EXHIBIT 2.2
EXECUTION VERSION
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is made and entered
into as of March 29, 2004 by and among Commonwealth Energy Corporation, a
California corporation ("PARENT"), Skipping Stone Acquisition Corporation, a
Delaware corporation and a wholly owned subsidiary of Parent ("MERGER SUB"),
Skipping Stone Inc., a Delaware corporation ("SKIPPING STONE") and the holders
(the "SKIPPING STONE STOCKHOLDERS") of Skipping Stone's common stock, par value
$0.0001 per share ("SKIPPING STONE COMMON STOCK"). Certain other capitalized
terms used in this Agreement are defined in EXHIBIT A.
INTRODUCTION
The boards of directors of each of Parent, Skipping Stone and Merger Sub
believe it is in the best interests of their respective companies and
stockholders that Parent acquire Skipping Stone through the statutory merger of
Merger Sub with and into Skipping Stone (the "MERGER") and, in furtherance
thereof, have approved the Merger, this Agreement and the transactions
contemplated hereby.
The parties hereto intend that the Merger qualify as a "reorganization"
within the meaning of Section 368(a) of the Code, and that this Agreement shall
be, and is hereby adopted as, a plan of reorganization for purposes of Section
368(a) of the Code.
ARTICLE I
THE MERGER
1.1 Effectiveness. The Merger will become effective upon acceptance by the
Secretary of State of the State of Delaware of a Certificate of Merger (the
"CERTIFICATE OF MERGER") filed by the parties hereto (the "EFFECTIVE TIME").
1.2 Merger. At the Effective Time, subject to and upon the terms and
conditions of this Agreement and the applicable provisions of the General
Corporation Law of Delaware ("DELAWARE LAW"), Merger Sub will be merged with and
into Skipping Stone, the separate corporate existence of Merger Sub will cease,
and Skipping Stone will continue as the surviving corporation and as a wholly
owned subsidiary of Parent (the "SURVIVING CORPORATION").
1.3 Conversion of Skipping Stone Common Stock. At the Effective Time, each
share of Skipping Stone Common Stock issued and outstanding immediately prior to
the Effective Time shall cease to be an existing and issued share and shall be
converted, by virtue of the Merger and without any action on the part of the
holders thereof, into a number of newly issued shares of Parent Common Stock
equal to the Exchange Ratio.
1.4 Conversion of Vested Options. At the Effective Time, each vested and
fully exercisable option to purchase Skipping Stone Common Stock under Skipping
Stone's Stock Option Plan dated May 1, 2000 (the "SKIPPING STONE OPTION PLAN")
which is outstanding and unexercised immediately prior thereto (a "VESTED
OPTION") shall, by virtue of the Merger and without any further action on the
part of Skipping Stone or any holder thereof, cease to represent a right to
acquire shares of Skipping Stone Common Stock and shall be converted
automatically into a number of newly issued shares of Parent Common Stock equal
to the product of (i) the number of shares of Skipping Stone Common Stock which
such option represented the right to acquire, less the number of such shares
equal in value to the aggregate costs to the holder that would have been
associated with exercising such option and (ii) the Exchange Ratio.
1.5 Exchange of Certificates.
(a) As soon as practicable after the Effective Time, Parent will cause to
be delivered to each registered Skipping Stone Stockholder, and to each holder
of a Vested Option, respectively, a certificate representing that number of
Merger Shares that such holder has the right to receive.
(b) The Merger Shares issued pursuant to the Merger in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Skipping Stone Common Stock and Vested
Options, and there shall be no further registration on the records of the
Surviving Corporation of (i) transfers of shares of Skipping Stone Common Stock
that were outstanding immediately prior to the Effective Time or (ii) issuances
incident to exercises of Vested Options. If, after the Effective Time,
certificates representing shares of Skipping Stone Common Stock are presented to
the Surviving Corporation for any reason, they shall be canceled and exchanged
as provided in this Article I.
(c) In the event any Certificate evidencing shares of Skipping Stone
Common Stock shall have been lost, stolen or destroyed, Parent shall deliver in
exchange for such lost, stolen or destroyed certificate, upon receiving notice
from the holder thereof and upon the making of an affidavit of that fact by such
holder, such amount as may be required pursuant to Section 1.3 hereof; provided,
however, that Parent may, in its discretion and, as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate to deliver a bond in such customary sum as it may reasonably direct
as indemnity against any claim that may be made against Parent with respect to
the certificate alleged to have been lost, stolen or destroyed.
1.6 Effect on Skipping Stone Options; Treasury Shares. At the Effective
Time, by virtue of the Merger, and without any further action on the part of any
holder thereof, (i) each outstanding option to purchase shares of Skipping Stone
Common Stock, other than a Vested Option as provided above, will be canceled and
extinguished without any present or future rights and (ii) any provision to the
contrary in this Agreement
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notwithstanding, any shares of Skipping Stone Common Stock held in the treasury
of Skipping Stone will be canceled and extinguished without any present or
future rights.
1.7 Closing. Unless this Agreement is earlier terminated pursuant to the
terms hereof, the closing of the Merger (the "CLOSING") will take place as
promptly as practicable following satisfaction or waiver of the conditions set
forth in Article VI hereof (other than those conditions that by their nature are
to be satisfied at the Closing, but subject to the fulfillment or waiver of
those conditions), at the offices of Paul, Hastings, Xxxxxxxx & Xxxxxx LLP, 000
Xxxx Xxxxxx Xxxxx, Xxxxxxxxxxx Xxxxx, Xxxxx Xxxx, Xxxxxxxxxx 00000, unless
another place or time is agreed to by Parent and Skipping Stone. The date of
Closing will be referred to herein as the "CLOSING DATE."
1.8 Fractional Shares. No fraction of a share of Parent Common Stock will
be issued by virtue of the Merger, but in lieu thereof each holder of Skipping
Stone Common Stock or Vested Options who would otherwise be entitled to a
fraction of a share of Parent Common Stock (after aggregating all fractional
shares of Parent Common Stock that otherwise would be received by such holder)
shall receive from Parent an amount of cash (rounded to the nearest whole cent),
without interest, equal to the product of (i) such fraction, multiplied by (ii)
the Parent Share Price.
1.9 Capital 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 such shares of Common
Stock of Merger Sub shall, as of the Effective Time, evidence ownership of such
shares of Common Stock of the Surviving Corporation.
1.10 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Skipping Stone Common Stock held by a holder who has demanded and
perfected appraisal or dissenters' rights for such shares in accordance with
Delaware Law and who, as of the Effective Time, has not effectively withdrawn or
lost such appraisal or dissenters' rights ("DISSENTING SHARES") shall not be
converted into or represent a right to receive Merger Shares (if any) pursuant
to Section 1.3 hereof, but the holder thereof shall only be entitled to such
rights as are granted by Delaware Law.
(b) Notwithstanding the provisions of Section 1.9(a) above, if any holder
of shares of Skipping Stone Common Stock who is otherwise entitled to exercise
dissenters' rights under Delaware Law shall effectively withdraw or lose
(through failure to perfect or otherwise) such dissenters' rights, 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 Merger Shares (if any) pursuant to Section 1.3 hereof,
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without interest on the payment and subject to the provisions of this Article I,
upon surrender of the certificate representing such shares.
(c) Skipping Stone shall give Parent (i) prompt notice of any written
demands for the exercise of dissenters' rights in respect of any shares of
Skipping Stone Common Stock, any withdrawals of such demands, and any other
instruments served pursuant to Delaware Law (including without limitation
instruments concerning appraisal or dissenters' rights) and received by Skipping
Stone and (ii) the opportunity to participate in all negotiations and
proceedings with respect to such demands. Skipping Stone shall not, except with
the prior written consent of Parent, voluntarily make any payment with respect
to any demands for the exercise of dissenters' rights in respect of any shares
of Skipping Stone Common Stock or offer to settle or settle any such demands.
1.11 Withholding Rights. Parent shall be entitled to deduct and withhold
from the Merger Shares otherwise issuable pursuant to this Article I to any
person who was a holder of Skipping Stone Common Stock or Vested Options
immediately prior to the Effective Time such amounts as Parent is required to
deduct and withhold with respect to the making of such payment under the Code,
or any provision of state, local or foreign tax law, and Parent shall pay such
amounts to the appropriate Governmental Authority in accordance with applicable
tax law. To the extent that amounts are so withheld by Parent and paid to the
appropriate Governmental Authority, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the holder of the shares
of Parent Common Stock in respect of which such deduction and withholding was
made by Parent.
1.12 Corporate Governance Matters.
(a) Certificate of Incorporation. The certificate of incorporation of
Merger Sub, as in effect immediately prior to the Effective Time, will be the
certificate of incorporation of the Surviving Corporation until thereafter
amended in accordance with applicable laws and such certificate of
incorporation.
(b) Bylaws. The bylaws of Merger Sub, as in effect immediately prior to
the Effective Time, will be the bylaws of the Surviving Corporation until
thereafter amended in accordance with applicable laws and such bylaws.
(c) Directors. The directors of Merger Sub immediately prior to the
Effective Time will be the directors of the Surviving Corporation until their
respective successors shall be duly elected and qualified.
(d) Officers. From and after the Effective Time, the officers of Merger
Sub will be the officers of the Surviving Corporation and will hold their
respective offices in accordance with and subject to the provisions of the
bylaws of the Surviving Corporation.
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1.13 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 or
to vest the Surviving Corporation with the full right, title and possession to
all assets, property, rights, privileges, immunities, powers and franchises of
Merger Sub, the officers and directors of the Surviving Corporation are fully
authorized in the name of either or both of Skipping Stone and Merger Sub or
otherwise to take all such action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SKIPPING STONE AND THE SKIPPING STONE
STOCKHOLDERS
Except as set forth with reasonable particularity and in reasonable detail
on a correspondingly numbered part of the Skipping Stone Disclosure Schedule,
Skipping Stone and the Skipping Stone Stockholders, jointly and severally,
represent and warrant, as of the date hereof and as of the Closing Date, to and
for the benefit of the Indemnitees, as follows:
2.1 Organization of Skipping Stone. Skipping Stone, and each of its
subsidiaries, is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Skipping
Stone, and each of its subsidiaries, has the corporate power and authority to
own its properties and to carry on its business as now being conducted, except
where the failure to do so would not have a Material Adverse Effect on Skipping
Stone and its subsidiaries considered as a whole. Skipping Stone, and each of
its subsidiaries, is duly qualified to do business and is in good standing as a
foreign corporation in each state or other jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its activities
make such qualification necessary and where the failure to be so qualified would
have a Material Adverse Effect on Skipping Stone and its subsidiaries considered
as a whole. Skipping Stone has delivered to Parent a true and correct copy of
its certificate of incorporation and bylaws, each as amended to date, as well as
true and correct copies of any comparable governing documents for each of its
subsidiaries.
2.2 Skipping Stone Capital Structure.
(a) The authorized capital stock of Skipping Stone consists of 10,000,000
shares of authorized Skipping Stone Common Stock, of which 1,468,714 shares are
issued and outstanding on the date of this Agreement and 3,200 shares are
reserved for issuance pursuant to Vested Options. Except as set forth in the
immediately preceding sentence, no shares of capital stock of Skipping Stone are
issued, reserved for issuance or outstanding. On the date of this Agreement,
Skipping Stone Common Stock is held of record by the persons, with the addresses
of record and in the amounts on the list previously provided to Parent. All
outstanding shares of Skipping Stone Common Stock are duly authorized, validly
issued, fully paid and non-assessable and not subject to preemptive rights
created by statute, Skipping Stone's certificate of incorporation or its
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bylaws or any agreement to which Skipping Stone is a party or by which it is
bound. All outstanding shares of Skipping Stone Common Stock have been issued in
compliance with applicable federal and state securities laws.
(b) Except as set forth on Part 2.2(b) of the Skipping Stone Disclosure
Schedule, there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which Skipping Stone or any of
its subsidiaries is a party or by which either is bound obligating Skipping
Stone or any of its subsidiaries to issue, deliver, sell, repurchase or redeem,
or cause to be issued, delivered, sold, repurchased or redeemed, any shares of
Skipping Stone Common Stock or obligating Skipping Stone or any of its
subsidiaries to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement. Except as set forth on Part 2.2(b) of the Skipping Stone
Disclosure Schedule, there are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or other equity-based compensation awards
or similar rights (whether payable in cash or otherwise) with respect to
Skipping Stone or any of its subsidiaries, or is there a commitment to issue any
such award or right. Except as contemplated in this Agreement or as set forth on
Part 2.2(b) of the Skipping Stone Disclosure Schedule, there are no voting
trusts, proxies, or other agreements or understandings with respect to the
voting stock of Skipping Stone. All holders of securities of Skipping Stone or
any of its subsidiaries have been, or will be, properly given, or shall have
properly waived, any required notice prior to the Merger.
2.3 Subsidiaries. Except as set forth on Part 2.3 of the Skipping Stone
Disclosure Schedule, Skipping Stone does not have and has never had any
subsidiaries, affiliates (as defined in Rule 405 promulgated under the
Securities Act) (other than its officers and directors) or a relationship with
another entity whereby they were under common control, and does not otherwise
own and, during the past five (5) years, has not otherwise owned any shares of
capital stock or any interest in, or control of, directly or indirectly, any
other corporation, partnership, association, joint venture or other business
entity. The authorized capital stock of each subsidiary, as well as the issued
and outstanding shares of capital stock of each subsidiary, is listed on Part
2.3 of the Skipping Stone Disclosure Schedule. All outstanding shares of the
capital stock of each subsidiary are, and at the Effective Time will be, duly
authorized, validly issued, fully paid and non-assessable and not subject to
preemptive rights created by statute, their respective charter documents or any
agreement of which Skipping Stone or any of its subsidiaries is a party or by
which it is bound.
2.4 Authority. Skipping Stone has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The vote required of the Skipping Stone Stockholders to duly approve the
Merger and this Agreement is that number of shares as would constitute a
majority of the outstanding shares of Skipping Stone Common Stock (the "SKIPPING
STONE STOCKHOLDER APPROVAL"). Except for Skipping Stone Stockholder Approval, no
other corporate proceedings on the
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part of Skipping Stone are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. Skipping Stone's board of
directors has approved the Merger and this Agreement and has directed that this
Agreement be submitted to the Skipping Stone Stockholders for approval. This
Agreement has been duly executed and delivered by Skipping Stone and, assuming
the due authorization, execution and delivery by the other parties hereto,
constitutes the valid and binding obligation of Skipping Stone, enforceable
against Skipping Stone in accordance with its respective terms except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally and (b) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.
2.5 No Conflict; Consents. Subject only to Skipping Stone Stockholder
Approval and except as set forth on Part 2.5 of the Skipping Stone Disclosure
Schedule, the execution and delivery of this Agreement by Skipping Stone does
not, and, as of the Effective Time, the consummation of the transactions
contemplated hereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of any benefit under (any such event, a "CONFLICT") (i) any provision of
the certificate of incorporation or bylaws of Skipping Stone or any comparable
governing document for each of its subsidiaries or (ii) any material mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation to which Skipping Stone or any of its subsidiaries or any of their
respective properties or assets are subject. No consent, waiver, approval, order
or authorization of, or registration, declaration or filing with, any
Governmental Authority or any third party, including a party to any agreement
with Skipping Stone or any of its subsidiaries (so as not to trigger any
Conflict), is required by or with respect to Skipping Stone or any of its
subsidiaries in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated hereby, except for (i) the
filing of the Certificate of Merger with the Secretary of State of the State of
Delaware, (ii) such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings (A) as may be required under applicable
federal and state securities laws or (B) which if not obtained would not
reasonably be expected to delay or hinder the consummation of the transactions
contemplated by this Agreement or (iii) such other consents, waivers,
authorizations, filings, approvals and registrations, if any, which are set
forth on Part 2.5 of the Skipping Stone Disclosure Schedule.
2.6 Skipping Stone Financial Statements.
(a) Skipping Stone has delivered to Parent the following financial
statements and notes (collectively, the "SKIPPING STONE FINANCIAL STATEMENTS"):
(i) Skipping Stone's audited consolidated balance sheets as of December 31, 2002
and December 31, 2001 and the related consolidated statements of operations,
retained earnings, and cash
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flows for the years then ended; and (ii) Skipping Stone's unaudited balance
sheet as of December 31, 2003 (the "UNAUDITED BALANCE SHEET") and the related
unaudited statement of profit and loss for the year then ended.
(b) The Skipping Stone Financial Statements are accurate and complete in
all material respects and present fairly the position of Skipping Stone as of
the respective dates thereof and the results of operations (and, in the case of
the financial statements referred to in Section 2.6(a)(i), cash flows of
Skipping Stone) for the periods covered thereby. Skipping Stone Financial
Statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods covered
(except that the financial statements referred to in Section 2.6(a)(ii) do not
contain footnotes and are subject to normal and recurring year-end audit
adjustments, which will not, individually or in the aggregate, be material in
magnitude).
2.7 No Undisclosed Liabilities. Except as set forth in Part 2.7 or Part
2.20(a) of the Skipping Stone Disclosure Schedule, neither Skipping Stone nor
any of its subsidiaries has any material liability, indebtedness, obligation,
expense, claim, deficiency, guaranty or endorsement of any type, whether
accrued, absolute, contingent, matured, unmatured or other (whether or not
required to be reflected in financial statements in accordance with GAAP) (each,
a "LIABILITY"), individually or in the aggregate, except (i) as reflected or
reserved against in Skipping Stone Financial Statements or disclosed in the
notes thereto and (ii) as has been incurred in the ordinary course of Skipping
Stone's or its subsidiary's, as the case may be, business since the latest date
of Skipping Stone Financial Statements, consistent with Skipping Stone's or its
subsidiary's, as the case may be, past practices.
2.8 No Changes. Except as set forth in Part 2.8 of the Skipping Stone
Disclosure Schedule, since December 31, 2003, there has not been, occurred or
arisen any:
(a) transaction by Skipping Stone or any of its subsidiaries except in the
ordinary course of business consistent with past practices;
(b) amendments or changes to the certificate of incorporation or bylaws of
Skipping Stone or the comparable governing documents of any of its subsidiaries;
(c) capital expenditure or commitment by Skipping Stone or any of its
subsidiaries in excess of $50,000 in any individual case or $100,000 in the
aggregate;
(d) payment, discharge or satisfaction, in any amount in excess of $25,000
in any one case, or $50,000 in the aggregate, of any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise),
other than (i) the payment, discharge or satisfaction of liabilities made in the
ordinary course of business consistent with Skipping Stone's or its
subsidiary's, as the case may be, past practices, (ii) reflected
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or reserved against in the Unaudited Balance Sheet or (iii) pursuant to Section
5.5 or 5.11;
(e) material loss, damage or destruction to, or any material interruption
in the use of, any of Skipping Stone's or any of its subsidiaries' respective
material assets;
(f) claim of wrongful discharge or other unlawful labor practice or action
with respect to Skipping Stone or any of its subsidiaries;
(g) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) utilized by Skipping Stone or
any of its subsidiaries;
(h) revaluation by Skipping Stone of any of its or any of its
subsidiaries' respective assets (whether tangible or intangible);
(i) declaration, setting aside or payment of a dividend or other
distribution with respect to Skipping Stone Common Stock, or any direct or
indirect redemption, purchase or other acquisition by Skipping Stone of any of
its capital stock or any split, combination or reclassification in respect of
any shares of Skipping Stone Common Stock, or any issuance or authorization of
any issuance of any other securities in lieu of or in substitution for shares of
Skipping Stone Common Stock, other than pursuant to Section 5.11 or Section
5.19;
(j) other than periodic increases in compensation in the ordinary course
and consistent with Skipping Stone's or its subsidiary's, as the case may be,
past practices, increase above historic levels in the salary or other
compensation or benefits (including, but not limited to, options or other
equity-based compensation awards) payable or to become payable by Skipping Stone
or any of its subsidiaries to any of their respective officers, directors,
employees or consultants, or, except as contemplated in Section 5.11, the
declaration, payment or commitment or obligation of any kind for the payment of
a bonus or other additional salary or compensation or benefits (including, but
not limited to, options or other equity-based compensation awards) to any such
person.
(k) sale, lease, license or other disposition of any of the material
assets or properties of Skipping Stone or any of its subsidiaries, or the
creation of any security interest in such assets or properties, other than
agreements with customers and suppliers entered into in the ordinary course of
business and consistent with Skipping Stone's or its subsidiary's, as the case
may be, past practices;
(l) amendment or termination of any material contract, agreement or
license to which Skipping Stone or any of its subsidiaries is a party or by
which it is bound other than in accordance with the terms thereof;
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(m) loan by Skipping Stone or any of its subsidiaries to any person or
entity, incurring by Skipping Stone or any of its subsidiaries of any
indebtedness, guaranteeing by Skipping Stone or any of its subsidiaries of any
indebtedness, issuance or sale of any debt securities of Skipping Stone or any
of its subsidiaries or guaranteeing of any debt securities of others, except for
advances to employees for travel and business expenses in the ordinary course of
business consistent with Skipping Stone's or its subsidiary's, as the case may
be, past practices;
(n) waiver or release of any right or claim of Skipping Stone or any of
its subsidiaries, including any write-off or other compromise of any account
receivable of Skipping Stone or any of its subsidiaries, other than in the
ordinary course of business consistent with Skipping Stone's or its
subsidiary's, as the case may be, past practice;
(o) commencement, settlement or notice or threat of commencement of any
lawsuit or proceeding against, or investigation of, Skipping Stone or any of its
subsidiaries or their respective affairs or any reasonable basis for any of the
foregoing;
(p) notice of any claim of ownership by a third party of Skipping Stone
Intellectual Property (as defined in Section 2.11) or of infringement by
Skipping Stone or any of its subsidiaries of any Skipping Stone Third-Party
Intellectual Property (as defined in Section 2.11);
(q) issuance or sale, or contract to issue or sell, by Skipping Stone of
any shares of Skipping Stone Common Stock, or securities exchangeable,
convertible or exercisable therefor, or of any other of its securities, other
than pursuant to the exercise of any options to purchase Skipping Stone Common
Stock outstanding on the date hereof and granted under Skipping Stone Option
Plan;
(r) material change in pricing or royalties set or charged by Skipping
Stone or any of its subsidiaries to its customers or licensees or material
change in pricing or royalties set or charged by persons who have licensed
Intellectual Property (as defined in Section 2.11) to Skipping Stone or any of
its subsidiaries;
(s) commitment to any person to (i) develop software without charge or
(ii) incorporate any software into any of Skipping Stone's products;
(t) exclusive license, distribution, marketing or sales agreement entered
into or any agreement to enter into any exclusive license, distribution,
marketing or sales agreement, other than in the ordinary course of business
consistent with past practice;
(u) event or condition of any character that has or could reasonably be
expected to have a Material Adverse Effect;
(v) new or changed material tax election or tax accounting method, closing
agreement, settlement of any claim or assessment in respect of Taxes, or
extension or
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waiver of the limitation period applicable to any claim or assessment in respect
of Taxes; or
(w) agreement by Skipping Stone or any of its subsidiaries or any of their
respective officers or employees to do any of the things described in the
preceding clauses (a) through (v) (other than negotiations with Parent and its
affiliates and representatives regarding the transactions contemplated by this
Agreement).
2.9 Tax Matters.
(a) Skipping Stone and its subsidiaries have filed all Tax Returns that
each was required to file (and which was due to be filed (after accounting for
any extension of time to file) prior to the Closing Date) under applicable laws
and regulations. All such Tax Returns were correct and complete in all respects
and have been prepared in substantial compliance with all applicable laws and
regulations. All Taxes due and owing by Skipping Stone and its subsidiaries
(whether or not shown on any Tax Return) have been paid. Skipping Stone and its
subsidiaries are not currently the beneficiary of any extension of time within
which to file any Tax Return. No claim has ever been made by an authority in a
jurisdiction where Skipping Stone or any of its subsidiaries does not file Tax
Returns that such is or may be subject to taxation by that jurisdiction. There
are no liens for Taxes (other than Taxes not yet due and payable) upon any of
the assets of Skipping Stone or any of its subsidiaries.
(b) Skipping Stone and each of its subsidiaries has withheld and paid all
Taxes required to have been withheld and paid in connection with any amounts
paid or owing to any employee, independent contractor, creditor, stockholder, or
other third party.
(c) No foreign, federal, state, or local tax audits or administrative or
judicial Tax proceedings are pending or being conducted with respect to Skipping
Stone or any of its subsidiaries. Neither Skipping Stone nor any of its
subsidiaries has received from any foreign, federal, state, or local taxing
authority (including jurisdictions where neither Skipping Stone nor any of its
subsidiaries has filed Tax Returns) any (i) written notice indicating an intent
to open an audit or other review, (ii) request for information related to Tax
matters or (iii) notice of deficiency or proposed adjustment for any amount of
Tax proposed, asserted, or assessed by any taxing authority against Skipping
Stone or any of its subsidiaries; Part 2.9 of the Skipping Stone Disclosure
Schedule lists all federal, state, local, and foreign income Tax Returns filed
with respect to Skipping Stone or any of its current or former subsidiaries for
taxable periods ended on or after December 31, 2001; Part 2.9 of the Skipping
Stone Disclosure Schedule indicates those Tax Returns that have been audited,
and indicates those Tax Returns that currently are the subject of audit. The
Skipping Stone Stockholders have delivered to Parent correct and complete copies
of all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by Skipping Stone or its current or
former subsidiaries filed or received since December 31, 2001.
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(d) Neither Skipping Stone nor any of its subsidiaries has waived any
statute of limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency.
(e) Neither Skipping Stone nor any of its subsidiaries has filed a consent
under Code Section 341(f) concerning collapsible corporations. Skipping Stone
and its subsidiaries are not party to any agreement, contract, arrangement or
plan that has resulted or would result, separately or in the aggregate, in the
payment of (i) any "excess parachute payment" within the meaning of Code Section
280G (or any corresponding provision of state, local or foreign Tax law) and
(ii) any amount that will not be fully deductible as a result of Code 162(m) (or
any corresponding provision of state, local or foreign Tax law). Neither
Skipping Stone nor any of its subsidiaries has been a United States real
property holding corporation within the meaning of Code Section 897(c)(2) during
the applicable period specified in Code Section 897(c)(1)(A)(ii). Each of
Skipping Stone and its current and former subsidiaries has disclosed on its
federal income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Code
6662. Neither Skipping Stone nor any of its subsidiaries is a party to or bound
by any Tax allocation or sharing agreement. Neither Skipping Stone nor any of
its subsidiaries (A) has been a member of an Affiliated Group filing a
consolidated federal income Tax Return or (B) has any Liability for the Taxes of
any person under Reg. Section 1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract, or otherwise.
(f) The unpaid Taxes of Skipping Stone and its current and former
subsidiaries (A) did not, as of the end of the most recent fiscal month, exceed
the reserve for Tax liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) set forth
on the face of the Unaudited Balance Sheet (rather than in any notes thereto)
and (B) do not exceed that reserve as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice in filing its
Tax Returns. Since the date of the Unaudited Balance Sheet, neither Skipping
Stone nor any of its subsidiaries has incurred any liability for Taxes arising
from extraordinary gains or losses, as that term is used in GAAP, outside the
ordinary course of business consistent with Skipping Stone's past practices.
(g) Neither Skipping Stone nor any of its subsidiaries will be required to
include any item of income in, or exclude any item of deduction from, taxable
income for any taxable period (or portion thereof) ending after the Closing Date
as a result of any: (A) change in method of accounting for a taxable period
ending on or prior to the Closing Date; (B) "closing agreement" as described in
Code Section 7121 (or any corresponding or similar provision of state, local or
foreign income Tax law) executed on or prior to the Closing Date; (C)
intercompany transactions or any excess loss account described in Treasury
regulations under Code Section 1502 (OR any corresponding or similar provision
of state, local or foreign income Tax law); (D) installment sale or open
transaction disposition made on or prior to the Closing Date; or (E) prepaid
amount received on or
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prior to the Closing Date other than those that are reserved against or
reflected on the Closing Balance Sheet.
(h) Neither Skipping Stone nor any of its subsidiaries has distributed
stock of another person, or had its stock distributed by another person, in a
transaction that was purported or intended to be governed in whole or in part by
Code Section 355 or Section 361.
(i) Skipping Stone filed a valid election to be treated as an S
corporation within the meaning of Section 1361(b) of the Code for all federal
and all pertinent state income Tax purposes effective June 2, 1997 and has at
all times since that date qualified as an S corporation for all such purposes
and will continue to qualify as an S corporation until the Closing. Since
electing to be treated as an S corporation, Skipping Stone has not disposed of
any assets which would result in the realization of any corporate level gain
under Section 1374.
(j) For United States federal and state tax purposes, Skipping Stone has
taken the position that all of its subsidiaries were liquidated effective
December 31, 2003. Subsequent to December 31, 2003, no subsidiary of Skipping
Stone has conducted any business, earned any income, entered into any contract
or agreement or used its name in connection with any agreement or arrangement
which may constitute the conduct of business.
2.10 Title to Assets; Equipment; Leasehold.
(a) Skipping Stone and each of its subsidiaries owns, and has good, valid
and marketable title to, all assets purported to be owned by it, including: (i)
all assets reflected on the Unaudited Balance Sheet and (ii) all other assets
reflected in Skipping Stone's and its subsidiary's, as the case may be, books
and records as being owned by Skipping Stone or its subsidiaries. All of such
assets are owned by Skipping Stone or its subsidiaries free and clear of any
encumbrances, except for (i) any lien for current taxes not yet due and payable,
(ii) liens or encumbrances that have arisen in the ordinary course of business
and that do not (individually or in the aggregate) materially detract from the
value of the assets subject thereto or materially impair the operations of
Skipping Stone and its subsidiaries considered as a whole, (iii) encumbrances
reflected, reserved or otherwise disclosed in the Skipping Stone Financial
Statements, or (iv) as set forth in Part 2.10(a) of the Skipping Stone
Disclosure Schedule.
(b) All material items of equipment and other tangible assets owned by or
leased to Skipping Stone or any of its subsidiaries are adequate for the uses to
which they are being put, are in good condition and repair (ordinary wear and
tear excepted) and are adequate for the conduct of Skipping Stone's and its
subsidiaries', considered as a whole, business in the manner in which such
business is currently being conducted.
(c) Neither Skipping Stone nor any of its subsidiaries owns any real
property or any interest in real property, except for the leasehold interest
created under the real
13
property leases identified in Part 2.10(c) of the Skipping Stone Disclosure
Schedule. All premises leased or subleased by Skipping Stone or any of its
subsidiaries are supplied with utilities and other services necessary for the
operation of their respective businesses.
2.11 Intellectual Property. Except as set forth on Part 2.11 of the
Skipping Stone Disclosure Schedule:
(a) Skipping Stone and each of its subsidiaries owns or has valid license
to all Intellectual Property (as defined below) used in the ordinary course of
business as such business currently operates ("SKIPPING STONE INTELLECTUAL
PROPERTY"). There is no contract to which Skipping Stone or any of its
subsidiaries is a party pursuant to which any person has any right (whether or
not currently exercisable) to use, license or otherwise exploit any Skipping
Stone Intellectual Property. To the extent that Skipping Stone Intellectual
Property is proprietary, Skipping Stone or its subsidiaries have taken all
commercially reasonable measures to protect the proprietary nature of each item
of Skipping Stone Intellectual Property considered confidential, and to maintain
in confidence all trade secrets and confidential information that they presently
own and use. All patents, trademarks, service marks, and copyrights owned or
used by Skipping Stone or any of its subsidiaries are valid, enforceable, and
subsisting.
As used in this Agreement, "INTELLECTUAL PROPERTY" means the following, in
tangible or intangible form: (i) all inventions, discoveries, improvements,
ideas, know-how, methodology, processes, and other proprietary technology, as
well as all United States and foreign patents and patent applications (including
reissues, continuations, continuations-in-part, divisionals, re-examinations,
renewals or extensions thereof); (ii) all software, algorithms, source code,
object code data structures, data bases and flow charts, and any customizations
and modifications of the foregoing; (iii) all copyrights and copyrightable
works, including, but not limited to, mask works, writings, designs, or other
original works of authorship and derivative works thereof (including those for
which registration has been applied, which are registered, or which are
unregistered); (iv) all United States and foreign trademarks, service marks,
trade names and other names, slogans and logos (including those for which
registration has been applied, which are registered, or which are unregistered);
(v) all trade secrets, including, but not limited to, confidential and other
non-public information for which there exists a right in any jurisdiction to
limit the use or disclosure thereof; and (vi) all Internet web sites, domain
names, and registrations or applications for registration thereof.
(b) With respect to each item of Skipping Stone Intellectual Property that
is not Skipping Stone Third-Party Intellectual Property (as used herein,
"SKIPPING STONE THIRD-PARTY INTELLECTUAL PROPERTY" means Intellectual Property
that is owned by a third party and licensed to Skipping Stone or any of its
subsidiaries): (i) Skipping Stone or one its subsidiaries, as the case may be,
owns and possesses all right, title and interest in and to such item free and
clear of any lien or encumbrance; (ii) such item is not subject to any
outstanding judgment, order, decree, stipulation or injunction; and (iii)
Skipping Stone or
14
its subsidiary, as the case may be, has the right to bring actions for
infringement or unauthorized use of such item.
(c) With respect to each item of Skipping Stone Third-Party Intellectual
Property: (i) Skipping Stone or one of its subsidiaries, as the case may be, has
a valid right to use such item free and clear of any lien or encumbrance; (ii)
Skipping Stone is not subject to any outstanding judgment, order, decree,
stipulation or injunction relating to such Skipping Stone Third-Party
Intellectual Property; (iii) to the best of Skipping Stone's knowledge, Skipping
Stone is not in material breach or default thereunder, and, no other party to
such license, sublicense or other agreement is in material breach or default
thereunder; and (iv) to the best of Skipping Stone's knowledge, no event has
occurred which with notice or lapse of time would constitute a material breach
or default by Skipping Stone, or permit termination, modification or
acceleration thereunder by the other party thereto.
(d) Neither Skipping Stone nor any of its subsidiaries has licensed any of
its Skipping Stone Intellectual Property to any Person on an exclusive basis.
Neither Skipping Stone nor any of its subsidiaries is currently subject under
any license to any covenant not to compete or contract limiting its ability to
exploit fully any Skipping Stone Intellectual Property or to transact business
in any market or geographical area or with any person.
2.12 Compliance with Laws. To Skipping Stone's knowledge, it and each of
its subsidiaries has complied in all material respects with, is not in violation
of, and has not received any notices of violation with respect to, any foreign,
federal, state or local statute, law or regulation.
2.13 Legal Proceedings; Orders.
(a) There is no pending Legal Proceeding, and to the knowledge of Skipping
Stone, no person has threatened to commence any Legal Proceeding: (i) that
involves Skipping Stone or any of its subsidiaries or any of the assets owned,
used or controlled by Skipping Stone or its subsidiary, as the case may be, or
any person whose liability Skipping Stone or its subsidiary, as the case may be,
has or may have retained or assumed, either contractually or by operation of
law; or (ii) that challenges, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, the Merger or any of the
other transactions contemplated by this Agreement. Except as set forth on Part
2.13 of the Skipping Stone Disclosure Schedule, to the knowledge of Skipping
Stone and the Skipping Stone Stockholders, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that will, or that could
reasonably be expected to, give rise to or serve as a basis for the commencement
of any such Legal Proceeding.
(b) No Legal Proceeding has been commenced by or is pending against
Skipping Stone or any of its subsidiaries.
15
(c) There is no order, writ, injunction, judgment or decree to which
Skipping Stone or any of its subsidiaries, or any of the respective assets owned
or used by Skipping Stone or its subsidiaries, is subject. To Skipping Stone's
Knowledge, no officer or other employee of Skipping Stone or of any of its
subsidiaries is subject to any order, writ, injunction, judgment or decree that
prohibits such officer or other employee from engaging in or continuing any
conduct, activity or practice relating to Skipping Stone's or one of its
subsidiary's, as the case may be, business.
2.14 Insurance. Part 2.14 of the Skipping Stone Disclosure Schedule
identifies all insurance policies maintained by, at the expense of or for the
benefit of Skipping Stone and its subsidiaries and identifies any material
claims made thereunder. Each of the insurance policies identified in Part 2.14
of the Skipping Stone Disclosure Schedule is in full force and effect. Neither
Skipping Stone nor any of its subsidiaries has received any notice or other
communication regarding any actual or possible (i) cancellation or invalidation
of any insurance policy, (ii) refusal of any coverage or rejection of any claim
under any insurance policy, or (iii) material adjustment in the amount of the
premiums payable with respect to any insurance policy.
2.15 Environmental Matters.
(a) With such exceptions as would not in the aggregate be reasonably
likely to have a Material Adverse Effect on Skipping Stone and its subsidiaries
taken as a whole: (i) no written notice, notification, demand, request for
information, citation, summons, complaint or order has been received or made by,
and no investigation, action, claim, suit, proceeding or review is pending or,
to the knowledge of Skipping Stone, threatened by, any person against Skipping
Stone or any of its subsidiaries, with respect to any applicable Environmental
Law (as defined below); (ii) Skipping Stone and each of its subsidiaries is and
has been in compliance with all applicable Environmental Laws; and (iii) there
are no liabilities or obligations of Skipping Stone or any of its subsidiaries
of any kind whatsoever, whether accrued, contingent, absolute, direct or
indirect, determined, determinable or otherwise, arising under or relating to
any Environmental Law (including, without limitation, liabilities or obligations
relating to divested properties or businesses or predecessor entities), and, to
Skipping Stone's knowledge, there are no facts, conditions, situations or set of
circumstances that have resulted or could reasonably be expected to result in,
or be the basis for, any such liabilities or obligations.
(b) For the purposes of this Agreement, the term "ENVIRONMENTAL LAWS"
means any international, national, provincial, regional, federal, state, local,
municipal, and foreign statutes, laws (including, without limitation, common
law), judicial decisions, decrees, regulations, ordinances, rules, judgments,
orders, codes, injunctions, permits or governmental agreements or other
requirements relating to human health and safety, to the environment, including,
without limitation, natural resources, or to pollutants, contaminants, wastes,
chemicals, petroleum products, by-products or additives, asbestos,
asbestos-containing material, polychlorinated biphenyls, radioactive material,
hazardous
16
substances or wastes, or any other substance (including any product) regulated
as harmful or potentially harmful to human health or the environment.
2.16 Brokers' and Finders' Fees. Skipping Stone has not incurred, nor will
it incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.17 Employee Matters and Benefit Plans.
(a) Skipping Stone has delivered a true and complete list of, and made
available to Parent (including all amendments and the most recent written
summary plan descriptions and annual report (Form 5500 Series), if applicable),
all material pension, retirement, profit-sharing, deferred compensation, stock
option, employee stock ownership, severance pay, vacation, bonus or other
incentive or employee benefit plans, arrangements or agreements, whether arrived
at through collective bargaining or otherwise, including, without limitation,
all "employee benefit plans" (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
Skipping Stone or its subsidiaries or any Person required to be aggregated with
Skipping Stone pursuant to Section 414 of the Code for the benefit of current or
former employees, retirees, dependents, spouses, directors, independent
contractors or other beneficiaries and under which current or former employees,
retirees, dependents, spouses, directors, independent contractors or other
beneficiaries are eligible to participate (collectively, the "SKIPPING STONE
BENEFIT PLANS").
(b) (i) Each of the Skipping Stone Benefit Plans has been operated and
administered in accordance with its terms and in compliance with all applicable
laws, including, but not limited to, ERISA and the Code; (ii) each of Skipping
Stone Benefit Plans intended to be "qualified" within the meaning of Section
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service (copies of which letters have been provided to Parent
), and there are no existing circumstances or any events that have occurred that
would be reasonably expected to affect adversely the qualified status of any
such Skipping Stone Benefit Plan; (iii) neither Skipping Stone, or any Skipping
Stone Benefit Plan or any trust created thereunder, nor, to the best knowledge
of Skipping Stone, any trustee or administrator thereof, has engaged in a
transaction in connection with which Skipping Stone, any Skipping Stone Benefit
Plan, any such trust, or any trustee or administrator thereof, or any party
dealing with any Skipping Stone Benefit Plan or any such trust could be subject
to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or
a tax imposed pursuant to Section 4975 of the Code; (iv) neither Skipping Stone,
or any Skipping Stone Plan or any trust created thereunder, nor, to the best
knowledge of Skipping Stone, any trustee, administrator or other fiduciary of
any Skipping Stone Plan, or any agent of any of the foregoing has engaged in any
transaction or acted or failed to act in a manner that could
17
subject Skipping Stone to any liability for breach of fiduciary duty under ERISA
or any other applicable law; (v) no Skipping Stone Benefit Plan provides
benefits, including, without limitation, death or medical benefits (whether or
not insured), with respect to current or former employees or directors of
Skipping Stone or its subsidiaries beyond their retirement or other termination
of service, other than (A) coverage mandated by applicable law, (B) death
benefits or retirement benefits under any "employee pension plan" (as such term
is defined in Section 3(2) of ERISA), (C) deferred compensation benefits accrued
as liabilities on the books of Skipping Stone or its subsidiaries, or (D)
benefits the full cost of which is borne by the current or former employee or
director (or his beneficiary); (vi) there are no pending or, to Skipping Stone's
knowledge, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of or against any of Skipping Stone Benefit Plans or any
trusts related thereto; (vii) there are no audits, inquiries, or proceedings
pending, or to the knowledge of Skipping Stone, threatened, by the Internal
Revenue Service, the Department of Labor or any other Governmental Authority
with respect to any Skipping Stone Benefit Plan; (viii) there has been no
amendment to, or written interpretation or announcement (whether or not written)
relating to, any Skipping Stone Benefit Plan, and there is no plan or intention
to establish a new Skipping Stone Benefit Plan, which would materially increase
the expense of maintaining such Skipping Stone Benefit Plans in the aggregate
above the level of the expense incurred in respect thereof for the fiscal year
ended December 31, 2003, other than such amendments, interpretations or
announcements required under applicable laws; and (ix) none of Skipping Stone
Benefit Plans would result, separately or in the aggregate, in the payment of
any "excess parachute payment" within the meaning of Section 280G of the Code in
connection with the transactions contemplated by this Agreement.
(c) No Skipping Stone Benefit Plan is or within the last six years has
been subject to Title IV or Section 302 of ERISA, and no circumstances exist
that could result in any liability to Skipping Stone under Title IV or Section
302 of ERISA. No Skipping Stone Benefit Plan within the past six years is or has
been a multiemployer plan within the meaning of Section 3(37) of ERISA.
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby (nor any termination of
employment in connection with the transactions contemplated hereby) will (i)
result in any payment or forgiveness of indebtedness becoming due to any current
or former director or employee of Skipping Stone or any of its affiliates from
Skipping Stone or any of its affiliates under any Skipping Stone Benefit Plan or
otherwise, (ii) increase any benefits otherwise payable under any Skipping Stone
Benefit Plan or (iii) result in any acceleration of the time of payment or
vesting of any such benefits, except for any payments or vesting which would
occur upon a termination of employment absent the consummation of the
transactions contemplated hereby.
18
(e) All contributions required to be made to any Skipping Stone Benefit
Plan and all premiums due or payable with respect to insurance policies funding
any Skipping Stone Benefit Plan, have been timely made or paid in full or, to
the extent not required to be made or paid, have been fully reflected in
Skipping Stone Financial Statements to the extent required under GAAP.
(f) With respect to each Skipping Stone Benefit Plan which is an employee
welfare benefit plan (within the meaning of Section 3(1) of ERISA), all claims
incurred by Skipping Stone are (i) insured pursuant to a contract of insurance
whereby the insurance company bears any risk of loss with respect to such
claims, (ii) covered under a contract with a health maintenance organization (an
"HMO") pursuant to which the HMO bears the liability for claims or (iii)
reflected as a liability or accrued for on Skipping Stone Financial Statements.
(g) Each of Skipping Stone Benefit Plans may be amended or terminated at
any time by action of Skipping Stone's board of directors, or a committee of
such board of directors or duly authorized officer, in each case subject to the
terms of Skipping Stone Benefit Plan and compliance with applicable laws and
regulations.
2.18 Governmental Authorization. Skipping Stone and each of its
subsidiaries possesses all consents, licenses, permits, grants or other
authorizations issued to them by a Governmental Authority (i) pursuant to which
Skipping Stone or such subsidiaries currently operates or holds any interest in
any of its properties or (ii) which are required for the operation of its
business or the holding of any such interest, other than, in each case, such
consents, licenses, permits, grants or authorizations of which the failure to
obtain would not, either individually or in the aggregate, have a Material
Adverse Effect (herein collectively called "SKIPPING STONE AUTHORIZATIONS"),
which Skipping Stone Authorizations are in full force and effect and constitute
all Skipping Stone Authorizations required to permit Skipping Stone and its
subsidiaries to operate or conduct their respective businesses or hold any
interest in their respective properties or assets.
2.19 Agreements, Contracts and Commitments.
(a) Except as set forth on Part 2.19(a) of the Skipping Stone Disclosure
Schedule or pursuant to Section 5.5, neither Skipping Stone nor any of its
subsidiaries has, or is a party to, or is bound by:
(i) any fidelity or surety bond or completion bond;
(ii) any lease of personal property having a value individually in excess
of $25,000;
(iii) any agreement of indemnification or guaranty, other than such
indemnification obligations in the software license agreements of Skipping Stone
or its
19
subsidiaries entered into in the ordinary course of business consistent with its
past practice and which indemnification obligations are capped at an amount not
to exceed the revenues generated under such agreements;
(iv) any agreement, contract or commitment containing any covenant
limiting the freedom of Skipping Stone to engage in any line of business or to
compete with any person, including without limitation, any exclusive license
agreements or distribution agreements, except for non-disclosure and
non-circumvention agreements customary in Skipping Stone's or any of it
subsidiaries' business;
(v) any agreement, contract or commitment relating to capital expenditures
involving future payments in excess of $10,000 individually or $25,000 in the
aggregate;
(vi) any agreement, contract or commitment relating to the disposition or
acquisition of assets or any interest in any business enterprise outside the
ordinary course of business;
(vii) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit, including guaranties referred to in clause (iii) hereof;
(viii) any purchase order or contract for the purchase of raw materials
involving $25,000 or more;
(ix) any construction contract;
(x) any distribution, joint marketing or development agreement;
(xi) any agreement, contract or commitment pursuant to which Skipping
Stone has granted or may grant in the future, to any party a source-code license
or option or other right to use or acquire source-code; or
(xii) any other agreement, contract or commitment that involves $25,000 or
more or is not cancelable without penalty on no more than thirty (30) days
notice.
(b) Part 2.19(b) of the Skipping Stone Disclosure Schedule sets forth a
list of Skipping Stone's top fifteen (15) customers according to revenue for the
fiscal year last completed.
(c) Except for such alleged breaches, violations and defaults, and events
that would constitute a material breach, violation or default with the lapse of
time, giving of notice, or both, all of which are noted in Part 2.19(c) of the
Skipping Stone Disclosure Schedule, Skipping Stone has not materially breached,
violated or defaulted under, or received notice that it has breached, violated
or defaulted under, any of the terms or conditions of any contract required to
be set forth on Parts 2.19(a), 2.19(b) or 2.11 of the
20
Skipping Stone Disclosure Schedule. To the knowledge of Skipping Stone and the
Skipping Stone Stockholders, each such contract is in full force and effect and,
except as otherwise disclosed in Part 2.19(c) of the Skipping Stone Disclosure
Schedule, is not subject to any default thereunder by any party obligated to
Skipping Stone pursuant thereto.
2.20 Accounts Receivable.
(a) Skipping Stone has provided Parent with a list of all accounts
receivable of Skipping Stone as of February 29, 2004, together with a range of
days elapsed since invoice.
(b) All such accounts receivable arose in the ordinary course of business
and are carried at values determined in accordance with GAAP consistently
applied. No person has any lien on any such accounts receivable, and no written
request within the past six months or agreement for deduction or discount has
been made with respect to any such accounts receivable.
2.21 Complete Copies of Materials. Skipping Stone has delivered or made
available true and complete copies of each document (or summaries of same)
referred to in, or set forth on, the Skipping Stone Disclosure Schedules or the
due diligence book compiled January 2004 provided by Skipping Stone to Parent or
its counsel.
2.22 Representations Complete. None of the representations or warranties
made by Skipping Stone (as modified by the Skipping Stone Disclosure Schedule),
nor any statement made in the Skipping Stone Disclosure Schedule or certificate
furnished by Skipping Stone pursuant to this Agreement, or furnished in or in
connection with documents mailed or delivered to the Skipping Stone Stockholders
in connection with soliciting their consent to this Agreement and the
transactions contemplated herein, contains or will contain at the Effective
Time, any untrue statement of a material fact, or omits or will omit at the
Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to Skipping Stone as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the state of
California. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the state of Delaware. Each of Parent and Merger
Sub has the corporate
21
power and authority to own its properties and to carry on its business as now
being conducted.
3.2 Authority. Parent and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. No other corporate proceedings on the part of Parent or
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Parent and Merger Sub and, assuming the due authorization,
execution and delivery by Skipping Stone, constitutes the valid and binding
obligations of Parent and Merger Sub, enforceable in accordance with its terms
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally and (b) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.
3.3 No Conflict. Neither the execution and delivery of this Agreement by
Parent or Merger Sub, nor the consummation by Parent or Merger Sub of the
transactions contemplated hereby nor compliance by Parent or Merger Sub with any
of the provisions hereof, will (i) conflict with or result in a breach of any
provision of Parent's or Merger Sub's charter or bylaws, (ii) constitute or
result in a default under, or require any consent pursuant to, or result in the
creation of any lien on any asset of Parent or Merger Sub under, any contract of
Parent or Merger Sub that has been filed as an exhibit to Parent's filings under
the Securities Act or Exchange Act..
3.4 Merger Consideration Stock. The shares of Parent Common Stock to be
issued pursuant to the Merger have been duly authorized, and upon issuance
pursuant to Article I of this Agreement, will be validly issued, fully paid and
nonassessable.
3.5 Capitalization.
(a) The authorized capital stock of Merger Sub consists of one hundred
thousand (100,000) shares of Common Stock, par value $0.01 per share, of which
one thousand (1,000) shares were issued and outstanding on the date of this
Agreement. Except as set forth in the immediately preceding sentence, no shares
of capital stock or other securities of Merger Sub are issued, reserved for
issuance or outstanding. All outstanding shares of common stock of Merger Sub
are duly authorized, validly issued, fully paid and non-assessable. All
outstanding shares of common stock of Merger Sub have been issued in compliance
with applicable federal and state securities laws. There is no record date for
the declaration, setting aside or payment of a dividend or other distribution
with respect to common stock of Merger Sub, or any direct or indirect
redemption, purchase or other acquisition by Merger Sub of any of its capital
stock or any split, combination or reclassification in respect of any shares of
common stock of Merger Sub, or any issuance or authorization of any issuance of
any other securities in lieu of or in substitution for shares of common stock of
Merger Sub. Merger Sub has not conducted any business prior to the date hereof
and has not, and prior to the Effective
22
Time will have no, assets, Liabilities or obligations of any nature other than
those incident to its formation and pursuant to this Agreement and the Merger,
the other transactions contemplated by this Agreement.
(b) The authorized capital stock of Parent consists of (i) 50,000,000
shares of Parent Common Stock, of which 27,645,067 shares were issued and
outstanding on the date of this Agreement and (ii) 10,000,000 shares of
Preferred Stock, of which 1,000,000 shares have been designated as Series A
Preferred Stock, 609,000 of which were issued and outstanding on the date of
this Agreement. In addition, (i) pursuant to a September 2003 court ruling,
which is currently on appeal, Parent has reflected 352,000 shares of "Other
Convertible Preferred Stock" in its financial statements; and (ii) an additional
80,000 shares of capital stock are currently subject to pending litigation as to
their validity. In addition to the foregoing, as of the date of this Agreement,
(i) options to purchase a total of 2,027,000 shares of Parent Common Stock were
outstanding under the Parent Incentive Plan, as amended, (ii) options to
purchase a total of 4,812,250 shares of Parent Common Stock granted outside the
Parent Incentive Plan were outstanding, and (iii) Parent is authorized to grant
options to purchase up to 4,972,500 additional shares of Parent Common Stock
pursuant to the Parent Incentive Plan. Except as set forth in this Section
3.5(b), no shares of capital stock or other securities of Parent are issued,
reserved for issuance or outstanding. All outstanding shares of Parent Common
Stock and Series A Preferred Stock of Parent are duly authorized, validly
issued, fully paid and non-assessable. There is no record date for the
declaration, setting aside or payment of a dividend or other distribution with
respect to the Parent Common Stock or any direct or indirect redemption,
purchase or other acquisition by Parent of any of its capital stock or any
split, combination or reclassification in respect of any shares of Parent Common
Stock, or any issuance or authorization of any issuance of any other securities
in lieu of or in substitution for shares of Parent Common Stock.
(c) Except as described in this Section 3.5, there are no preemptive or
other outstanding rights, options, warrants, conversion rights, stock
appreciation rights, redemption rights, repurchase rights, agreements,
arrangements, calls, commitments or rights of any kind that obligate Parent or
any of its subsidiaries to issue or to sell any shares of capital stock or other
securities of Parent or any of its subsidiaries or any securities or obligations
convertible or exchangeable into or exercisable for, or giving any person a
right to subscribe for or acquire, any securities of Parent or any of its
subsidiaries, and no securities or obligation evidencing such rights are
authorized, issued or outstanding.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of Skipping Stone. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, except as permitted by this Agreement, and to
the extent that
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Parent shall otherwise consent in writing, such consent not to be unreasonably
withheld, Skipping Stone and each of its subsidiaries, subject to Section
2.9(j), will (i) carry on its business in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted, (ii) pay its debts and
Taxes when due (subject to the right to contest same in good faith), (iii) pay
or perform other obligations when due, and, (iv) use all reasonable efforts
consistent with its past practice and policies to preserve intact its present
business organization, including keeping available the services of its present
officers and employees and preserving its relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired its goodwill and
ongoing businesses at the Effective Time. Skipping Stone shall promptly notify
Parent of any event or occurrence or emergency not in the ordinary course of
business, and any material event involving or adversely affecting Skipping Stone
or its business. Except as expressly contemplated by this Agreement (including,
without limitation, Section 5.5 or 5.11 or 5.19) or set forth on Part 4.1 of the
Skipping Stone Disclosure Schedule, Skipping Stone will not, without the prior
written consent of Parent, which consent shall not be unreasonably withheld or
delayed:
(a) enter into any material commitment or transaction not in the ordinary
course of business consistent with Skipping Stone's past practices;
(b) (i) transfer to any person or entity any rights to Skipping Stone
Intellectual Property, (ii) enter into or amend any agreement with respect to
Skipping Stone Intellectual Property with any person or entity or with respect
to the Intellectual Property of any person or entity (other than intellectual
property rights acquired under "shrink-wrap" and similar widely available
commercial binary code end-user licenses), (iii) buy or license any Intellectual
Property, (iv) enter into any agreement with respect to the development of any
Intellectual Property or Technology;
(c) amend or otherwise modify (or agree to do so), or violate the material
terms of, any of the material agreements set forth or described in the Skipping
Stone Disclosure Schedule;
(e) commence any litigation or any dispute resolution process;
(f) declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of Skipping
Stone Common Stock, or split, combine or reclassify any of Skipping Stone Common
Stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of Skipping Stone Common Stock, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares of
Skipping Stone Common Stock (or options, warrants or other rights exercisable
therefor), other than pursuant to Skipping Stone Option Plan.
(g) except for the issuance of shares of Skipping Stone Common Stock upon
exercise of the presently outstanding options to purchase Skipping Stone Common
Stock, issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of,
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or purchase or propose the purchase of, any shares of Skipping Stone Common
Stock or securities convertible into, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue any Skipping Stone Common Stock or other convertible
securities;
(h) cause or permit any amendments to Skipping Stone's certificate of
incorporation or bylaws;
(i) acquire or agree to acquire by merging or consolidating with, or by
purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
Skipping Stone;
(j) sell, lease, license, loan or otherwise dispose of any of the material
properties or assets of Skipping Stone except in the ordinary course of business
and consistent with Skipping Stone's past practices;
(k) authorize any additional or new capital expenditure or expenditures
that individually is in excess of $10,000 or in the aggregate are in excess of
$25,000;
(l) incur any indebtedness for borrowed money, other than in the ordinary
course of business consistent with past practice, or guarantee any such
indebtedness or issue or sell any debt securities of Skipping Stone or guarantee
any debt securities of others;
(m) except as contemplated in Section 5.11, grant any severance or
termination pay or extraordinary compensation (whether in cash, stock, or other
equity instruments) to any director, officer, employee or consultant;
(n) except as contemplated in this Agreement, adopt or, except as may be
required by law, amend or terminate any employee benefit plan, program, policy
or arrangement (including without limitation any amendment which accelerates
vesting under any such employee benefit plan, program, policy or arrangement or
any existing employee plan) except to the extent such amendments do not result
in a material increase in cost, or enter into any employment contract, extend
any employment offer or loan, pay or agree to pay any special bonus or special
remuneration to any director, employee or consultant, or increase the salaries,
wage rates or benefits of its employees, nor grant any equity-based compensation
award (whether payable in cash, shares or otherwise), except for increases and
grants that are consistent with Skipping Stone's past practices and that occur
in the ordinary course of business;
(o) revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable;
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(p) pay, discharge or satisfy, in an amount in excess of $10,000 in any
one case or $20,000 in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction that is either in the ordinary course of
business or liabilities reflected or reserved against in Skipping Stone
Financial Statements;
(q) except as set forth on Part 2.9 of the Skipping Stone Disclosure
Schedule, make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(r) enter into any strategic alliance, joint development or joint
marketing arrangement or agreement;
(s) fail to pay or otherwise satisfy its monetary obligations in excess of
$10,000 in any one case or $20,000 in the aggregate, as they become due, other
than as being contested in good faith;
(t) cancel or amend any insurance policy;
(u) alter, or enter into any commitment to alter, its interest in any
corporation, association, joint venture, partnership or business entity in which
Skipping Stone directly or indirectly holds any interest on the date hereof; or
(v) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (v) above, or any other action that would
prevent Skipping Stone from performing or cause Skipping Stone not to perform
its covenants hereunder.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Ancillary Agreements. As soon as practicable after the date hereof,
the parties hereto will use commercially reasonable best efforts to negotiate
and execute, or cause to be negotiated and executed:
(a) the Registration Rights Agreement, substantially in the form attached
as EXHIBIT B, pursuant to which the Skipping Stone Stockholders will be granted
certain piggyback registration rights with respect to the Merger Shares;
(b) the Skipping Stone Stockholder Escrow Agreement, substantially in the
form attached as EXHIBIT C, pursuant to which the Skipping Stone Stockholders
agree to place, on a pro rata basis, twenty percent (20%) of the aggregate
number of Merger Shares to which each is entitled pursuant to Article I in
escrow for a period of six (6)
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months (plus a reasonable administrative period) after the Effective Time for
the benefit of Parent, which shares will be applied pursuant to the terms of the
Skipping Stone Stockholder Escrow Agreement to cover the Post-Closing True Up.
The terms governing the escrow contemplated in this Section 5.1(b) are set forth
in the Skipping Stone Stockholder Escrow Agreement, which terms shall govern
such escrow, the foregoing general description of such escrow notwithstanding.
(c) the Retention Escrow Agreement, substantially in the form attached as
EXHIBIT D, pursuant to which Xxxxx Xxxxxxx, Xxxx Xxxxxx, Xxxx Xxxx and Xxxxx
Xxxxxxxxxx will, in addition to participating in the share escrow contemplated
above in Section 5.1(b), place ten percent (10%) of the aggregate number of
Merger Shares to which each is entitled to receive pursuant to Article I in
escrow for a period, in the case of Xxxxx Xxxxxxx, of eighteen (18) months, and
in the case of each such other person, of twelve (12) months, which shares will
be forfeited pursuant to the terms of the Retention Escrow Agreement in each
case based on the occurrence of a voluntary resignation (but not upon death,
disability or certain changes of control not approved by the board) of such
person's employment with the Surviving Corporation and its affiliates, now
existing or existing after the Reorganization, following the Effective Time or
termination for cause of such employment as set forth in the Retention Escrow
Agreement. The terms governing the escrow contemplated in this Section 5.1(c)
are set forth in the Retention Escrow Agreement, which terms shall govern such
escrow, the foregoing general description of such escrow notwithstanding.
(d) the Xxxxx Xxxxxxx Non-Compete Agreement, substantially in the form
attached as EXHIBIT E.
5.2 Issuance of Merger Consideration Stock.
(a) Sale of Parent Common Stock. Each of the parties hereto acknowledges
and agrees that the shares of Parent Common Stock issuable to the Skipping Stone
Stockholders pursuant to Article I shall constitute "restricted securities"
within the meaning of the Securities Act. The certificates for such shares shall
bear appropriate legends to identify such privately placed shares as being
restricted under the Securities Act and to comply with applicable state
securities laws. Each of the parties hereto acknowledges and understands that
each of Parent and Merger Sub is relying upon certain written representations
made by each Skipping Stone Stockholder in issuing the shares of Parent Common
Stock.
(b) Blue Sky Laws. Parent shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions that are
applicable to the issuance of the Merger Shares pursuant hereto. Skipping Stone
shall use its reasonable best efforts to assist Parent as may be necessary to
comply with the securities and blue sky laws of all jurisdictions that are
applicable in connection with the issuance of the Merger Shares pursuant hereto.
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(c) Additional Assurances. At the request of Parent, each of the other
parties hereto shall use its commercially reasonable efforts to execute, or to
cause to be executed, and delivered to Parent such instruments and do and
perform such acts and things as may be necessary or desirable for complying with
all applicable securities laws and state corporate law.
5.3 Access to Skipping Stone Information. Skipping Stone shall afford to
Parent and its accountants, counsel and other representatives, reasonable access
during the period prior to the Effective Time to (i) all of the properties,
books, contracts, agreements and records of Skipping Stone, (ii) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of Skipping Stone as Parent may
reasonably request, and (iii) all employees of Skipping Stone as identified by
Parent. Skipping Stone agrees to provide Parent and its accountants, counsel and
other representatives copies of internal financial statements (including Tax
returns and supporting documentation) promptly upon request. No information or
knowledge obtained in any investigation pursuant to this Section 5.3 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of Skipping Stone to consummate the Merger.
5.4 Confidentiality. Each of the parties hereto shall (and shall cause
each of its representatives to) not disclose any information provided by the
other party with respect to the negotiation and execution of this Agreement or
the consummation of the transactions contemplated hereby, including for the
purposes of due diligence ("CONFIDENTIAL INFORMATION"), and shall (and shall
cause each of its representatives to) use the Confidential Information only with
respect to the consummation of the transactions contemplated hereby or as
otherwise provided by this Agreement; provided, however, that the following
shall be deemed not to be Confidential Information: (i) information that the
receiving party can demonstrate was already in its possession prior to the
disclosure thereof by the other party, (ii) information that is generally known
to the public and did not become so known through the violation of this Section
5.4 or any other confidentiality agreement between Parent and Skipping Stone by
the receiving party or its representatives, (iii) information that becomes
available to the receiving party on a non-confidential basis from a source other
than the other party or its representatives, provided that such source is not
known by the receiving party to be bound by a contractual, legal or fiduciary
obligation of confidentiality to the other party with respect to that
information, and (iv) information that is required to be disclosed by law or by
applicable rules and regulations. Skipping Stone acknowledges that the Parent
Common Stock may be publicly traded and that any Confidential Information with
respect to Parent could be considered to be material non-public information
within the meaning of U.S. federal and state securities laws. Accordingly,
Skipping Stone acknowledges and agrees not to (and shall inform each of its
officers, directors and employees not to) engage in any transactions in Parent
Common Stock in violation of applicable xxxxxxx xxxxxxx laws.
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5.5 Expenses. If the Merger is not consummated, all fees and expenses
incurred in connection with the Merger including, without limitation, all legal,
accounting, financial advisory, consulting, investment banking and all other
fees and expenses of third parties ("THIRD PARTY EXPENSES") shall be the
obligation of the party that incurred such Third Party Expenses; provided,
however, that if this Agreement is terminated in accordance with Article VIII
(other than a termination arising from a breach by Skipping Stone in any
material respect of its covenants, agreements, representations or warranties
contained herein), Parent shall (i) pay the Third Party Expenses incurred by
Skipping Stone prior to and including such termination and (ii) shall reimburse
Skipping Stone for the value of the consulting services provided by Skipping
Stone and its personnel to Parent and its affiliates in accordance with the rate
schedule set forth in the Consulting Services Agreement between the parties from
the date hereof up to and including such termination. Notwithstanding any other
provision of this Agreement to the contrary, if the Merger is consummated,
Skipping Stone shall be permitted to pay its Third Party Expenses; provided,
however, the payment of such Third Party Expenses shall be subject to the
Post-Closing True Up.
5.6 Public Disclosure. No disclosure (whether or not in response to an
inquiry) of the existence or nature of this Agreement or the transactions
contemplated hereby shall be made by any party hereto unless approved by duly
authorized officers of both Parent and Skipping Stone prior to release, provided
that such approval shall not be unreasonably withheld and subject in any event
to Parent's obligation to comply with applicable laws and the rules and
regulations.
5.7 Consents. The parties hereto shall use their reasonable best efforts
to obtain the consents, waivers and approvals as may be required in connection
with the Merger (all of such required consents, waivers and approvals of
Skipping Stone are set forth in Part 2.5 of the Skipping Stone Disclosure
Schedule) so as to preserve all rights of, and benefits to, Skipping Stone
thereunder from and after the Effective Time.
5.8 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable efforts to
take promptly, or cause to be taken, all actions, and to do promptly, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby, to obtain all necessary waivers, consents and approvals and to effect
all necessary registrations and filings, and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement.
5.9 Notification of Certain Matters. Skipping Stone shall give prompt
notice to Parent, and Parent shall give prompt notice to Skipping Stone, of (i)
the occurrence or non-occurrence of any event that is likely to cause any
representation or warranty of Skipping Stone, Parent or Merger Sub,
respectively, contained in this Agreement to be
29
untrue or inaccurate at or prior to the Effective Time and (ii) any failure of
Skipping Stone, Parent or Merger Sub, as the case may be, to comply with or
satisfy in all material respects any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section 5.9 shall not limit or otherwise affect
any remedies available to the party receiving such notice. No disclosure by
Skipping Stone pursuant to this Section 5.9, however, shall be deemed to amend
or supplement the Skipping Stone Disclosure Schedule or prevent or cure any
misrepresentations, breach of warranty or breach of covenant.
5.10 Additional Documents and Further Assurances. Each party hereto, at
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
reasonably desirable for effecting completely and promptly the consummation of
this Agreement and the transactions contemplated hereby; provided that nothing
in this Section 5.10 shall be construed to obligate any party to waive any of
the closing conditions set forth in Article VI.
5.11 Employees.
(a) Any employee Skipping Stone plans to terminate shall be terminated
effective as of the Closing Date, provided, however, that Parent shall be
notified of all such terminations as they occur and at least five (5) days prior
to the Closing Date and, provided, further, however, that Skipping Stone shall
be under no obligation to terminate any employee. Prior to the Closing Date, (i)
Skipping Stone may offer retention agreements to its employees, in form prepared
by Parent and reasonably acceptable to Skipping Stone, and (ii) Skipping Stone
may make bonus payments to such of its employees as it shall determine in its
sole discretion, provided, however, that in no event shall the aggregate value
of all such retention payments, bonus payments and all such distributions
pursuant to Section 5.19 exceed three hundred thousand dollars ($300,000) and,
provided, further, however, that any such retention payments, bonus payments and
distributions pursuant to Section 5.19 may only be made out of Skipping Stone's
cash on hand, cash equivalents and accounts receivable from Parent as of the
date of such payments.
(b) On the Effective Date, Parent shall grant stock options to purchase an
aggregate of Seven Hundred Thousand (700,000) shares of Parent Common Stock
pursuant to the terms of the Parent Incentive Plan in such amounts and to such
employees of Skipping Stone as set forth on EXHIBIT F. Such stock option grants
shall be subject to vesting in three equal annual installments, beginning on the
first anniversary of the Effective Date and contingent upon such employees
agreeing to mutually acceptable employment terms with the Surviving Corporation.
Additionally, such stock option grants shall be made in accordance with Parent's
past practice with respect to employee pay grade and organizational status. Such
stock option grants shall be evidenced by an
30
agreement in customary form for grants of stock options under the Parent
Incentive Plan, consistent with the terms and conditions hereof.
(c) EXHIBIT G sets forth the names of the Skipping Stone employees that
Skipping Stone, as of the date hereof, believes intend to be retained as
employees of the Surviving Corporation.
5.12 Skipping Stone Retention Agreements. As soon as practicable after the
date hereof, Skipping Stone and Parent will use reasonable best efforts to agree
upon the guidelines within which Skipping Stone will proceed with respect to the
retention following the Effective Time of certain existing Skipping Stone
employees.
5.13 Reorganization Treatment; Tax Matters.
(a) The parties intend the Merger to qualify as a "reorganization" under
Section 368(a) of the Code. Neither Parent nor the Surviving Corporation shall
take, or cause to be taken, any action that would, or fail to take any action,
or cause any action to fail to be taken, the omission of which would be likely
to, prevent or impede the Merger from qualifying as a "reorganization" under
Section 368(a) of the Code. Subject to the foregoing, none of the parties makes
any representation or warranty to any other or to any stockholder of any party
regarding the tax treatment of the Merger or whether the Merger will qualify as
a "reorganization" under the Code and each of the parties hereto acknowledges
that it is relying on its own advisors in connection with the Tax treatment of
the Merger and the other transactions contemplated by this Agreement.
(b) Each of the parties agrees that it will not take any position on any
federal, state or local income or franchise tax return, or take any other tax
reporting position, that is inconsistent with the treatment of the Merger as a
"reorganization" within the meaning of Section 368(a) of the Code.
(c) S Corporation Status. Skipping Stone and the Skipping Stone
Stockholders shall not revoke Skipping Stone's election to be taxed as an S
corporation within the meaning of Code Sections 1361 and 1362. Skipping
Stone and the Skipping Stone Stockholders shall not take or allow any action,
other than as contemplated in this Agreement, that would result in the
termination of Skipping Stone's status as a validly electing S corporation
within the meaning of Code Sections 1361 and 1362.
5.14 Skipping Stone's Director and Officer Indemnification.
(a) All rights to indemnification and permitted limitations of liability
for monetary damages existing in favor of the present or former directors,
officers and employees of Skipping Stone (other than for indemnification claims
for damages under Article VII of this Agreement) (the "COVERED D&O INDEMNITEES")
as provided in Skipping Stone's articles of incorporation or bylaws as in effect
on the date hereof or pursuant to any agreements previously disclosed by
Skipping Stone to Parent in writing
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with specific reference to this Section, with respect to matters occurring prior
to the Effective Time (including without limitation the transactions
contemplated by this Agreement) shall survive the Merger and shall continue in
full force and effect (to the extent consistent with applicable law) after the
Effective Time, without material alteration or amendment. After the Effective
Time, Parent shall, and shall cause the Surviving Corporation to, indemnify,
defend and hold harmless Covered D&O Indemnitees against all losses, claims,
damages or liabilities arising out of actions or omissions occurring at or prior
to the Effective Time (including without limitation the transactions
contemplated by this Agreement) to the full extent then permitted under Delaware
Law and by Skipping Stone's articles of incorporation or bylaws as in effect on
the date hereof; provided that such indemnification shall be subject to any
limitation imposed from time to time under applicable law. Without limiting the
foregoing, the Surviving Corporation, to the extent permitted by applicable law,
will periodically advance expenses as incurred with respect to the foregoing to
the fullest extent permitted under applicable law; provided that the person to
whom the expenses are advanced provides an undertaking to repay such advances if
it is ultimately determined that such person is not entitled to indemnification.
(b) This Section 5.14 is intended for the benefit of, and shall be
enforceable by, the Covered D&O Indemnitees, their heirs and personal
representatives, and shall be binding on the Surviving Corporation and Parent or
their respective successors or assigns.
5.15 Additional Financial Statements. At least five (5) days prior to the
Closing, Skipping Stone shall deliver to Parent:
(a) Skipping Stone's audited consolidated balance sheets as of December
31, 2003 and the related consolidated statements of operations and retained
earnings, and cash flows for the year then ended; and
(b) Skipping Stone's unaudited balance sheet as of a date within five (5)
days of the Closing Date (the "CLOSING BALANCE SHEET").
(c) All of the financial statements to be delivered pursuant to this
Section 5.15 shall be prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered (except that the financial statements
referred to in Section 5.15(b) will not contain footnotes and will be subject to
normal and recurring year-end audit adjustments).
5.16 Skipping Stone Employee Plans. Skipping Stone shall take all such
actions as are necessary or appropriate to terminate all group severance,
separation or salary continuation plans, programs or arrangements, effective no
later than the day immediately preceding the Closing Date, except as Skipping
Stone and Parent shall otherwise agree. Effective as of the day before the
Closing Date, Skipping Stone shall terminate its 401(k) plan. No later than five
(5) business days prior to the Closing Date, Skipping Stone shall provide Parent
with evidence that Skipping Stone's 401(k) plan has
32
been terminated (effective as of the day before the Closing Date) pursuant to a
plan termination amendment adopted by Skipping Stone's board of directors. The
form and substance of such amendment and resolutions shall be subject to review
and approval of Parent. Skipping Stone shall also take such other actions in
furtherance of terminating its 401(k) plan as Parent may reasonably require,
including furnishing to Parent at the Closing a copy of a completed IRS Form
5310 (Application for Determination for Terminating Plan) for the plan.
5.17 Bank Debt. Parent shall use reasonable best efforts to take all
necessary action in connection with (a) the pay off and termination or (b)
assumption of the SBA Loan and Revolving Credit Facility, dated as of April 27,
2001 between Skipping Stone and PNC Bank (the "BANK DEBT"), prior to the
Effective Time so that all personal guarantees of Xxxxx Xxxxxxx thereunder shall
be released and fully discharged effective as of the Effective Time. In the
event that, notwithstanding such reasonable best efforts, such Bank Debt is
neither terminated nor assumed by Parent, then, within ten (10) days after the
Effective Time, Parent shall pay and discharge, or cause the Surviving
Corporation to pay and discharge the Bank Debt in full.
5.18 Certain Tax Returns of the Company. The Skipping Stone Stockholders
shall prepare or cause to be prepared any income Tax Returns of Skipping Stone
and its subsidiaries that are required to be filed after the Effective Time and
which relate to any taxable period ending on or before the Effective Time (which
income Tax Returns shall then be signed and filed by an appropriate officer of
Skipping Stone). The Surviving Corporation shall fully cooperate with the
Skipping Stone Stockholders in connection with the preparation of those Tax
Returns, including providing reasonable access to the information necessary to
the completion of those Tax Returns. The parties hereto acknowledge and agree
that the taxable year of Skipping Stone for all pertinent income tax purposes
closes as of the Effective Date and that the items that are taken into account
on Skipping Stone's income Tax Returns for the short taxable year ending with
the Effective Date shall be determined in accordance with an automatic closing
of Skipping Stone's books in accordance with Section 1362(e)(6)(D) of the Code.
5.19 Special Dividend or Distribution. Notwithstanding anything herein to
the contrary, Skipping Stone may declare, set aside or pay a cash dividend on,
or make any other cash distribution in respect of, the Skipping Stone Common
Stock on or prior to the Effective Time; provided that in no event shall the
aggregate value of all such dividends or distributions and all bonus or
retention payments, if any, pursuant to Section 5.11(a) exceed three hundred
thousand dollars ($300,000).
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ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Stockholder Approval. Skipping Stone Stockholder Approval shall have
been obtained.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition (i)
preventing the consummation of the Merger, (ii) prohibiting Parent's ownership
or operation of any portion of the business of Skipping Stone or (iii)
compelling Parent or Skipping Stone to dispose of or hold separate all or any
material portion of the business or assets of Skipping Stone or Parent as a
result of the Merger, shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing be threatened
or pending shall be in effect.
(c) Government Approvals. All approvals of governments and government
agencies necessary to consummate the Merger hereunder, shall have been received.
(d) No Order. No Governmental Authority shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger.
6.2 Additional Conditions to Obligations of Skipping Stone. The
obligations of Skipping Stone to consummate the Merger and the transactions
contemplated by this Agreement shall be subject to the satisfaction at or prior
to the Closing of each of the following conditions, any of which may be waived,
in writing, exclusively by Skipping Stone:
(a) Representations and Warranties. The representations and warranties of
Parent and Merger Sub contained in this Agreement shall be true and correct in
all material respects (except for those representations and warranties that are
by their terms qualified by a standard of materiality, which representations and
warranties shall have been true and correct in all respects) on and as of the
date of this Agreement and on and as of the Closing Date, except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date), with the same force
and effect as if made on and as of the Effective Time, and Skipping Stone shall
have received a certificate to such effect signed on behalf of Parent by a duly
authorized officer.
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(b) Legal Opinion. Skipping Stone shall have received a legal opinion from
Paul, Hastings, Xxxxxxxx & Xxxxxx LLP, legal counsel to Parent and Merger Sub,
in substantially the form attached hereto as EXHIBIT H.
(c) Agreements and Covenants. Parent and Merger Sub shall have performed
or complied in all material respects with each of the agreements and covenants
required by this Agreement to be performed or complied with by them on or prior
to the Effective Time, and Skipping Stone shall have received a certificate to
such effect signed by a duly authorized officer of Parent.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. The representations and warranties of
Skipping Stone and the Skipping Stone Stockholders contained in this Agreement
shall be true and correct in all material respects (except for those
representations and warranties that are by their terms qualified by a standard
of materiality, which representations and warranties shall be true and correct
in all respects) on and as of the date of this Agreement and on and as of the
Closing Date, except for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of
such date) and for changes contemplated or permitted by this Agreement, with the
same force and effect as if made on and as of the Closing Date, and Parent and
Merger Sub shall have received a certificate to such effect signed on behalf of
Skipping Stone by the Chief Executive Officer of Skipping Stone.
(b) Agreements and Covenants. Skipping Stone shall have performed or
complied in all material respects with each of the agreements and covenants
required by this Agreement to be performed or complied with by Skipping Stone on
or prior to the Effective Time, and Parent and Merger Sub shall have received a
certificate to such effect signed on behalf of Skipping Stone by the Chief
Executive Officer of Skipping Stone.
(c) Certificate of Secretary of Skipping Stone. Parent shall have received
a certificate, validly executed by the Secretary of Skipping Stone, certifying
as to (i) the terms and effectiveness of the certificate of incorporation and
the bylaws of Skipping Stone, and (ii) the valid adoption of resolutions of the
board of directors of Skipping Stone and the Skipping Stone Stockholders
approving this Agreement and the consummation of the transactions contemplated
hereby.
(d) Third Party Consents. Parent shall have been furnished with evidence
satisfactory to it that Skipping Stone has obtained all required consents,
approvals and waivers which are necessary in connection with the Merger to
transfer to the Surviving Corporation all rights of Skipping Stone thereunder.
35
(e) Legal Opinion. Parent shall have received a legal opinion from Stroock
& Stroock & Xxxxx LLP, legal counsel to Skipping Stone, in substantially the
form attached hereto as EXHIBIT I.
(f) Material Adverse Change. There shall not have occurred any event or
condition of any character that has had or is reasonably likely to have a
Material Adverse Effect determined without regard to whether such change
constitutes a breach of a representation or warranty.
(g) Resignation of Directors. The directors of Skipping Stone in office
immediately prior to the Effective Time shall have resigned as directors of the
Surviving Corporation effective immediately prior to the Effective Time.
(h) Certificate of Good Standing. Parent shall have received a certificate
of good standing for Skipping Stone from the Secretary of State of the State of
Delaware, dated within a reasonable period prior to the Closing Date.
(i) Certificate of Status of Foreign Corporation. Parent shall have
received a Certificate of Status of Foreign Corporation or similar certificate
of Skipping Stone issued by the Secretary of State of such states where Skipping
Stone is qualified to do business dated within a reasonable period prior to the
Closing Date certifying as to the good standing of Skipping Stone in such
states.
(j) Diligence Review. Parent shall have completed its review of Skipping
Stone and Skipping Stone's business and assets and liabilities to Parent's
satisfaction and such review shall not have revealed any liability of Skipping
Stone or cost associated with consummation of the Merger of which Parent was not
fully aware on the date hereof and which Skipping Stone does not cure within a
reasonable period of time after notice of such liability or cost, such
reasonable period of time to be agreed upon by Parent and Skipping Stone through
good-faith negotiations on a case-by-case basis.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
7.1 Survival of Representations.
(a) Each party hereto shall have the right to rely fully upon the
representations, warranties, covenants and agreements of the other party
contained in this Agreement or in any instrument delivered pursuant to this
Agreement. All of the representations and warranties made by Skipping Stone and
the Skipping Stone Stockholders contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Merger and continue until
5:00 p.m., California time, on the one year anniversary of the Effective Time
(the "EXPIRATION DATE"); provided, however, that the representations and
warranties contained in Section 2.9 (Tax Matters) shall
36
survive until the expiration of all applicable statutes of limitations (giving
effect to any waiver, mitigation or extension thereof). All representations and
warranties made by Parent and Merger Sub (other than relating to tax matters,
which shall survive until the expiration of all applicable statutes of
limitations (giving effect to any waiver, mitigation or extension thereof))
shall terminate and expire as of the Effective Time, and any liability of Parent
or Merger Sub with respect to such representations and warranties shall
thereupon cease The covenants and agreements of each party to this Agreement set
forth herein and in any ancillary documents hereto that are to be performed
following the Closing Date shall survive the Closing and continue in full force
and effect until such covenants and agreements are performed in accordance with
the terms of this Agreement and the applicable ancillary document. The foregoing
notwithstanding, nothing in this Section 7.1(a) shall be construed to prevent a
claim against any party to this Agreement for fraud or intentional
misrepresentation in connection herewith or the transactions contemplated
hereby.
(b) For purposes of this Article VII, each statement or other item of
information set forth in the Skipping Stone Disclosure Schedule shall be deemed
to be part of the relevant representation and warranty made by Skipping Stone
and the Skipping Stone Stockholders in this Agreement. The representations and
warranties made by Skipping Stone and the Skipping Stone Stockholders contained
in this Agreement or in any other document, certificate, schedule or instrument
delivered or executed in connection herewith shall be deemed to be made as of
the date of this Agreement and as of the Closing Date (except to the extent any
such representation or warranty expressly speaks of an earlier date), subject,
as provided in this Agreement, to the exceptions set forth in the Skipping Stone
Disclosure Schedule.
7.2 Indemnification.
(a) From and after the Closing Date (but subject to Section 7.1(a)),
recipients of Merger Shares pursuant to Article I (collectively, the
"INDEMNIFYING PARTY") shall jointly and severally hold harmless and shall
indemnify each Indemnitee from and against, and shall compensate, reimburse and
pay for, any damages which are directly or indirectly suffered or incurred by
any Indemnitee or to which any Indemnitee may otherwise become subject
(regardless of whether or not such damages relate to any third-party claim) and
which arise from or as a result of, or are directly or indirectly connected
with: (i) any inaccuracy in or breach or alleged breach of any representation or
warranty of Skipping Stone set forth in this Agreement or in any other document,
certificate, schedule or instrument delivered or executed in connection herewith
(without giving effect to any materiality or knowledge qualification or any
similar qualification contained or incorporated directly or indirectly in such
representation or warranty); (ii) any breach or alleged breach of any covenant
or obligation of Skipping Stone (including the covenants set forth in Article IV
and Article V); (iii) any demands by holders of Skipping Stone Common Stock
under Chapter 13 of the Delaware Law; or (iv) any legal proceeding relating to
any inaccuracy or breach of the type referred to in clauses (i) or (ii)
37
above (including any legal proceeding commenced by any Indemnitee for the
purpose of enforcing any of its rights under this Article VII).
(b) In the event the Surviving Corporation suffers, incurs or otherwise
becomes subject to any damages as a result of or in connection with any
inaccuracy in or breach or alleged breach of any representation, warranty,
covenant or obligation, then (without limiting any of the rights of the
Surviving Corporation as an Indemnitee) Parent shall also be deemed, by virtue
of its ownership of the stock of the Surviving Corporation, to have incurred
damages as a result of and in connection with such inaccuracy or breach.
(c) Threshold. No Indemnitee shall be entitled to indemnification pursuant
to Article VII for breach of representations and warranties until such time as
the total amount of all damages (including the damages arising from such
inaccuracy or breach and all other damages arising from any other inaccuracies
in or breaches of any representations or warranties) that have been directly or
indirectly suffered or incurred by any one or more of the Indemnitees, or to
which any one or more of the Indemnitees has or have otherwise become subject,
exceeds twenty-five thousand dollars ($25,000) in the aggregate, and then only
for the amount of such excess.
(d) Indemnity Cap. Notwithstanding anything in this Agreement to the
contrary, the aggregate liability of the Skipping Stone Stockholders for any
indemnification payments under Article VII for breaches of representations and
warranties or otherwise in this Agreement shall be limited to, and shall not
exceed, one million dollars ($1,000,000) (the "INDEMNITY CAP"); provided,
however, that the Indemnity Cap shall not apply to any indemnification
obligations of the recipients of the Indemnifying Party arising out of any fraud
or intentional misrepresentation by Skipping Stone or the Skipping Stone
Stockholders; provided, further, however, that the Indemnity Cap and the
provisions of this Section 7.2(d) shall not effect, or be determined with
respect to, any escrow arrangement contemplated in Section 5.1 of this Agreement
or the exhibits referenced therein.
7.3 No Contribution. The Indemnifying Party shall not have and shall not
exercise or assert (or attempt to exercise or assert), any right of
contribution, right of indemnity or other right or remedy against the Surviving
Corporation in connection with any indemnification obligation or any other
liability to which such persons may become subject under or in connection with
this Agreement.
7.4 Tax Treatment; Form of Payment.
(a) The parties hereto shall report any indemnification payment made
pursuant to this Article VII as a purchase price adjustment, unless otherwise
required by applicable legal requirements.
38
(b) Any payment to be made pursuant to this Article VII by Skipping Stone
or the Skipping Stone Stockholders may at the option of the Skipping Stone
Stockholders be made in shares of Parent Common Stock, which shares shall be
delivered free and clear of any lien within five (5) business days of the date
on which any such payment obligation is conclusively determined in accordance
with the terms of this Agreement. For the purposes of determining the number of
shares of Parent Common Stock to be paid in accordance with this Section 7.4(b),
the value of each such share shall deemed to be the Parent Share Price.
7.5 Arbitration.
(a) Each of the parties hereby waives its right to resolve any
controversy, claim or dispute involving the parties (or their affiliated
persons) directly or indirectly concerning this Article VII or the subject
matter hereof through any court proceeding or litigation and acknowledges that
all such controversies, claims or disputes, shall be finally settled in
accordance with the provisions of this Section 7.5. Each of the parties
represents to the other that this waiver is made knowingly and voluntarily after
consultation with and upon the advice of counsel and is a material part of this
Agreement.
(b) In the event of any controversy, claim or dispute arising out of or
relating to this Article VII, the Indemnitees shall provide written notice
specifying in reasonable detail the particulars of the dispute, the provisions
of the Agreement which are involved and the party's suggested resolution of the
controversy. Thereupon, the parties agree to attempt in good faith to
expeditiously resolve the controversy, claim or dispute by good faith
negotiation for a period of at least thirty (30) days, including, without
limitation, at least one face-to-face meeting between the Skipping Stone
Stockholders owning a majority of the Skipping Stone Common Stock on the date
hereof and an officer of Parent with authority to resolve any such controversy,
claim or dispute.
(c) If these negotiations fail to result in a resolution within thirty
(30) days, then such Indemnitee may submit such controversy, claim or dispute to
mandatory and binding arbitration held in Orange County, California, in
accordance with the rules of commercial arbitration then followed by the
American Arbitration Association or any successor to the functions thereof. The
arbitrator shall have the right and authority to determine how his decision or
determination as to each issue or matter in dispute may be implemented or
enforced. Any decision or award of the arbitrator shall be final and conclusive
on the parties to this Agreement and their respective affiliates, and may be
entered and enforced in any court of competent jurisdiction.
(d) The parties hereto agree that any action to compel arbitration
pursuant to this Agreement may be brought in the appropriate Orange County,
California, court and in connection with such action to compel the laws of the
State of Delaware shall control. Application may also be made to such court for
confirmation of any decision or award of the arbitrator, for an order of the
enforcement and for any other remedies which may be necessary to effectuate such
decision or award. The parties hereto hereby consent to the
39
jurisdiction of the arbitrator and the exclusive jurisdiction of such court and
waive any objection to the jurisdiction of such arbitrator and court.
(e) Each of the Indemnitee, on the one hand, and Skipping Stone and the
Skipping Stone Stockholders, on the other hand, shall pay an equal one-half
(1/2) of all costs, fees and expenses of the arbitration and, notwithstanding
any law to the contrary, each party will bear the fees, costs and expenses of
its own counsel, experts and witnesses; provided, however, that in connection
with any judicial proceeding to compel arbitration pursuant to this Agreement or
to confirm, vacate or enforce any award rendered by an arbitrator, the
prevailing party in such a proceeding shall be entitled to recover reasonable
attorney's fees and expenses incurred in connection therewith, in addition to
any other relief to which it may be entitled.
(f) Notwithstanding the foregoing in this Section 7.5, however, nothing
contained herein shall require arbitration of any issue arising under this
Agreement for which injunctive relief is successfully sought.
7.6. Exclusive Remedy; Limitation on Damages. Any provision of this
Agreement to the contrary notwithstanding, (i) from and after the Closing, with
the exceptions of Section 5.13 relating to taxes and covenants which survive the
Closing in accordance with Section 7.1(a), the indemnification provisions in
this Article VII shall, except in cases of fraud or in the case of equitable
claims, be the exclusive remedy of the parties hereto with respect to any and
all damages relating to this Agreement and the transactions contemplated hereby
and shall be in lieu of any rights the parties may have under law (as opposed to
equity) with respect thereto, and (ii) in no event shall damages include any
consequential or incidental damages of any kind; provided, however, that the
provisions of this Section 7.6(i) shall not have any effect with respect to any
escrow arrangement contemplated in Section 5.1 of this Agreement or the exhibits
hereto.
7.7 Special Indemnification for Shareholder Litigation. Parent and Merger
Sub shall hold harmless and shall indemnify Skipping Stone and each of the
Skipping Stone Stockholders from and against, and shall compensate, reimburse
and pay for, any judgments, costs, damages, losses, liabilities, claims,
actions, demands or expenses (including costs of investigation and defense and
reasonable attorneys' fees) which are directly or indirectly suffered or
incurred by any of Skipping Stone or the Skipping Stone Stockholders or to which
any of Skipping Stone or the Skipping Stone Stockholders may otherwise become
subject (regardless of whether or not such damages relate to any third-party
claim) and which arise from or as a result of, or are directly or indirectly
connected with, any litigation or other proceeding commenced by any shareholder
(subject to the exception and limitation set forth in the last sentence of this
Section 7.7) of Parent or Merger Sub or any of their affiliates (whether in its
individual capacity or in a derivative action brought on behalf or for the
benefit of Parent or Merger Sub or any of their affiliates) against any of
Skipping Stone or the Skipping Stone Stockholders relating to this Agreement and
the transactions contemplated hereby, so long as such litigation or
40
other proceeding does not result from the fraud, intentional misrepresentation,
willful misconduct, bad faith or material breach of this Agreement by Skipping
Stone or the Skipping Stone Stockholders. Notwithstanding any other provision of
this Agreement, this Section 7.7 shall remain in full force and effect and
survive any termination of this Agreement. Any provision to the contrary in
Section 7.7 notwithstanding, in no event shall any corporate person who, as of
the date of this Agreement or in the future, controls, is controlled by, or is
under common control with, Parent (including, without limitation, Commerce
Energy Group, a Delaware corporation) be prohibited from bringing a claim
against Skipping Stone or the Skipping Stone Stockholders pursuant to and in
accordance with the terms of this Agreement, and furthermore, in no event shall
this Section 7.7 prohibit or otherwise effect any right of Parent to assign its
rights, interests or obligations under this Agreement pursuant to Section 9.10.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated and the Merger abandoned
at any time prior to the Effective Time, whether before or after approval of the
Merger by the Skipping Stone Stockholders:
(a) by mutual written consent of Skipping Stone and Parent;
(b) by either Skipping Stone or Parent if: (i) the Effective Time has not
occurred by ninety (90) days after the date hereof (provided that the right to
terminate this Agreement under this Section 8.1(b)(i) shall not be available to
any party whose failure to fulfill an obligation hereunder has been the cause
of, or resulted in, the failure of the Effective Time to occur on or before such
date); (ii) there shall be a final nonappealable order of a federal or state
court in effect preventing consummation of the Merger; or (iii) there shall be
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Authority that would make
consummation of the Merger illegal;
(c) by either Skipping Stone or Parent if a Governmental Authority shall
have issued an order, decree or ruling or taken any other action, in any case
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Merger, which order, decree or ruling is final and nonappealable;
(d) by Skipping Stone if it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement on the part of Parent set forth in this
Agreement, or if any representation or warranty of Parent shall have become
untrue such that the conditions set forth in Section 6.2(a) or Section 6.2(c)
would not then be satisfied; provided that if such inaccuracy in Parent's
representations and warranties or breach by Parent is curable by Parent or
through the exercise of commercially reasonable efforts, then Skipping Stone may
only
41
terminate this Agreement under this Section 8.1(d) if the breach is not cured
within thirty (30) days following the date of written notice from Skipping Stone
of such breach;
(f) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a breach of any representation, warranty,
covenant or agreement on the part of Skipping Stone set forth in this Agreement,
or if any representation or warranty of Skipping Stone shall have become untrue,
in either case such that the conditions set forth in Section 6.3(a) or Section
6.3(b) would not then be satisfied; provided, that if such inaccuracy in
Skipping Stone's representations and warranties or breach by Skipping Stone is
curable by Skipping Stone through the exercise of its commercially reasonable
efforts, then Parent may only terminate this Agreement under this Section 8.1(f)
if the breach is not cured within thirty (30) days following the date of written
notice from Parent of such breach;
(g) by Parent, if a Material Adverse Effect shall have occurred after the
date of this Agreement, and such Material Adverse Effect has not been cured
within thirty (30) days; provided, however, that no cure period shall be
required for a Material Adverse Effect which by its nature cannot be cured; or
(h) Where action is taken to terminate this Agreement pursuant to this
Section 8.1, it shall be sufficient for such action to be authorized by the
board of directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Merger Sub or
Skipping Stone or their respective officers, directors, employees, agents,
consultants, representatives or stockholders; provided that each party shall
remain liable for any breaches of this Agreement prior to its termination; and
provided further that the provisions of Sections 5.4, 5.5, 5.6 7.6 and 7.7 and
Articles VIII and IX of this Agreement shall remain in full force and effect and
survive any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after the
Skipping Stone Stockholders approve this Agreement, this Agreement may be
amended by the parties hereto at any time only by execution of an instrument in
writing signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent and
Merger Sub, on the one hand, and Skipping Stone, on the other, may, to the
extent legally allowed, (a) extend the time for the performance of any of the
obligations of the other party hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or
42
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent or Merger Sub:
Xx. Xxx X. Xxxxxx
Chairman of the Board and Chief Executive Officer
Commonwealth Energy Corporation
00000 Xxx Xxxx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxxxx 00000
Phone: (000) 000-0000
Fax: (000) 000-0000
with a copy to (which copy shall not constitute notice):
Paul, Hastings, Xxxxxxxx & Xxxxxx LLP
Attn: Xxxx X. Xxxxx Xxxxxx, Esq.
000 Xxxx Xxxxxx Xxxxx
Xxxxxxxxxxx Xxxxx
Xxxxx Xxxx, Xxxxxxxxxx 00000
Phone: (000) 000-0000
Fax: (000) 000-0000
if to Skipping Stone:
[To be specified.]
with a copy to (which copy shall not constitute notice):
Stroock & Stroock & Xxxxx LLP
Attn: Xxxxxxx X. Xxxxxxxx, Esq.
000 Xxxxxx Xxxx
00
Xxx Xxxx, Xxx Xxxx 00000-0000
Phone: (000) 000-0000
Fax: (000) 000-0000
if to a Skipping Stone Stockholder:
[To be specified.]
with a copy to (which copy shall not constitute notice):
Stroock & Stroock & Xxxxx LLP
Attn: Xxxxxxx X. Xxxxxxxx, Esq.
000 Xxxxxx Xxxx
Xxx Xxxx, Xxx Xxxx 00000-0000
Phone: (000) 000-0000
Fax: (000) 000-0000
9.2 Interpretation. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The word "agreement" when used herein shall be deemed in each case
to mean any contract, commitment or other agreement, whether oral or written,
that is legally binding. The word "person" or "persons" when used herein shall
be deemed in each case to mean any individual, partnership, corporation
(including a business trust), joint stock company, a limited liability company,
an unincorporated association, a joint venture or other entity or a governmental
authority. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When reference is made herein to "the business
of" an entity, such reference shall be deemed to include the business of all
direct and indirect subsidiaries of such entity. Reference to the subsidiaries
of an entity shall be deemed to include all direct and indirect subsidiaries of
such entity.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement. This Agreement, the Skipping Stone Disclosure
Schedule, and the documents and instruments and other agreements among the
parties hereto referenced herein: (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject
44
matter hereof; and (b) are not intended to confer upon any other person any
rights or remedies hereunder, except as contemplated by Section 9.11.
9.5 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction of
any state or federal court within the State of Delaware, in connection with any
matter based upon or arising out of this Agreement or the matters contemplated
herein, and agrees that process may be served upon them in any manner authorized
by the laws of the State of Delaware for such persons and waives and covenants
not to assert or plead any objection that they might otherwise have to such
jurisdiction and such process.
9.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other party, provided, however, that, after the Effective Time, Parent
may assign any of its
45
rights, interests and obligations hereunder to any corporate person who, as of
the date of this Agreement or in the future, controls, is controlled by, or is
under common control with, Parent (including, without limitation, Commerce
Energy Group, a Delaware corporation). Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
9.11 Absence of Third Party Beneficiary Rights. Except as set forth in
Section 5.14(b), no provisions of this Agreement are intended, nor shall be
interpreted, to provide or create any third party beneficiary rights or any
other rights of any kind in any client, customer, affiliate, partner of any
party hereto or any other person or entity unless specifically provided
otherwise herein.
9.12 Stockholder's Agreement. Each of the Skipping Stone Stockholders
hereby agrees that the Stockholder's Agreement, dated as of June 2, 1997 by and
between Skipping Stone, Inc. and the stockholders party thereto shall be
terminated and of no further force and effect, effective as of the Effective
Time.
46
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized respective officers as of the date first written
above.
COMMONWEALTH ENERGY CORPORATION
By: /s/ Xxx X. Xxxxxx
------------------------------------------
Name: Xxx X. Xxxxxx
Title: Chairman and Chief Executive Officer
SKIPPING STONE ACQUISITION CORPORATION
By: /s/ Xxx X. Xxxxxx
------------------------------------------
Name: Xxx X. Xxxxxx
Title: Chairman and Chief Executive Officer
SKIPPING STONE INC.
By: /s/ Xxxxx Xxxxxxx
------------------------------------------
Name: Xxxxx Xxxxxxx
Title: Chief Executive Officer
COMPANY STOCKHOLDERS
XXXXX XXXXXXX
By: /s/ Xxxxx Xxxxxxx
------------------------------------------
Xxxxx Xxxxxxx
XXXX XXXXXX
By: /s/ Xxxx Xxxxxx
------------------------------------------
Xxxx Xxxxxx
XXXX XXXX
47
By: /s/ Xxxx Xxxx
------------------------------------------
Xxxx Xxxx
XXXXX XXXXXXXXXX
By: /s/ Xxxxx Xxxxxxxxxx
------------------------------------------
Xxxxx Xxxxxxxxxx
:
48
EXHIBIT A
"AGREEMENT" has the meaning set forth in the first paragraph of this
Agreement.
"AFFILIATED GROUP" means any affiliated group within the meaning of Code
Section 1504(a) or any similar group defined under a similar provision of state,
local or foreign law.
"CERTIFICATE OF MERGER" has the meaning set forth in Section 1.1.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CLOSING" has the meaning set forth in Section 1.6.
"CLOSING BALANCE SHEET" has the meaning set forth in Section 5.15(b).
"CLOSING DATE" has the meaning set forth in Section 1.6.
"CONFIDENTIAL INFORMATION" has the meaning set forth in Section 5.4.
"COVERED D&C INDEMNITEES" has the meaning set forth in Section 5.14(a).
"DELAWARE LAW" has the meaning set forth in Section 1.2.
"DISSENTING SHARES" has the meaning set forth in Section 1.9(a).
"EFFECTIVE TIME" has the meaning set forth in Section 1.1.
"ENVIRONMENTAL LAWS" has the meaning set forth in Section 2.15(b).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE RATIO" means the result of dividing Skipping Stone Share Price
by the Parent Share Price.
"ERISA" has the meaning set forth in Section 2.17(a).
"EXPIRATION DATE" has the meaning set forth in Section 7.1(a).
"GAAP" has the meaning set forth in Section 2.6(b).
"GOVERNMENTAL AUTHORITY" means any (i) nation, state, commonwealth,
province, territory, country, municipality, district or other jurisdiction of
any nature; (ii) federal, state, local, municipal, foreign, supranational or
other government; or (iii) governmental, self-regulatory or quasi-governmental
authority of an nature (including any governmental
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division, department, agency, commission, instrumentality, official,
organization, unit, body or entity and any court or other tribunal).
"HMO" has the meaning set forth in Section 2.17(f).
"INDEMNIFYING PARTY" has the meaning set forth in Section 7.2(a).
"INDEMNITEES" mean Parent, Merger Sub and their respective parents and
affiliates, now existing or existing after the Reorganization and their
successors and assigns, and each of such person's officers, directors,
stockholders, attorneys and agents, provided, however, that in no event shall
this definition include a person who is included in the definition of
Indemnifying Party.
"INDEMNITY CAP" has the meaning set forth in Section 7.2(d).
"INTELLECTUAL PROPERTY" has the meaning set forth in Section 2.11(a).
"LEGAL PROCEEDING" means any ongoing or threatened action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Authority or any
arbitrator or arbitration panel.
"MATERIAL ADVERSE EFFECT" means, with respect to any person or entity, any
change, event or effect that, individually or when taken together with all other
such changes, events or effects that have occurred prior to the date of
determination of the occurrence of the Material Adverse Effect, is or is
reasonably likely to be materially adverse to (a) the business, assets
(including intangible assets), liabilities, condition (financial or otherwise),
results of operations, capitalization or prospects of such person or entity or
(b) such person's or entity's ability to consummate the transactions
contemplated by this Agreement.
"MERGER" has the meaning set forth in the Introduction to this Agreement.
"MERGER CONSIDERATION STOCK" means shares of Parent's Common Stock.
"MERGER SHARES" mean, with respect to any Skipping Stone Stockholder, the
number of shares of Merger Consideration Stock such Skipping Stone Stockholder
is entitled to receive, if any, in connection with the Merger.
"MERGER SUB" has the meaning set forth in the first paragraph of this
Agreement.
"PARENT" has the meaning set forth in the first paragraph of this
Agreement.
"PARENT COMMON STOCK" means the Common Stock of Parent.
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"PARENT INCENTIVE PLAN" means the Commonwealth Energy Corporation 1999
Incentive Plan, as amended.
"PARENT SHARE PRICE" means $1.92.
"POST-CLOSING TRUE UP" means the following:
"The true up calculation shall be a two-step process.
Step I
The true up shall be based on the change in net equity of Skipping Stone
Inc. as of December 31, 2003 less up to $300,000 for "Employees" and "Special
Dividend or Distribution" as described in Section 5.11(a) and 5.19 of this
Agreement and Plan of Merger and less the net book value of the "Property and
Equipment" for the Philadelphia office compared to the net equity of Skipping
Stone Inc. as of the "Effective Time" of this merger as described in Sections
1.1 and 1.2 of this Agreement and Plan of Merger.
Net equity at December 31, 2003 is defined as the difference between the
total assets minus the total liabilities of Skipping Stone Inc. as of 12/31/03.
Net equity at the "Effective Time" of this merger is defined as the
difference between the total assets minus the total liabilities as of the
"Effective Time" of this merger (as described in Sections 1.1 and 1.2 of this
Agreement and Plan of Merger) less any payments of "Bank Debt" (as described in
Section 5.17 of this Agreement and Plan of Merger) by Commonwealth Energy
Corporation with no adjustments made to these assets and liabilities for any
purchase price allocation adjustments to fair value, such as goodwill, deferred
taxes, patents, licenses, fixes assets, liabilities, etc.
Any reduction in net equity from this calculation will be a reduction to
the escrow account as described in Section 5.1(b).
Step II
The second part of the true up calculation will take the Balance Sheet of
Skipping Stone Inc. as of the "Effective Time" of this merger as described in
Sections 1.1 and 1.2 of the Agreement and Plan of Merger and will verify that as
of six months from the "Effective Time" of this merger all assets have been
collected, amortized or realized as cash and no other liabilities have been
accrued or paid by Skipping Stone Inc. or Commonwealth Energy Corporation after
the "Effective Time" of this merger related to liabilities that existed before
the "Effective Time" of the merger for Skipping Stone Inc.
Any uncollected assets or additional liabilities will be a reduction to
the escrow account as described in Section 5.1(b)."
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"REORGANIZATION" means a transaction after which Parent is a wholly owned
subsidiary of Commerce Energy Group, a Delaware corporation.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SKIPPING STONE" has the meaning set forth in the first paragraph of this
Agreement.
"SKIPPING STONE AUTHORIZATIONS" has the meaning set forth in Section 2.18.
"SKIPPING STONE BENEFIT PLANS" has the meaning set forth in Section
2.17(a).
"SKIPPING STONE COMMON STOCK" has the meaning set forth in the first
paragraph of this Agreement.
"SKIPPING STONE DISCLOSURE SCHEDULE" means the schedule (dated as of the
date of the Agreement) delivered to Parent and Merger Sub on behalf of Skipping
Stone on the date of the Agreement and signed by a duly authorized officer of
Skipping Stone.
"SKIPPING STONE FINANCIAL STATEMENT" has the meaning set forth in Section
2.6(a).
"SKIPPING STONE INTELLECTUAL PROPERTY" has the meaning set forth in
Section 2.11(a).
"SKIPPING STONE OPTION PLAN" has the meaning set forth in Section 1.4.
"SKIPPING STONE SHARE PRICE" means the number obtained by dividing three
million one hundred thousand dollars ($3,100,000) by the total number of shares
of Skipping Stone Common Stock and Vested Options outstanding immediately prior
to the Effective Time.
"SKIPPING STONE STOCKHOLDER" has the meaning set forth in the first
paragraph of this Agreement.
"SKIPPING STONE STOCKHOLDER APPROVAL" has the meaning set forth in Section
2.4.
"SURVIVING CORPORATION" has the meaning set forth in Section 1.2.
"TAX" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Section 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
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"TAX RETURN" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"THIRD PARTY EXPENSES" has the meaning set forth in Section 5.5.
"VESTED OPTION" has the meaning set forth in Section 1.4.
"UNAUDITED BALANCE SHEET" has the meaning set forth in Section 2.6(a).
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