT: THE READERS DIGEST ASSOCIATION, INC.
By: /s/ Xxxxxxx X. Xxxxxx
----------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Senior Vice President and
General Counsel
MERGER SUB: RD MERGER SUB, INC.
By: /s/ Xxxxxxx X. Xxxxxx
----------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: President
SHAREHOLDER:
REPRESENTATIVE
/s/ Xxxxx Xxxxx
-------------------------------------
Xxxxx Xxxxx
