AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
CELERITY SOLUTIONS, INC., SOMERSET, INC.,
AND SOMERSET AUTOMATION, INC.
THIS AGREEMENT (the "Agreement"), made as of the 8th day of December, 1997,
by and among Celerity Solutions, Inc. ("Celerity"), a Delaware corporation,
Somerset, Inc., a Delaware Corporation ("Somerset Subsidiary"), Somerset
Automation, Inc. ("Somerset") and Xxx Xxxxxxxxx and other individuals identified
on Exhibit A (the "Signing Shareholders").
WITNESSETH
WHEREAS, the Boards of Directors of Celerity, Somerset Subsidiary and
Somerset have approved and deem it advisable and in the best interests of their
respective companies and their shareholders to consummate the business
combination transaction provided for herein;
WHEREAS, the Signing Shareholders are a party to this agreement and desire
to sell their Shares upon terms herein specified;
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
hereinafter set forth, and of other good and valuable consideration, the parties
hereto agree as follows:
ARTICLE I
THE REORGANIZATION
1.1 Structure of the Reorganization. Celerity will cause a Delaware
corporation (Somerset, Inc.) to be organized as a wholly owned subsidiary of
Celerity. Subject to the terms and conditions of this Agreement, at the Closing
Date, as defined herein, in accordance with Delaware General Corporation Law,
Somerset will merge with and into Somerset Subsidiary pursuant to a plan of
merger which qualifies as a reorganization under Section 368(a)(1)(A) and
(a)(2)(D) of the Internal Revenue Code of 1986 ("the IRS code"), as amended (the
"Reorganization"). All parties will report this transaction on their respective
tax returns as a reorganization under Section 368(a)(1)(A) and (a)(2)(D) of the
IRS code. Somerset Subsidiary shall be the surviving corporation in the
Reorganization and shall continue in its corporate existence under the laws of
the State of Delaware. Upon consummation of the Reorganization, the separate
corporate existence of Somerset shall terminate.
1.2 Somerset Shareholders. A list of each owner of issued and outstanding
shares of Somerset Common Stock (the "Somerset Shareholders"), the number of
shares owned by each Somerset Shareholder is set forth in Schedule 1.2.
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1.3 Aggregate Reorganization Consideration.
(a) At the Closing, as defined herein, all of the shares of common stock of
Somerset ("Somerset Common Stock"), issued and outstanding immediately prior to
the Closing, other than shares held in Somerset's treasury shall be
automatically converted into the right to receive the Aggregate Reorganization
Consideration as defined below.
(b) The Aggregate Reorganization Consideration will constitute the
following:
(i) a number of shares of common stock of Celerity, par value ($0.10)
per share ("Celerity Common Stock") equal to a fraction the numerator
of which is three million one hundred sixty thousand and one dollars
($3,160,001) and the denominator of which is equal to the Fair Market
Value of Celerity Common Stock. Fair Market Value will be determined
by the average daily closing bid per share of Celerity Common Stock as
reported by the Nasdaq Stock Market Small-Cap Market for sixty (60)
trading days period ending on the business day prior to the Closing
Date; and
(ii) the sum of two million two hundred ninety six thousand one
hundred sixty three dollars ($2,296,163) in cash; and
(iii) the delivery of promissory notes, in the form of Exhibit B
hereto (the "Notes"), in favor of each of the Somerset Shareholders
with the aggregate value of eight hundred forty three thousand eight
hundred thirty six dollars ($843,836).
1.4 Reorganization Consideration. The Aggregate Reorganization
Consideration shall be issued to the Somerset Shareholders at the Closing in
proportion to the number of shares of Somerset Common Stock (the "Shares") held
by each such Somerset Shareholder in relation to the aggregate number of Shares
outstanding as of the Closing (the "Reorganization Consideration").
1.5 Options. All unexercised Somerset stock options as of the date of the
Closing, whether vested or unvested, will terminate upon Closing without any
further liability or obligation on the part of Somerset or Celerity to such
optionees.
1.6 The Notes. The Notes shall be executed and delivered by Celerity in
connection with the Closing. Payments of Note Amounts thereon shall be made in
accordance with the terms of the Notes.
1.7 Miscellaneous.
(a) No certificates or scrip for fractional shares of Celerity Common Stock
shall be issued upon the surrender for exchange of the Shares, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a stockholder of Celerity. In lieu of fractional shares, Celerity will
increase the Note amount to each such holder of a fractional share in an amount
equal to the product of such fractional interest and the Fair Market Value of a
share of
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Celerity Common Stock.
(b) On December 8, 1997 Celerity will pay all full and final invoices for
all legal expenses and expenses for the preparation of the audited financial
statements from February 1, 1997 to September 30, 1997 by Ernst & Young,
incurred by Somerset in preparation of the Closing of the Reorganization as
specified in Schedule 1.7.
ARTICLE II
SIGNING SHAREHOLDERS
2.1 Acknowledgment of Signing Shareholders - As a condition to the
Celerity's issuance of the Celerity Common Stock in the Reorganization (the
"Celerity Shares"), each Signing Shareholder acknowledges that (i) he is
acquiring the Celerity Shares for his own account for investment only and not
for or with a view to resale or distribution; (ii) he has been furnished and has
carefully read (a) the Annual Report and Proxy Statement of Celerity for the
fiscal year ended March 31, 1997; (b) the Forms 10-Q of the Celerity for the
three month periods ended June 30 and September 30, 1997; (c) Form 8-K dated
June 26, 1997; and (d) any other material provided by Celerity to the Somerset
Shareholders (the "Documents") and has received information with respect to all
matters he considers material to the decision to enter into this Agreement and
has relied solely upon the Documents and upon independent investigations in
making the decision to enter into this Agreement. No oral or written statement
or inducement which is contrary to the information set forth in the Documents
has been made by or on behalf of Celerity.
2.2 Acknowledgment of Restricted Nature of Common Stock. The Signing
Shareholders hereby acknowledge that the Celerity Shares are subject to the
following:
(a) The Signing Shareholders may not, directly or indirectly, offer, sell,
transfer, assign, pledge, hypothecate or otherwise dispose of the Celerity
Shares (or solicit any offers to purchase or otherwise acquire or take a pledge
of the Celerity Shares), except pursuant to (i) an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations thereunder and (ii) an effective registration
statement or qualification under applicable "Blue Sky" state securities laws
(the "Blue Sky Laws"), or unless such Signing Shareholders shall have delivered
Celerity evidence of compliance with Rule 144 which is reasonably satisfactory
to Celerity or an opinion of counsel, which opinion of counsel shall be
satisfactory to Celerity, to the effect that no registration statement or
qualification is required because of the availability of exemptions from
registration and/or qualification under the Securities Act or Blue Sky Laws;
(b) The Signing Shareholders understand that (i) the offer and sale of
Celerity Shares has not been registered under the Securities Act or registered
or qualified under any Blue Sky Laws as of the date hereof and will not be
registered or qualified under the Securities Act or any Blue Sky Laws at the
Closing Date, (ii) each of the Signing Shareholders must continue to bear the
economic risk of the investment in the Celerity Shares before such period of
time until the offer and sale of the Celerity Shares is subsequently registered
and/or qualified under the Securities Act and any applicable Blue Sky Laws or an
exemption from such registration and/or qualification is available, (iii) there
can be no assurance that the offer and sale of the Celerity Shares will be
registered and/or qualified under the
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Securities Act or any applicable Blue Sky Laws at any time, (iv) when and if
Celerity Shares may be disposed of without registration in reliance upon Rule
144 under the Securities Act ("Rule 144"), the offer and sale of Celerity Shares
may not qualify under Rule 144 since dispositions under such Rule can be made
only in limited amounts in accordance with the terms and conditions of such
Rule, (v) if the exemption afforded by Rule 144 is not available, public offer
or sale of the Celerity Shares without registration will require the
availability of an exemption under the Securities Act or any applicable Blue Sky
laws, (vi) a restrictive legend in substantially the form hereinafter set forth
shall be placed upon the Common Stock and (vii) a notation shall be made in the
appropriate records of the Celerity indicating that such Celerity Shares are
subject to restrictions on transfer and appropriate stop-transfer instructions
will be issued to the transfer agent of Celerity with respect to such Celerity
Shares; and
(c) The Signing Shareholders understand that the Shares shall bear a legend
in substantially the following form:
THE SHARES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT").
SUCH SHARES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED
OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR, UNLESS, IN THE OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER, SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT
FROM REGISTRATION OR IS OTHERWISE IN COMPLIANCE WITH THE ACT AND SUCH
LAWS.
(d) Celerity shall from the date commencing on the date hereof and ending
on the second anniversary of this Reorganization use its best efforts to (a)
make and keep public information available as those terms that are understood
and defined in Rule 144; and (b) file with the SEC in a timely manner all
reports and other documents required of Celerity under the Securities Act and
the Securities Exchange Act of 1934.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SOMERSET
AND THE SIGNING SHAREHOLDERS
Somerset and Signing Shareholders, subject to Section 6.2 of this
Agreement, represent and warrant, and except as set forth in the schedules
making reference to specific sections of this Agreement and delivered to
Celerity prior to execution hereof (the "Schedules"), the following as of the
date hereof and as of the Closing Date to Celerity as follows:
3.1 Organization and Good Standing. Somerset is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
California, and has the corporate power and lawful authority to own, lease and
operate its assets, properties and business and to carry on its business
activities as now conducted. Somerset has, since its incorporation, insofar as
failure to comply would have any material impact at this or any future time,
complied in all material respects with all laws, regulations, ordinances, and
orders applicable to its business activities and properties to the best of
knowledge of Somerset and Signing Shareholders. Somerset has previously provided
to Celerity true and correct copies, as in effect, of its Articles of
Incorporation and Bylaws.
3.2 Capitalization. The authorized capital stock of Somerset consists of
twenty five million (25,000,000) shares of common stock, of which one million
nine hundred ninety eight thousand one hundred seventy three ( 1,998,173 )
shares are issued and outstanding. All of the issued and outstanding shares of
Somerset Common Stock are owned of record by the Somerset Shareholders listed on
Schedule 1.2. Somerset has no additional classes of common stock and has no
authorized classes of preferred stock issued or outstanding. As of the Closing
Date, there will be no outstanding options, rights, warrants, or claims to
purchase any of the common stock or other securities of Somerset.
3.3 Financial Statements and Condition.
(a) Attached hereto and made a part hereof as Schedule 3.3(a) are the
audited income statement and balance sheet of Somerset for the fiscal years
ended January 31, 1997, 1996, and an audited income statement and a balance
sheet for eight months ending September 30, 1997. Also attached hereto and made
a part hereof as Schedule 3.3(b) are the unaudited income statements and balance
sheets of Somerset for the period ending October 30, 1997 and selected balance
sheet accounts as of December 5, 1997. (The financial statements set forth in
Schedule 3.3(a) and 3.3(b) are collectively referred to herein as the "Financial
Statements".)
(b) Except as disclosed in Schedule 3.3(b), the Financial Statements (i)
fairly and accurately present the assets, liabilities, shareholders' equity and
financial position of Somerset as of the dates thereof, (ii) contain no material
misstatements or omissions, and (iii) except for unaudited statements, contain
and reflect all necessary adjustments for a fair
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presentation of the financial condition and results of operations of Somerset
for the periods covered thereby.
(c) The accounts and notes receivable set forth in the Financial Statements
or arising since the date thereof are valid and genuine and have arisen from
bona fide transactions in the ordinary course of business, consistent with past
practices, for goods sold or services performed and to the knowledge of Somerset
and Signing Shareholders are not subject to valid defenses, set-offs, or
counterclaims. Except as set forth in Schedule 3.3(c), such receivables have
been recorded in accordance with Somerset's historical revenue recognition
policy and have been collected or are collectable in accordance with their terms
at least ninety percent (90%) of the aggregate full recorded amount thereof no
later than 120 days following the Closing.
3.4 Absence of Certain Changes. Except as described in Schedule 3.4, since
Financial Statements dated September 30, 1997, set forth in Schedule 3.3 the
Company has conducted its business in the ordinary course consistent with past
practices and there has not been and as of the Closing shall not have been:
(a) any material adverse change in the business, assets, condition
(financial or otherwise), results of operations or prospects of Somerset (a
"Material Adverse Change"), or any event, occurrence, development or state of
circumstances or facts which could reasonably be expected to result in a
Material Adverse Change;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any securities of Somerset, any repurchase,
redemption or other acquisition by Somerset of any outstanding shares of capital
stock or other securities of, or other ownership interests in Somerset;
(c) any amendment of any outstanding security of Somerset;
(d) any incurrence, assumption or guarantee by Somerset of any indebtedness
for borrowed money;
(e) any creation or assumption by Somerset of any lien on any asset;
(f) any making of any loan, advance or capital contributions to or
investment in any person;
(g) any damage, destruction or other casualty loss (whether or not covered
by insurance) affecting the business or assets of Somerset which, individually
or in the aggregate, has had or would reasonably be expected to have a material
adverse effect on the business, assets, condition (financial or otherwise),
results of operations or prospects of Somerset;
(h) any transaction or commitment made, or any contract or agreement
entered into, by Somerset relating to its assets or business (including the
acquisition or
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disposition of any assets) or any relinquishment by Somerset of any contract or
other right, in either case, material to Somerset, other than transactions and
commitments in the ordinary course of business consistent with past practices
and those contemplated by this Agreement;
(i) any change in any method of accounting or accounting practice by
Somerset;
(j) any (i) grant of any severance or termination pay to any director,
officer or employee of Somerset (ii) entering into of any employment, deferred
compensation or other similar agreement (or any amendment to any such existing
agreement) with any director, officer or employee of Somerset, (iii) change in
benefits payable under existing severance or termination pay policies or
employment agreements or (iv) change in compensation, bonus or other benefits
payable to directors, officers or employees of Somerset; or
(k) any labor dispute or any activity or proceeding by a labor union or
representation thereof to organize any employees of Somerset.
3.5 Taxes.
(a) Since its incorporation in the State of California, Somerset has
prepared and timely filed all federal, state, local and foreign returns,
estimates, information statements and reports required to be filed at or before
the date of this Agreement ("Returns") relating to any and all Taxes concerning
or attributable to Somerset, or its operations and such Returns are true and
correct in all material respects and have been completed in all material
respects in accordance with applicable law. "Tax" or, collectively, "Taxes,"
shall mean any and all federal, state, local and foreign taxes, assessments and
other governmental charges, duties, impositions and liabilities, including taxes
based upon or measured by gross receipts, income, profits, sales, use and
occupation, and value added, ad valorem, transfer, franchise, withholding,
payroll recapture, employment, excise and property taxes, together with all
interest, penalties and additions imposed with respect to such amounts and any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a predecessor
entity. There are no tax liens on any property or assets of Somerset. Except as
described in Schedule 3.5, there have been no audits or examinations of any
Returns by any applicable governmental agency. To the best knowledge of Somerset
and Signing Shareholders, no state of facts exists or has existed which would be
reasonably likely to constitute grounds for the assessment of any penalty or of
any material Tax liability beyond that shown on the respective Returns. There
are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any Return for any period. For purposes of this Section
3.5, "material Tax liability" shall be defined as liability in excess of $5,000
in the aggregate.
(b) Somerset, as of the date of this Agreement: (i) to the best knowledge
of Somerset and Signing Shareholders, has paid all Taxes it is required to pay
except for Tax payments which
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have been disputed by Somerset in good faith (which disputes, if pending, are
described on the Somerset Disclosure Schedule) and (ii) has withheld with
respect to its employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be withheld.
(c) Somerset does not have any material liabilities for unpaid federal,
state, local and foreign Taxes that have not been accrued for or reserved on the
Somerset Financial Statements, whether asserted or unasserted, contingent or
otherwise.
(d) Somerset is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(e) No payment which Somerset is obliged to pay to any director, officer,
employee or independent contractor pursuant to the terms of an employment
agreement, severance agreement or otherwise will constitute an excess parachute
payment as defined in Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code").
(f) Somerset is not currently under any contractual obligation to pay any
Tax obligations of, or with respect to any transaction relating to, any other
person or to indemnify any other person with respect to any Tax.
3.6 Litigation. Except as disclosed in Schedule 3.6, there are, and within
the prior twenty-four (24) months there have been, no actions, suits,
investigations, or proceedings pending or, threatened or anticipated against or
affecting Somerset or its assets, at law or in equity, or before any court,
arbitrator, or federal, state, municipal, or other governmental department,
commission, board, bureau, agency, or instrumentality, domestic or foreign.
Somerset is not operating under, subject to, or in default with respect to any
order, writ, injunction, or decree of any court or federal, state, municipal, or
other governmental department, commission, board, bureau, agency, or
instrumentality, domestic or foreign. Except as disclosed in Schedule 3.6,
Somerset has not received or had outstanding any claim or complaint from or on
behalf of any employee or former or potential employee alleging wrongful
termination, failure to hire, harassment, or discrimination by reason of race,
age, sex, handicap, or veteran's status.
3.7 Absence of Undisclosed Liabilities. Except as specifically reserved
against or reflected in the Financial Statements or described in Schedule 3.7 or
another Schedule, Somerset is not subject to any material liability or financial
obligation (known, direct or indirect, absolute, contingent, accrued or
otherwise). Somerset is not in default with respect to any term or condition of
any indebtedness or liability (including any current or deferred trade payable).
Signing Shareholders does not know of any facts or circumstances which might
reasonably serve as the basis for any material liabilities or financial
obligations with respect to Somerset which are not disclosed in the Schedules.
For purposes of this Section 3.7, any individual liability, or all such
liabilities in the aggregate, should be deemed to be material if the individual
or aggregate value is greater than $10,000.
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3.8 Absence of Questionable Payments. Neither Somerset nor any director,
officer, agent, employee, or other person acting on behalf of Somerset has used
any of Somerset's funds for improper or unlawful contributions, payment, gifts,
or entertainment, or made any improper or unlawful expenditures relating to
political activity to governmental officials or others. Neither Somerset nor any
director, officer, agent, employee, or other person acting on behalf of Somerset
has accepted or received any improper or unlawful contributions, payments,
gifts, or entertainment or expenditures.
3.9 Dividends. Since September 30, 1997, Somerset has not declared, paid or
set aside for payment, or agreed to declare or pay, any dividend or other
distribution in respect of its capital stock.
3.10 Insolvency. Somerset is not the subject of any existing, pending or
threatened insolvency or bankruptcy proceedings under the laws of any
jurisdiction. The consummation of the transactions contemplated by this
Agreement will not result in any Signing Shareholder or Somerset being the
subject of such proceedings.
3.11 Intellectual Property
(a) Somerset neither owns, nor licenses, nor uses any registered
trademarks, registered service marks, registered trade names (except its
corporate name), registered copyrights, or patents, except as listed and
described in Schedule 3.11, ("Somerset Intellectual Property Rights"), all of
which are owned, possessed, licensed or lawfully used by Somerset which are
incorporated in , are or form a part of any product of Somerset currently
distributed or any new product or new version of an existing product set forth
on Schedule 3.16 ("Somerset Products"). Schedule 3.11 contains (i) all material
licenses, sublicenses and other agreements other than end-user licenses as to
which Somerset is a party and pursuant to which any person is authorized to use
any Somerset Intellectual Property Rights, and (ii) all material licenses,
sublicenses and other agreements as to which Somerset is a party and pursuant to
which Somerset is authorized to use any third party technology, trade secret,
know-how, process, patents, trademarks or copyrights, including software
("Licensed Intellectual Property"), which are incorporated in, are, or form a
part Somerset Products.
(b) Somerset is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Somerset Intellectual Property Rights or Licensed Intellectual Property
except as set forth in Schedule 3.14.
(c) Except for Licensed Intellectual Property, all patents, registered
trademarks, service marks and copyrights claimed by or issued to Somerset in
connection with Somerset Products are valid and subsisting. Somerset (i) has not
received notice that it has been sued in any suit, action or proceeding which
involves a claim of infringement of any patents, trademarks, service marks,
copyrights or violation of any trade secret or other proprietary right of any
third
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party; (ii) has no knowledge that the manufacturing, marketing, licensing or
sale of Somerset Products infringes any patent, trademark, service xxxx,
copyright, trade secret or other proprietary right of any third party; and (iii)
has no knowledge of any claim challenging or questioning the validity or
effectiveness of any of its licenses or agreements relating thereto. To the best
knowledge of Somerset and Signing Shareholders, there is no valid basis for any
claim of the type specified in the immediately preceding sentence which would be
reasonably likely in any material way interfere with the continued enhancement
and exploitation by Somerset of any of the Somerset Products. None of the
Somerset Products, nor, to the best knowledge of Somerset and Signing
Shareholders, the use or exploitation of any patents, trademarks, trade names,
copyrights, software, technology, know-how or processes by Somerset in its
current business infringes on the rights of, or constitutes misappropriation of,
any proprietary information or intangible property right of any third person or
entity, including without limitation any patent, trade secret, copyright,
trademark or trade name.
(d) Except pursuant to certain contracts listed on Schedule 3.14, Somerset
has not granted any third party any right to manufacture or reproduce any of the
Somerset Products or any adaptations, translations, or derivative works based on
the Somerset Products or any portion thereof. Except pursuant to certain
contracts listed on Schedule 3.14, and except with respect to the rights of
third parties to the Licensed Intellectual Property, no third party has any
right granted by Somerset to manufacture, reproduce, distribute, market or
exploit any works or materials of which any of the Somerset Products are a
"derivative work" as that term is defined in the United States Copyright Act,
Title 17, U.S.C. Section 101. Except pursuant to certain contracts listed on
Schedule 3.14, Somerset has not granted any third party any right to use or
distribute the source code version of any Somerset Product.
(e) Since June 1, 1996, except as set forth in Scheduled 3.11 and 3.14, all
designs, drawings, specifications, source code, object code, documentation, flow
charts and diagrams incorporating, embodying or reflecting any of the Somerset
Products at any stage of their development (the "Somerset Components") were
written, developed and created solely and exclusively by employees of Somerset
without the assistance of any third party or entity or were created by third
parties who assigned ownership of their rights to Somerset by means of valid and
enforceable consultant confidentiality and invention assignment agreements,
which are listed in Schedule 3.14. Somerset has at all times used commercially
reasonable efforts to treat the Somerset Products and Somerset Components as
containing trade secrets and has not disclosed or otherwise dealt with such
items in such a manner as to cause the loss of such trade secrets by release
into the public domain.
(f) To the best knowledge of Somerset and Signing Shareholders, no employee
of Somerset is in violation of any term of any employment contract, patent
disclosure agreement of any other contract or agreement relating to the
relationship of any such employee with Somerset.
(g) Except as listed in Section 3.11, each present and since June 1, 1996,
each former employee of Somerset with access to confidential information of
Somerset is under an obligation
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(arising either through contract, statute or common law) to maintain the
confidentiality of such confidential information and Somerset has all right,
title and interest in any copyrights and/or trade secrets resulting from
inventions developed by any current or former Somerset employee within the scope
of their employment by Somerset. Except as set forth in Schedule 3.11 and 3.14,
each person presently, or each person since June 1, 1996, previously employed by
Somerset as an independent contractor with access to confidential information
has executed a confidentiality and non-disclosure agreement pursuant to the form
of agreement previously provided to Celerity or its representatives. Such
confidentiality and non-disclosure agreements constitute valid and binding
obligations of Somerset and such person, enforceable in accordance with their
respective terms. To the best knowledge of Somerset and Signing Shareholders,
the carrying on of Somerset's current business by any of its employees, does not
conflict with or result in a breach of the terms, conditions or provisions of or
constitute a default under any contract, covenant or instrument under which any
such employees is obligated.
(h) No product liability or warranty claims have been communicated to or to
the best knowledge of Somerset and Signing Shareholders, threatened against
Somerset, nor to the best knowledge of Somerset and Signing Shareholders, is
there any specific situation, set of facts or occurrence that provides a valid
basis for such claim.
3.12 Real Property Leases. Schedule 3.12 contains a complete and accurate
description of each parcel of real property leased to Somerset (collectively,
the "Real Property"). True, correct and complete copies of all leases of the
Real Property (the "Real Property Leases") have been delivered to Celerity. All
of the Real Property Leases are valid and in full force and effect, and there
does not exist any default or event which with notice or lapse of time or both
would constitute a default under any of the Real Property Leases. Except as set
forth in Schedule 3.12, the Real Properties are used and operated in compliance
and in conformity with all applicable leases, contracts, commitments, licenses
and permits to the extent that the failure to so comply would not have a
material adverse effect on the business or Somerset.
3.13 Licenses for Third Party Software. Set forth on Schedule 3.13 hereto
is a description of each license under which Somerset is the licensee of any
Third Party Software (as such term is hereinafter defined) along with a
description of such Third Party Software. Except as set forth on Schedule 3.13,
Somerset has delivered to Celerity a true, correct and complete copy of each
license agreement with licensing payments in excess of $500 over the life of the
license identified in Schedule 3.13. Except for Schedule 3.13, the software or
computer programs described in said licenses are presently used by Somerset as
licensee under the terms of said licenses. All royalties due under said licenses
have been paid and there exists no default under the terms of said licenses and
no event has occurred which, upon the passage of time or the giving of notice,
or both, would result in any event of default or prevent Somerset from
exercising and obtaining the benefits of any options contained therein. Somerset
has all rights, title and interest of the licensee under the terms of said
licenses, free of all liens, claims or
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encumbrances, all such licenses are valid and in full force and effect and
Somerset is in compliance with the terms thereof. There will be no default or
basis for acceleration under any of said licenses as a result of the
transactions contemplated by this Agreement. Somerset has not received any
notice of infringement, violation or conflict with any Intellectual Property
Rights of third parties with respect to its use of any Third Party Software.
3.14 Contracts, Leases and Commitments. Schedule 3.14 sets forth all
contracts, agreements, orders and commitments, written or oral, presently used
by Somerset or which are binding upon Somerset, which are material to conduct of
the business and identifies those material Contracts (including without
limitation licenses for Third Party Software) which require the approval or
consent of a third party as a condition to the continuing effectiveness of such
agreement as a result of the transactions contemplated hereunder. Schedule 3.14
also sets forth all contracts, agreements, orders and commitments, oral or
written, pursuant to which Somerset has any interest (including without
limitation a retained ownership interest, right to receive royalty or licensing
fees, distribution or other rights) in programs, titles or intellectual property
developed by Somerset. The contracts, agreements, orders and commitments
identified on Schedule 3.14 are hereinafter referred to as the "Contracts."
Except as set forth on Schedule 3.14, (i) no event has occurred or is continuing
which, upon the passage of time or the giving of notice, or both, could
constitute an event of default by Somerset with respect to any Contract, and the
Signing Shareholders are not aware of any claim of any such default having been
made against Somerset with respect to any Contract, and (ii) Somerset is not
aware of any event which upon the passage of time or the giving of notice, or
both, could constitute an event of default by any other party to any such
Contract or could cause the acceleration of any obligation of any other party
thereto or the creation of a lien or encumbrance upon any of Somerset's assets.
Except as set forth on Schedule 3.14, each of the Contracts is valid, binding
and enforceable against Somerset and to the best knowledge of Somerset and
Signing Shareholders each other party thereto in accordance with its terms
without any defenses, setoffs, counterclaims or disputes of any nature and is in
full force and effect. No purchase commitment for materials, supplies, component
parts or other items of inventory of the business to which Somerset is a party
is in excess of the ordinary, normal, usual and current requirements of the
business or at a price in excess of the current reasonable market price. No
Contract which relates to the business obligates Somerset (i) to provide
software, products or services to third parties which Somerset knows or has
reason to believe are at prices which would result in a net loss on the sale or
provision of such software, products or services, or which are pursuant to terms
or conditions it cannot reasonably expect to satisfy or fulfill in their
entirety, or (ii) to purchase or acquire services, information, Third Party
Software, inventory or equipment in excess of the normal, ordinary, usual and
current requirements of the business or at a price in excess of the current
reasonable market price. Somerset has not waived any right under any Contract.
Except as set forth in Schedule 3.14, there are no agreements, understandings,
instruments or proposed transactions between Somerset and any employee, officer
or director of Somerset which shall survive the Closing Date. Somerset is not a
party to, nor are any of Somerset's assets bound by, any agreement that is
adverse to its business. Somerset has not received notice that any party to any
of the Contracts intends to cancel or terminate any contract or to exercise or
not exercise any option under any Contract.
Page 21
3.15 Employment Relations. To the best knowledge of Somerset and
Signing Shareholders, Somerset is in compliance with all federal, state, or
other applicable laws, domestic or foreign, respecting employment and employment
practices, terms and conditions of employment, and wages and hours and has not
and is not engaged in any violation of the Fair Labor Standards Act or Service
Contract Act or any unfair labor practice. Somerset is not a party to a
collective bargaining agreement and none of its employees are represented by a
labor union. Somerset has entered into no employment agreements and has not
agreed to any salary or wage increases or committed to provide employees of
Somerset with employment benefits (including vacation or sick leave, medical,
life or dental insurance, disability and the like) except as set forth in
Schedule 3.15. All sums due to current or former employees for accrued
compensation, bonuses, commissions and benefits as well as vacation time have
been duly and adequately accrued on the accounting records of Somerset and are
reflected in the financial statements.
3.16 Title and Related Matters. Somerset has good and marketable title to
all of its assets (except for Third Party Software), free and clear of all
mortgages, options, leases, covenants, conditions, agreements, liens, security
interests, adverse claims, restrictions, charges, encumbrances or rights of
others. There exists no restriction on the use or transfer of any of Somerset's
assets (except for Third Party Software, for which Somerset has valid and
enforceable licenses as set forth in Schedule 3.16). Schedule 3.16 sets forth a
list of (i) all machinery or equipment, including without limitation, computer
hardware, used to conduct the business of Somerset with an original market value
in excess of $1,000 (the "Equipment"), together with the date of acquisition of
each piece of Equipment, and the location of each piece of Equipment and (ii)
all "Company Software," which shall include all of Somerset's software and
computer programs used in its business, including any software or computer
programs not wholly-owned by Somerset ("Third Party Software") embedded therein,
in machine readable source code forms and in machine executable object code
forms and all related specifications (including, without limitation, all logic
architectures, algorithms and logic flows and all physical, functional,
operating and design parameters), operating systems and procedures (including
development methodology), designs, design revisions, related applications
software in any language, concepts, ideas, processes, techniques, software
design and test tools, third party software interfaces, methods of
implementation and packaging, all associated know-how and show-how and all
related programmer and user manuals, which are used by Somerset to install,
operate, maintain, correct, test, repair, enhance, extend, modify, prepare
derivative works based upon, design, develop, reproduce and package such
software and computer programs.
3.17 Use and Condition of Property. Somerset's assets are in good operating
condition and repair, ordinary wear excepted, are fit and usable for the
purposes for which they are being used, are sufficient for all current
operations of the business and conform to all applicable laws and regulations.
No notice of any violation of any law, statute, ordinance or regulation relating
to any such property or assets has been received by Somerset except as have been
fully complied with or are listed on Schedule 3.17 hereof. All of Somerset's
assets are located at the premises of the business located at Somerset's
corporate headquarters at Irvine, California, except as otherwise noted on
Schedule 3.16 or Schedule 3.17. Somerset's assets constitute all of the
Page 22
property now used in, and necessary for the conduct of, the business in the
manner and to the extent conducted by Somerset during the period covered by the
Financial Statements or as presently conducted. Somerset does not, and has not
since the date of its formation, own or have any interest in real estate except
as described in Schedule 3.17 and the interest under the Real Property Leases.
3.18 Conditions Affecting the Business. Somerset has used its best efforts
to keep available for Celerity the services of the professional employees,
consultants, agents, customers, and suppliers of Somerset active in the conduct
of its business. Except as set forth in Schedule 3.18, Somerset and Signing
Shareholders have no knowledge of any threatened or anticipated loss of any
employees, consultants, customers, suppliers or agents or other advantageous
arrangement and have not received any notice of any threatened or anticipated
loss of any customer or supplier, as a result of the Reorganization or for any
other reason.
3.19 Compliance with Laws - To the best knowledge of Somerset and Signing
Shareholders, Somerset is in compliance with all federal, state, local and
foreign laws, regulations, rules, ordinances and orders to which its business
and operations are subject. Somerset has all requisite licenses, permits and
certificates from federal, state and local governmental authorities as may be
necessary to conduct its business and own and operate its assets and such
permits are valid and in full force and effect and will not be terminated or
adversely affected by the consummation of the transactions contemplated hereby
except in cases when non-compliance is not material to the business. All
information which Somerset has provided to customs authorities (in the U.S.,
Europe or any other jurisdiction) in connection with the import and export of
goods is correct and the company has complied with all U.S. and foreign
legislation relating to the same. Somerset is in compliance with its obligations
to the customs authorities. Somerset does not owe customs duties to any
governmental entity, nor does a customs pledge of any property of Somerset
exist. There are no claims against Somerset by customs authorities in the U.S.,
or any other jurisdiction. Somerset is not and has not been in breach of any
currency regulation and currency control legislation.
3.20 Disclosure. This Agreement, the Exhibits, the Schedules, and the other
documents, certificates, and statements delivered to Celerity in connection
herewith or with the transactions contemplated hereby as taken as a whole, do
not contain any untrue statement of a material fact and do not omit to state a
material fact necessary in order to make the statements contained herein and
therein not misleading. Having regard for the ordinary nature of the various
segments of the business of Somerset, there is no material fact known to Signing
Shareholders, or which upon reasonable investigation should have been known to
Signing Shareholders, which materially adversely affects or in the future, as a
result of existing material facts whose impact has not yet been experienced, may
materially adversely affect the business of Somerset which has not been set
forth in this Agreement, the Exhibits, the Schedules, or the other documents,
certificates, and written statements furnished or to be furnished to Celerity by
or on behalf of Somerset.
Page 23
3.21 Ownership of Shares. Each Signing Shareholder owns or will own at
Closing his/her respective Shares set forth in Schedule 1.2, of record and
beneficially, free and clear of any liens, claims, encumbrances or restrictions.
Each Signing Shareholder has or will have at Closing good and marketable title
to his respective Shares and has, and at the Closing shall have, the absolute
right, power and capacity to sell, assign and deliver his Shares to Celerity,
free and clear of all liens, claims, encumbrances and restrictions.
3.22 Related Party Transactions. There are no loans, leases, royalty
agreements or other continuing transactions between Somerset and the Signing
Shareholders, any affiliate of any Signing Shareholder, or any member of any
Signing Shareholder's family. To the best knowledge of Somerset and Signing
Shareholders none of the officers or directors of Somerset or the Signing
Shareholders (a) has any material direct or indirect interest in any entity
which does business with Somerset; (b) has any direct or indirect interest in
any property, asset or right which is used by Somerset in the conduct of its
business; or (c) has any contractual relationship with Somerset other than such
relationships which occur from being an employee, officer, director or
stockholder of Somerset.
3.23 Brokers' Fees. Neither Somerset nor the Signing Shareholders have any
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
3.24 Subsidiaries. Somerset has no subsidiaries and maintains no other
equity interest in any other company or entity.
3.25 Environmental and Health and Safety Matters. Somerset is in compliance
with all applicable environmental laws, regulations and ordinances relating to
pollution, safety, health or protection of the environment, including, without
limitation, those relating to containment, emissions, discharges, releases or
threatened releases of hazardous substances into the environment (the
"Environmental Laws"). Somerset has not received notice (from a court,
government agency or otherwise) that it has any potential liability with respect
to any violation or alleged violation of any Environmental Law.
3.26 Employee Benefit Plans.
(a) Except as set forth on Schedule 3.26, Somerset does not maintain any
pension, retirement, profit-sharing, deferred compensation, stock option,
employee stock ownership, severance pay, vacation, bonus or other material
incentive plans, any material written employee programs, arrangements or
agreements, whether arrived at through collective bargaining or otherwise,
material medical, vision, dental or other health plans, life insurance plans or
other material employee benefit plans or fringe benefit plans, including,
without limitation, all "employee benefit plans" as that term is 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 Somerset or any entity required to be aggregated with
Somerset pursuant to Section 414 of the Code (each, a
Page 24
"Commonly Controlled Entity") for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors or other beneficiaries
and under which employees, retirees, dependents, spouses, directors, independent
contractors or other beneficiaries eligible to participate ("Company Benefit
Plans").
(b) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
material payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director or any
employee of Somerset from Somerset or any of its affiliates under any Company
Benefit Plan or otherwise, (ii) materially increase any benefits otherwise
payable under any Company Benefit Plan or (iii) result in any acceleration of
the time of payment or vesting of any such benefits under any Company Benefit
Plan.
3.27 Authority.
(a) Somerset has all requisite corporate power and authority to enter into
this Agreement, to execute, deliver and perform their respective obligations
hereunder and thereunder, and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement, the performance by
Somerset of its obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of Somerset, including
approval by its Boards of Directors. The Agreement is a legal, valid and binding
obligation of Somerset enforceable against Somerset in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and except
that the availability of equitable remedies is subject to the discretion of the
court before which any proceeding therefor may be brought.
(b) The execution and delivery of this Agreement do not and the performance
and consummation of the transactions contemplated hereby will not conflict with
or result in any violation of any statute, law, rule, regulation, judgment,
order, decree, or ordinance applicable to Somerset or its respective properties
or assets, or conflict with or result in any conflict with, breach or violation
or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation, forfeiture or acceleration of any
obligation or the loss of a benefit under, or result in the creation of a lien
or encumbrance on any of the properties or assets of Somerset pursuant to (i)
any provision of its Certificates of Incorporation or Bylaws (ii) or except as
set forth in Schedule 3.14, or any agreement, contract, note, mortgage,
indenture, lease, instrument, permit, concession, franchise or license material
to the business or financial condition of Somerset and to which Somerset is a
party or by which Somerset or any of its property or assets may be bound or
affected.
(c) No consent, approval, order or authorization of, or registration,
declaration, qualification, or filing of or with, any governmental entity is
required by or with respect to Somerset in connection with the execution and
delivery of this Agreement or the consummation by Somerset of the transactions
contemplated hereby.
Page 25
(d) This Agreement and the Reorganization and the other transactions
contemplated hereby have been validly approved by Somerset Shareholders as
required by California law and Somerset's by laws.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CELERITY
Celerity represents and warrants the following as of the date hereof:
4.1 Organization and Good Standing of Celerity. Celerity and Somerset
Subsidiary are corporations duly organized, validly existing, and in good
standing under the laws of the State of Delaware. Celerity and Somerset
Subsidiary has full corporate power to carry on its businesses as now conducted
and is entitled to own, lease, and operate the properties or assets it now owns,
leases, and operates.
4.2 Authority.
(a) Celerity and Somerset Subsidiary have all requisite corporate power and
authority to enter into this Agreement, the Consulting Agreement referred to in
Section 5.2 and the Notes (collectively, the "Related Documents") (to extent
each is a party), to execute, deliver and perform their respective obligations
hereunder and thereunder, and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the Related
Documents, the performance by Celerity and Somerset Subsidiary of their
respective obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of Celerity and
Somerset Subsidiary, including approval by their respective Boards of Directors
and by Celerity as the sole shareholder of Somerset Subsidiary. Each of this
Agreement and the Related Documents is a legal, valid and binding obligation of
Celerity and Somerset Subsidiary enforceable against Celerity and Somerset
Subsidiary in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies is subject to the discretion of the court before which any proceeding
therefor may be brought.
(b) The execution and delivery of this Agreement and the Related Documents
do not and the performance and consummation of the transactions contemplated
hereby and thereby will not conflict with or result in any violation of any
statute, law, rule, regulation, judgment, order, decree, or ordinance applicable
to Celerity or Somerset Subsidiary or their respective properties or assets, or
conflict with or result in any conflict with, breach or violation or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation, forfeiture or acceleration of any obligation
or the loss of a benefit under, or result in the creation of a lien or
encumbrance on any of the properties or assets of Celerity or Somerset
Subsidiary pursuant to (I) any provision of their respective Certificates of
Incorporation or Bylaws, or (ii)
Page 26
any agreement, contract, note, mortgage, indenture, lease, instrument, permit,
concession, franchise or license material to the business or financial condition
of Celerity and to which Celerity or Somerset Subsidiary is a party or by which
Celerity or Somerset Subsidiary or any of their respective property or assets
may be bound or affected.
(c) No consent, approval, order or authorization of, or registration,
declaration, qualification, or filing of or with, any governmental entity is
required by or with respect to Celerity or Somerset Subsidiary in connection
with the execution and delivery of this Agreement or the Related Documents or
the consummation by Celerity and Somerset Subsidiary of the transactions
contemplated hereby, except for the filing of an Agreement of Reorganization
with the appropriate documents with the relevant governmental authorities in
Delaware and California.
(d) No vote of holders of capital stock of Celerity is necessary to approve
this Agreement and the Reorganization and the other transactions contemplated
hereby.
4.3 Litigation. There are, and within the prior twenty-four (24) months
there have been, no actions, suits, investigations, or proceedings pending or,
to the knowledge of Celerity, threatened or anticipated against or affecting
Celerity or its assets, at law or in equity, or before any court, arbitrator, or
federal, state, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality, domestic or foreign. Celerity is not
operating under, subject to, or in default with respect to any order, writ,
injunction, or decree of any court or federal, state, municipal, or other
governmental department, commission, board, bureau, agency, or instrumentality,
domestic or foreign. Celerity has not, since January 1, 1997, received or had
outstanding any claim or complaint from or on behalf of any employee or former
or potential employee alleging wrongful termination, failure to hire,
harassment, or discrimination by reason of race, age, sex, handicap, or
veteran's status.
4.4 Compliance with Laws. Celerity is in compliance with all federal,
state, local and foreign laws, regulations, rules, ordinances and orders to
which its business and operations are subject except in cases when
non-compliance is not material to the business. Celerity has all requisite
licenses, permits and certificates from federal, state and local governmental
authorities as may be necessary to conduct its business and own and operate its
assets and such permits are valid and in full force and effect and will not be
terminated or adversely affected by the consummation of the transactions
contemplated hereby except in cases when non-compliance is not material to the
business.
4.5 Contracts and Commitments. Celerity has not received notice that any
party to any of the outstanding contracts with third parties referred to in
Documents intends to cancel or terminate any contract or to exercise or not
exercise any option under any contract.
4.6 Disclosure. The Documents and the other documents, certificates,
statements and information provided to the Somerset Shareholders by Celerity in
connection herewith or with the transactions contemplated hereby, when read
together as a single disclosure, do not contain
Page 27
any untrue statement of material fact and do not omit to state a material fact
necessary in order to make the statements contained herein and therein not
misleading. Having regard for the ordinary nature of the various segments of the
business of the Celerity, there is no material fact known to Celerity, or which
upon reasonable investigation should have been known to Celerity, which
materially adversely affect or in the future, as a result of existing material
facts whose impact has not yet been experienced, may (so far as Celerity can now
reasonably foresee) materially adversely affect the business of Celerity which
has not been disclosed to the Somerset Shareholders in writing.
4.7 Third-Party Consents. No consent or approval is needed from any third-party
in order to enable Celerity and CSAC to effect the Reorganization or any of the
transactions contemplated hereby.
4.8 Issuance of Shares. The Celerity Shares to be issued to the Somerset
Shareholders pursuant to this Agreement will be duly authorized, validly issued,
fully paid and nonassessable.
ARTICLE V
CLOSING AND CONDITIONS PRECEDENT
5.1 Closing Date. Subject to the satisfaction or waiver of the conditions
to closing set forth below, the delivery of the Aggregate Reorganization
Consideration pursuant to Article 1 (referred to herein as the "Closing") shall
take place on December 8th, 1997 at headquarters of Somerset at Irvine,
California, or at such other time, date, and place as may be fixed by agreement
in writing among the parties hereto. Concurrently with the Closing, a
Certificate of Merger will be filed with the Delaware secretary of State, and
the date of that filing is referred to hereto as the closing date (the "Closing
Date").
5.2 Conditions to Closing
(a) Conditions Precedent to Celerity Performance. The obligation of
Celerity to effect the transactions referenced herein shall be subject to the
fulfillment (or waiver of fulfillment at the sole discretion of Celerity), at or
prior to the Closing Date, of the following conditions:
(i) The members of the Board of Directors of Somerset shall have
resigned in writing from the Board of Directors effective upon the Closing.
(ii) Xxx Xxxxxxxxx shall have singed a letter terminating his existing
contract with Somerset and shall have executed a consulting agreement with
Celerity in the form of Exhibit D.
(iii) Xxxx Xxxxxx and Xxx Xxxx should have signed amendments to their
existing employment contracts.
Page 28
(iv) There shall have been no material adverse change in the financial
condition, business or prospects of Somerset.
(v) Each of the Signing Shareholders of Somerset shall have executed
this Agreement and all Somerset Shareholders shall have delivered their
Shares to Celerity on the Closing Date.
(b) Conditions Precedent to Somerset's Performance. The obligation of Somerset
to effect the transactions referenced herein shall be subject to the fulfillment
(or waiver of fulfillment at the sole discretion of Somerset), at or prior to
the Closing Date, of the following conditions:
(i) Celerity shall have delivered payment as set forth in Article I to
the Somerset Shareholders on the Closing Date.
(ii) Celerity shall have provided loans to certain Somerset
Shareholders in the aggregate amount not to exceed $124,000 as set forth in
Schedule 5.2.
(iii) Celerity shall grant 70,000 stock options to distribute to
Somerset critical employees as set forth is Schedule 5.2 pursuant to the
Celerity Employee Stock Option Plan, at the exercise price determined as a
fair market value as of the date of the Closing as defined in the Plan and
the vesting schedule over 3 years with 20% of the total options granted to
an employee vested at the end of the first year, 35% vested at the end of
the second and 45% vested at the end of the third year of this employee's
employment with the company.
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification by Celerity. Celerity shall defend, indemnify, and hold
harmless the Somerset Shareholders, their heirs, personal representatives and
assigns, against and in respect of any damages, losses, claims, or liabilities,
including costs, expenses, and fees incident or related thereto, resulting from
any misrepresentation, breach of express warranty or covenant, or
non-fulfillment of any obligation of Celerity under this Agreement provided a
claim is asserted in a lawsuit filed against Celerity and/or Somerset Subsidiary
within one year following the date of the Reorganization.
6.2 Indemnification by the Signing Shareholders.
(a) Subject to the terms and conditions set forth in this Article VI, each
of the Signing Shareholders shall indemnify and hold harmless Celerity, Somerset
Subsidiary and any other successor in interest (collectively, for purposes of
this Section 6.2, "Celerity") against and in respect of his Prorata Share (as
defined below) of any Damages (as defined below); provided, however, that no
Signing Shareholder shall have any obligation whatsoever to indemnify Celerity
(i) unless and until the aggregate Damages incurred by Celerity exceed $50,000,
(ii) with respect to any Damages relating to third party claims asserted against
Celerity, unless such third party claim is asserted in a lawsuit filed against
Celerity within one year following the date
Page 29
of this Agreement, and/or (iii) with respect to any Damages not relating to
third party claims against Celerity, unless such claim is asserted in a lawsuit
filed by Celerity against the Signing Shareholders within one year following the
date of this Agreement. Further, in no event shall the aggregate liability or
obligation of any Signing Shareholder to Celerity for Damages exceed such
Signing Shareholder's Maximum Liability (as defined below).
(b) In the event that Celerity incurs Damages which are covered by the
Policies (as defined below) Celerity will present a claim under the Policies for
those Damages under this Section 6.2. Any amount recovered on the claim will
offset the liability of the Signing Shareholders under Section 6.2, but will not
eliminate this liability. In the event that Celerity is entitled to
indemnification from a Signing Shareholder, such Signing Shareholder may, at his
election, satisfy such indemnification by delivering to Celerity any combination
of the following in an aggregate amount equal to the amount of such Signing
Shareholder's indemnification obligation (i) shares of Celerity Common Stock,
which will be valued for this purpose by multiplying the number of shares
delivered by the average of the daily closing asked price per share of Celerity
Common Stock for the ten trading days immediately preceding the date of such
delivery, (ii) a document stating that a specified dollar amount of the Note
held by such Signing Shareholder shall be canceled, and confirming that Celerity
shall thereafter have no continuing obligation with respect to the amount of the
Note so canceled, which cancellation shall be credited dollar-for-dollar against
the indemnification obligation, and/or (iii) cash.
(c) For purposes of this Section 6.2, the "Prorata Share" for each Signing
Shareholder is as follows:
Signing Shareholder Prorata Share
Xxx Xxxxxxxxx 69.3278%
Xxxx Xxxxxx 11.6735%
Xxx Xxxx 2.4280%
Xxxx Xxxxxxxxx 9.0573%
Xxxxx Xx 6.4696%
Xxxx Xxxx 0.2387%
Xxx Xxxxxx 0.8051%
-------------- --------
Total 100.00%
(d) For the purposes of this Section 6.2, the "Maximum Liability" for each
Signing Shareholder at any given point in time shall be an amount equal to the
difference obtained by subtracting (i) the sum of (A) the Signing Shareholder's
Prorata Share times the aggregate payments made on all of the Notes issued to
the Somerset Shareholders in connection with the Reorganization, and (C) the
aggregate amount of payments on such Notes which are then past due, if any, from
(ii) an amount equal to $3,359,222 times the Signing Shareholder's Prorata Share
. By the way of example, but without limiting the generality of the foregoing,
the Maximum Liability for each Signing Shareholder immediately following the
Closing Date (prior to any payments being made or due under the Notes) will be
as follows:
Page 30
Signing Shareholder Maximum Liability
------------------- -----------------
Xxx Xxxxxxxxx $2,328,876
Xxxxxxx Xxxxxx $ 392,138
Xxx Xxxx $ 81,563
Xxxx Xxxxxxxxx $ 304,256
Xxxxx Xx $ 217,328
Xxxx Xxxx $ 8,017
Xxx Xxxxxx $ 27,043
Total $3,359,222
(e) For purposes of this Section 6.2, "Damages" shall mean all losses.,
claims, or liabilities, including costs, expenses and fees incident or related
thereto, (including but not limited to attorneys' fees) resulting from any
misrepresentation, breach of express warranty or covenant made by, or the
non-fulfillment of any obligation on the part of, the Signing Shareholders under
this Agreement
(f) Celerity shall maintain in force until March 14, 1998, for the benefit of
Celerity, all of the policies of insurance currently held by Somerset through
TriWest Insurance Services (i.e., directors' and officers', errors and
omissions, etc.) (collectively, the "Policies") with coverage in amounts no less
than, and deductible amounts no more than, the coverage and deductible amounts
currently applicable to the Policies. Thereafter, until the first anniversary of
the date of this Agreement, Celerity shall use its best efforts to maintain the
Policies in force with coverage in amounts no less than, and deductible amounts
no more than, the coverage and deductible amounts currently applicable to the
Policies.
6.3 Notice of Claims. The party (the "Indemnified Party") which has
identified or incurred any damage, loss, claim, or liability for which such
party is indemnified under this Agreement shall deliver written notice thereof
to the other party hereto (the "Indemnifying Party"), which notice shall set
forth and describe the exact nature of any such damages, losses, claims, or
liabilities, the specific or best estimated amount or amount involved, and the
Section of this Agreement deemed by such party to establish responsibility on
the part of the other.
6.4 Defense and Settlement of Lawsuits. If any legal proceeding shall be
instituted against an Indemnified Party by any party in respect of which the
Indemnifying Party may be responsible under this Article VI, the Indemnified
Party shall give written notice thereof to the Indemnifying Party. Upon receipt
of such notice, the Indemnifying Party shall undertake the defense of such
proceeding through counsel selected by it (provided that the Indemnified Party
shall be entitled, at its own expense, to participate in any such legal
proceeding or the negotiation and settlement thereof through counsel of its
choice). The Indemnifying Party shall in all cases have the right to settle or
compromise any such proceeding or to refrain therefrom; provided, however, that
(i) without the prior written consent of the Indemnified Party, the Indemnifying
Party shall not have the right to enter into any settlement or compromise which
would obligate or
Page 31
adversely affect the Indemnified Party in any way, if the Indemnified Party does
not consent to a settlement or compromise proposed by the Indemnifying Party and
agreed to by the third party plaintiff, and (ii) if the Indemnified Party does
not give such consent and such proceeding shall ultimately result in a monetary
judgment or settlement greater than the proposed settlement or compromise, the
Indemnifying Party shall be deemed discharged from any monetary liability
hereunder with respect to any amount in excess of the amount of the settlement
or compromise so proposed and agreed to by the third party and from any expenses
(including attorneys' fees and expenses) incurred by the Indemnified Party
subsequent to the date the proposed settlement or compromise was agreed to by
the third-party plaintiff; provided further, however, that no Indemnified Party
shall be required to consent to the terms of any settlement or compromise which
imposes any non-monetary obligation upon or admission of guilt by such
Indemnified Party, and such Indemnifying Party shall not be deemed discharged
from such liabilities by reason of the failure of the Indemnified Party to
consent to such non-monetary obligation or admission of guilt. If the
Indemnifying Party is Signing Shareholders, consent will be obtained by the
majority in interest vote of the Signing Shareholders. In the event that the
liability arising under Section 6.2 is a result of a claim of a third party, not
internal to Celerity, Xxx Xxxxxxxxx will represent the Signing Shareholders to
negotiate a settlement, subject to Celerity's consent, with the third party
plaintiff.
ARTICLE VIII
MISCELLANEOUS
8.1 Notices. All notices, request, demands, and other communications called
for or contemplated hereunder shall be in writing and shall be deemed to have
been duly given when delivered or when mailed by United States certified or
registered mail, prepaid, addressed to the parties at the following address for
the Celerity and Somerset and the addresses listed in Exhibit A for Signing
Shareholders (or at such other addresses as the parties may designate by written
notice given in the manner aforesaid):
If to Celerity: Celerity Solutions, Inc.
000 Xxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, XX 00000
Attn: Chief Executive Officer
With a copy to: Xxxxxx X. Xxxx, Xx., Esq.
Xxxxx & XxXxxxxx
000 Xxxxxxxxxxx Xxx., X.X.
Xxxxxxxxxx, X.X. 00000-0000
If to Somerset: Somerset Inc.
00000 Xxx Xxxxxx Xxx, Xxxxx 000
Xxxxxx, XX 00000
Attn: President
Page 32
With a copy to: Xxxxx XxXxxxxxx
Higham, XxXxxxxxx & Xxxxxxx LLP
00000 Xxxxx Xxxx, Xxxxx 000
Xxxxxx Xxxxxx, XX 00000
8.2 Fees of Finders, Brokers and Others. The respective parties hereto
certify that no person or company provided services as a broker, agent, or
finder or assisted in the negotiations of this Agreement, except for counsel.
Each party agrees to indemnify the other for any claim asserted by any person or
company purporting to act on its behalf in providing services as a broker,
agent, or finder in connection with this Agreement.
8.3 Entire Agreement. This Agreement, the Exhibits, and the Schedules and
certain employment agreements to be entered into in connection with the Closing
contain the entire agreement between the parties with respect to the
transactions contemplated herein and supersede all previous written or oral
negotiations, commitments, and understandings.
8.4 Counterpart. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. A facsimile signature by
a representative of the Celerity or by a Signing Shareholders shall be deemed
the original signature of such party.
8.5 Confidentiality. The parties hereto agree that the contents of this
Agreement, the Exhibits, and any Schedules (but not the effect of the
transaction) and any and all information delivered to the other in conjunction
herewith concerning the business and financial affairs of the Signing
Shareholders, Somerset, or Celerity shall be held in confidence by the recipient
party and its agents and representatives and shall not be disclosed to other
parties without the written consent of all parties hereto; provided, however,
that any party shall have the right to make such public announcement and filings
as it may deem appropriate to comply with applicable law, including applicable
securities laws.
8.6 Survival of Representations. All the representations, covenants,
warranties, and understandings contained in this Agreement shall survive the
Closing and shall terminate on the first anniversary of the Closing, except for
Section 2.2 (d) that will terminate on the second anniversary of the Closing. No
performance or execution of this Agreement in whole or in part by a party hereto
shall constitute a waiver by such party or stop such party from asserting its
rights hereunder, nor shall a waiver of or failure to exercise one or more
rights hereunder constitute a waiver of any other rights.
8.7 Interpretation. The article and section headings contained in this
Agreement are for reference purposes only and shall not affect the
interpretation of this Agreement. All references to section and article number
refer to sections and articles of this Agreement, except as
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otherwise specified. All references to schedules refer to schedules which are
attached to this Agreement, except as otherwise specified, and are hereby made a
part of this Agreement. All references in this Agreement to gender shall be
deemed to include all genders, and an references in the singular or plural shall
be deemed to include the plural and singular, as appropriate.
8.8 Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware except the conflict of laws
provisions thereof.
8.9 Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality of invalidity shall not affect the validity of the
remainder of this Agreement.
8.10 Assignment. No party hereto may assign or delegate or otherwise
transfer any of its rights or obligations hereunder without the prior written
consent of the other party hereto, and any agreement, act, or deed purporting to
effect any such assignment, delegation, or transfer without such prior written
consent shall be void; provided however that such prohibition shall not exclude
assignment by operation of law, such as by merger of a party into another
corporation.
8.11 Binding Effect. Subject to the provisions of Section 8.10, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, heirs and assigns.
8.12 No Third-Party Beneficiaries. Except as provided in Section 8.10, the
provisions of this Agreement are intended solely for the benefit of the parties
hereto and Somerset Shareholders, and no other party is entitled to any rights,
benefits, or privileges created hereunder.
8.13 Amendment. This Agreement may not be modified or amended except by a
writing or writings signed by the party against whom any modification or
amendment is asserted or sought to be enforced.
8.14 Further Assurances. Each of the parties hereto will, at any time and
from time to time, use all reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable laws and regulations to fulfill its obligations under
this Agreement, to consummate and make effective the Reorganization pursuant to
this Agreement.
8.15 Piggyback Registration Rights.
(a) Registration Rights. Subject to the terms set forth in this Section,
Celerity agrees to provide the Somerset Shareholders with "piggyback"
registration rights with respect to
Page 34
shares of Celerity Common Stock issued pursuant to Section 1.3(b)(i) of this
Agreement (the "Piggyback Shares").
(b) Registration Initiated by Celerity. If Celerity at any time during the
twelve (12) month period commencing at the date of the Closing proposes to
register an offering of its securities under the Securities Act for its own
account or for others, other than registrations in connection with employee and
director benefit plans, offerings of debt securities, or for the primary
registration statements related to acquisitions, and the registration form to be
used may be used for the registration of registrable Piggyback Shares, Celerity
will:
(i) give written notice thereof to the Somerset Shareholders (which
shall include a list of the jurisdictions in which Celerity intends to
attempt to qualify such securities under the applicable blue sky or other
state securities laws) within 10 business days of its decision to effect a
registration of securities for its own account or for others; and
(ii) use its best efforts to include in such registration (and any
related qualification under blue sky laws or other compliance), subject to
Section 8.15(c), and in any underwriting involved therein, subject to
Section 8.15(d), all the registrable Piggyback Shares specified in a
written request by the Somerset Shareholders made within 10 business days
after receipt of such written notice from Celerity; provided, that if at
any time after giving written notice (x) Celerity in good faith shall
determine not to proceed with such registration, Celerity may, at its
election, give written notice of such determination to the Somerset
Shareholders and, thereupon, shall be relieved of its obligation to
register such registrable Piggyback Shares pursuant to this Section in
connection with such registration, without prejudice, or (y) Celerity shall
determine to delay the registration of such securities, Celerity shall be
permitted to delay the registration of such registrable Piggyback Shares
for the same period as the delay in registering the securities to be
registered by Celerity for its own account or for others.
(c) Amount to be Included. In the event that registrable Piggyback Shares
are requested to be included in any registration initiated pursuant to Section
8.15(b), Celerity may, in its sole discretion, limit the number or amount of
securities to be included in the registration such that (A) Celerity shall
include in such registration the securities it intended to offer and (B) with
respect to any additional securities which may be included in such registration
(after inclusion of the securities referred to in clause (A)), all holders of
securities (including the holders of registrable Piggyback Shares) who hold
registration rights and who have requested registration (collectively, "Security
Holders") shall participate in the offering pro rata based upon the ratio of the
number of shares requested to be registered by each such Security Holder to the
total number of shares requested to be registered by all such Security Holders.
(d ) Underwritten Public Offerings. In the event that registrable Piggyback
Shares are requested to be included in any registration initiated pursuant to
Section 8.15(b) that contemplates an underwritten public offering:
Page 35
(i) Celerity shall advise the Somerset Shareholders as a part of the
written notice given pursuant to Section 8.15(b)(i) that the registration
is for a registered public offering involving an underwriting. In such
event, the right of the Somerset Shareholders to registration pursuant to
this Section 8.15 shall be conditioned upon its participation in such
underwriting and the inclusion of the registrable Piggyback Shares in the
underwriting to the extent provided herein. The Somerset Shareholders shall
(together with Celerity and the other holders (if any) distributing their
securities through such underwriting) enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by Celerity. If the Somerset Shareholders disapprove of the
terms of any such underwriting, they may elect to withdraw therefrom by
written notice to Celerity and the underwriter. Any registrable Piggyback
Shares excluded or withdrawn from such underwriting shall be withdrawn from
such registration.
(ii) If, in the good faith judgment of the managing underwriter of
such public offering, the inclusion of all of the registrable Piggyback
Shares covered by such request for registration, together with the number
or amount of securities that were intended to be offered by Celerity or
other security holders who hold registration rights, would interfere with
the successful marketing of such securities, then, such managing
underwriter may limit the number or amount of securities to be included in
the registration such that (A) Celerity shall include in such registration
the securities it intended to offer and (B) with respect to any additional
securities which may be included in such registration (after inclusion of
the securities referred to in clause (A)), all Security Holders shall
participate in the underwritten public offering pro rata based upon the
ratio of the number of shares requested to be registered by each such
Security Holder to the total number of shares requested to be registered by
all such Security Holders.
(e) Expenses of Registration. Celerity shall bear all fees, costs and
expenses with respect to the inclusion of Piggyback Shares in any registration
statement pursuant to this Section 8.15 and the public offering in connection
therewith; provided, however, that the holders of such Piggyback Shares shall
bear their respective pro rata share of any underwriting discounts and
commissions. The fees, costs and expenses of registration to be borne as
provided above shall consist of all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for Celerity, fees
and disbursements of counsel for the underwriter or underwriters of such
securities (if Celerity and /or selling security holders are otherwise required
to bear such fees and disbursements), and all legal fees and disbursements and
other expenses of complying with state securities or blue sky laws of any
jurisdictions in which the securities to be offered are to be registered or
qualified.
(f) Somerset Shareholders' Conduct. With respect to any sale of Piggyback
Shares covered by a Registration Statement, the Somerset Shareholders understand
and agree as follows:
(i) The Somerset Shareholders will carefully review the information
concerning it contained in the Registration Statement and will promptly
notify Celerity if such information is not complete and accurate in all
respects, including having properly disclosed any
Page 36
position, office or other material relationship within the past three years
with Celerity or its affiliates;
(ii) The Somerset Shareholders agree to comply with the
anti-manipulation rules under the Securities Exchange Act of 1934 (the
"Exchange Act") in connection with purchases and sales of securities of
Celerity during the time the Registration Statement remains effective;
(iii) The Somerset Shareholders agree to only sell Piggyback Shares in
a jurisdiction after counsel for Celerity has advised that such sale is
permissible under the applicable Blue Sky Laws;
(iv) The Somerset Shareholders agree to comply with the prospectus
delivery requirements of the Exchange Act; and
(vii) In connection with the registration of the Piggyback Shares, the
Somerset Shareholders will furnish to Celerity in writing such information
requested by Celerity with respect to themselves and the proposed
distribution by them as shall be necessary in order to assure compliance
with federal and applicable state securities laws.
(g) Provided Information. Celerity shall furnish to each holder of
Piggyback Shares included in any registration statement under this Section 8.15
such number of copies of the registration statement including a summary
prospectus in conformity with the requirements of the Securities Act, and such
other documents as any such holder may reasonably request to facilitate the
disposition of Piggyback Shares owned by such holder.
(h) Indemnification.
(i) Celerity shall indemnify and hold harmless each holder of
Piggyback Shares included in any registration statement under this Section
8.15 from and against , and shall reimburse each such holder with respect
to, any and all claims, actions (actual or threatened), demands, losses,
damages, liabilities, costs and expenses, including without limitation
attorneys' fees to which such holder may become subject under the
Securities Act or otherwise, insofar as such claims, actions, demands,
losses, damages, liabilities, costs or expenses arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in such registration statement, any prospectus contained herein,
or any amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided, however, that Celerity will not be liable in any such
case to the extent that any such claim, action, demand, loss, damage,
liability, cost or expense is caused by an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
written information furnished by such holder specifically for use in the
preparation thereof; provided, further, that with respect to an untrue
statement or alleged untrue statement or omission or alleged omission made
in a preliminary prospectus but eliminated or remedied in the amended
Page 37
prospectus on file with the Securities and Exchange Commission (the
"Commission") at the time the registration statement becomes effective (or
an amended prospectus filed with the Commission pursuant to Rule 424(b)
(the "Final Prospectus"), this indemnity shall not inure to the benefit of
such holder, if, having previously been furnished by or on behalf of
Celerity with copies of the Final Prospectus, such holder thereafter fails
to deliver a copy of the Final Prospectus to the person asserting the
claim, action, demand, loss, damage, liability, cost or expense, prior to
or concurrently with the sale of securities to such person.
(ii) Each holder of Piggyback Shares included in any registration
statement under this Section 8.15 shall indemnify and hold harmless
Celerity from and against, and shall reimburse Celerity with respect to any
and all claims, actions (actual or threatened), demands, losses, damages,
liabilities, costs and expenses, including without limitation attorneys'
fees, to which Celerity may become subject under the Securities Act or
otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
such registration statement, any prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading to the extent any such claim, action, demand, loss, damage,
liability, cost or expense is caused by an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
written information furnished by such holder of Piggyback Shares
specifically for use in preparation thereof.
(iii) Each holder of Piggyback Shares who is not a Signing Shareholder
shall execute an indemnification agreement for the benefit of Celerity in
substance and form equivalent to Section 8.15(h)(ii) prior to having such
holder's Piggyback Shares included in any registration statement pursuant
to Section 8.15.
IN WITNESS WHEREOF, the parties have duly exercised this Agreement as of
the date first referenced above.
Signatures on next page
Page 38
Celerity Solutions, Inc.
By: /s/ Xxxxx Kopukina
---------------------------
Its: President
---------------------------
Somerset Automation, Inc.
By: /s/ Xxx Xxxxxxxxx
----------------------------------
Its: CEO
----------------------------------
Signing Shareholders
/s/ Xxx Xxxxxxxxx
----------------------------------------
Xxx Xxxxxxxxx
/s/ Xxxx Xxxxxx
----------------------------------------
Xxxx Xxxxxx
/s/ Xxx Xxxx
----------------------------------------
Xxx Xxxx
/s/ Xxxx Xxxxxxxxx
----------------------------------------
Xxxx Xxxxxxxxx
/s/ Xxxxx Xx
----------------------------------------
Xxxxx Xx
/s/ Xxxx Xxxx
----------------------------------------
Xxxx Xxxx
/s/ Xxx Xxxxxx
----------------------------------------
Xxx Xxxxxx
Page 39
EXHIBIT B
NON-NEGOTIABLE PROMISSORY NOTE
AND SECURITY AGREEMENT
CELERITY SOLUTIONS, INC. SOMERSET, INC.
000 Xxxxx Xxxxxx, Xxxxx 000 00000 Xxx Xxxxxx Xxx, Xxxxx 000
Xxxxxxx, XX 00000 Xxxxxx, XX 00000
X.X. XX
Principal Amount
Dated: Dated, 1997
1. Amount and Rate. Celerity Solutions, Inc., a Delaware corporation having
its principal place of business at 000 Xxxxx Xxxxxx, Xxxxx 000, Xxxxxxx, XX
00000 ("Celerity"), and Somerset, Inc., a Delaware corporation whose principal
office is at 00000 Xxx Xxxxxx Xxx., Xxxxx 000, Xxxxxx, XX 00000 ("Somerset
Subsidiary") (collectively the "Obligors"), for value received, jointly and
severally, hereby promise to pay Shareholder as a selling shareholder of
Somerset Automation, Inc. (the "Holder"), the amount of NoteAmount United States
Dollars (U.S. $Dollars1) ("Principal"), in lawful money of the United States of
America in immediately available funds on the dates hereinafter specified. The
Note will bear interest at the rate of seven and a half percent (7.5%) per annum
with the total amount of interest paid under this Notes of Interest United
States Dollars (U.S. $Interest1) subject to Section 4 (the "Interest Amount").
The total aggregate amount paid under the Notes is equal to the sum of Principal
and Interest Amounts (the "Note Amount"). The Note Amount of this Promissory
Note and Security Agreement (the "Note") shall be payable in three (3) equal
payments of Payments United States Dollars (U.S. $Payments1) on April 1, 1999,
July 1, 1999, and October 1, 1999 and one payment of FinalPayment United States
Dollars (U.S. $Payment2) on October 1, 2000, when the Note is paid in full (the
"Last Payment"). Payments made in accordance with this Section shall be made at
Holder's address set forth in Section 14 of this Note, or to another address
agreed upon by the parties.
2. Prepayment of the Note. The Note may be prepaid in whole or in part by
Celerity at any time provided that the obligation of the Obligors hereunder
shall not be satisfied until such time as the Holder shall have been paid an
amount which in the aggregate equals the Note Amount, subject to any adjustments
set forth herein or in the Reorganization Agreement. Within 15 days of the month
end in which license fees relating to Somerset Automation warehousing software
(receiving through shipping) with modifications, improvements, derivations and
enhancements made hereafter ("Somerset Products") have been received by
Celerity, a prepayment will be made on each of the Notes issued to each selling
shareholder of Somerset Automation, Inc. ("Somerset Automation") in connection
with the Reorganization Agreement (the "Notes") in an aggregate amount equal to
30% of the license fees received, until the Notes are paid in full. Any payments
Page 40
shall be made to the Holder in proportion to the aggregate amount of the Notes
outstanding at the time of such payment. License fees will include license fees
received from customers of Somerset Automation and Somerset Subsidiary including
current customers except an amount not to exceed $15,000 expected to be received
from Xxxxxx Xxxxxx. If the Note is prepaid as a result of license fees received,
the Last Payment will be adjusted to be the difference between the Note Amount
and the amount paid under the Note up to the date of the Last Payment.
3. Subordination. Any debt security issued by Celerity to shareholders of a
potential future acquisition candidate after the date of this Note until this
Note is paid in full will be subordinate to the payment of this Note.
4. Event of Default. In the event the Obligors fail to make a payment in
accordance with the terms hereof, and should the Obligors fail to remedy such
failure for a period of ten (10) business days following the due date of such
amount, ("Event of Default") the Holder will have the right to declare the
entire amount under the Notes to be due and payable, and interest will
automatically be applied in an amount equal to the lower of the Prime Rate (as
published by the Wall Street Journal as of the date of such failure) plus five
(5%) percent per annum or the maximum amount permitted by law on the amount past
due. Holder may exercise any and all rights and remedies available to him/her
under applicable law.
5. Security Interest.
(a) Definitions. In addition to any terms defined elsewhere in this Note,
the following terms have the meanings indicated for purposes of this Note (such
definitions being equally applicable to the singular and plural forms of the
defined term):
(1) "Agent" means a person designated herein by all the shareholders
of Somerset Automation (the "Somerset Shareholders") to execute the
Security Interest of the Holder.
(2) "Collateral" refers to the following: (a) any right, title and
interest in and to Somerset Products developed by Somerset Automation or
Somerset Subsidiary. "Collateral" does not include: (i) computer software
hereafter developed or acquired by Somerset Subsidiary or Celerity that
represents product functionality (not pertaining to receiving through
shipping) that is not in the current Somerset Products as of the date first
written above including without limitation interfaces which may hereafter
be developed to the current Somerset Automation software; (ii) any plans or
processes relating to the production, sale and distribution of the
Collateral; or (iii) the proceeds, income or royalties attributable to
Somerset Products prior to an the event defined in Section 5(b) (as defined
herein).
Page 41
(3) "Financing Statements" shall mean the form of financing statements
as shall be necessary to perfect, upon filing, a security interest in the
Collateral in each jurisdiction in which such Collateral is located or in
which a filing is required under the UCC to perfect such security interest.
(4) "UCC" means the Uniform Commercial Code as in effect on the date
hereof in the State of Delaware, as amended from time to time, and any
successor statute; provided that if by reason of mandatory provisions of
law, the perfection or the effect of perfection or non-perfection of the
security interest in any Collateral is governed by the Uniform Commercial
Code, or other applicable statute, law or provision relating to the
perfection or the effect of perfection or non-perfection of any such
security interest, as in effect on or after the date hereof in any other
jurisdiction, "UCC" means the Uniform Commercial Code or such other
statute, law or provision as in effect in such other jurisdiction for
purposes of the provision hereof relating to such perfection or the effect
of perfection or non-perfection.
(b) Grant of Security Interest. Somerset Subsidiary hereby grants to Agent
for the benefit of Holder a continuing security interest in and to all right,
title and interest of Somerset Subsidiary or Celerity in the Collateral,
provided that Somerset Automation held such right, title and interest to the
Collateral as of the Closing (as defined in the Reorganization Agreement), to
secure payment and performance of the obligations under this Note. The ability
of the Holder to exercise his/her legal rights and remedies under the applicable
law with respect to the Collateral shall arise only in the event of all of the
following: (1) an Event of Default shall have occurred, and (2) Celerity shall
have initiated a proceeding under the U.S. Bankruptcy Code or any applicable
bankruptcy or insolvency statute or an involuntary proceeding shall have been
initiated and Celerity shall have failed to have such proceeding stayed or
dismissed, and (3) the Agent shall have received written instructions from the
Selling Shareholders representing at least eighty percent (80%) of the unpaid
balance of the Notes to exercise their legal rights against the Obligors with
respect to the Collateral.
(c) Waivers. The Obligors waive any right to require the Holder to proceed
against any person or to exhaust any Collateral or to pursue any remedy
available to the Holder. The Obligors waive any defenses they may have arising
from the Holder's failure to perfect or maintain a perfected security interest
in the Collateral.
(d) Termination of Security Interests; Release of Collateral. Upon payment
in full of the obligations of the Obligors hereunder, the security interest
created hereby shall terminate. Upon such termination of the security interest
or release of any Collateral, the Agent will execute and deliver to the Obligors
such documents as the Obligors shall reasonably request to evidence the
termination of the security interest or the release of such Collateral which has
not yet theretofore been sold or otherwise applied or released. Such release
shall be without warranty or recourse to Holder, except as to the
Page 42
absence of any prior assignments by Holder on behalf of its interest in the
Collateral, as the case may be.
6. Agent Appointed Attorney-in-Fact. Holder hereby irrevocably appoints Xxx
Xxxxxxxxx as Agent and Holder's attorney-in-fact, with full authority in the
place and stead of the Holder and in the name of Holder, Agent or otherwise, to
exercise the legal rights of Holder against the Obligors with respect to the
Collateral as set forth in Section 5(b). In the event of death or disability of
the appointed Agent, Somerset Shareholders will appoint a successor by a
majority vote.
7. Reorganization Agreement. This Promissory Note and Security Agreement is
one of the Notes referred to in the Reorganization Agreement dated
MergerAgreementDate, 1997 between the Selling Shareholders and Obligors (the
"Reorganization Agreement"), and it evidences consideration provided by the
Obligors to the Selling Shareholders thereunder. If the Holder is a Signing
Shareholder, this Note is subject to all of the terms and conditions contained
in the Reorganization Agreement, which are incorporated herein by reference.
Capitalized terms used in this Note shall, unless otherwise stated herein, have
the respective meanings assigned to them in the Reorganization Agreement.
8. Successors and Assigns. The terms and provisions of this Note shall be
binding upon, and the benefits thereof shall inure to, the parties hereto and
their respective permitted heirs, successors and assigns. Neither this Note nor
any rights or obligations hereunder may be assigned by Obligors without the
prior written consent of Holder. Except with respect to a transfer to an
affiliate or relative of a Holder, notice of any transfer of this Note by a
Holder shall be given to Obligors within a reasonable time period after such
transfer. Upon surrender of this Note at the office of the Obligors, the
Obligors shall execute and deliver one or more replacement Notes in the name of
the transferee(s).
9. No Implied Waiver. No delay or omission to exercise any right, power or
remedy accruing to Holder upon any breach or default of Obligors under this Note
shall impair any such right, power or remedy of Holder, nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default occurring thereafter, nor
shall any waiver of any single breach or default be deemed a wavier of any other
breach or default occurring theretofore or thereafter.
10. No Registration. THIS PROMISSORY NOTE AND SECURITY AGREEMENT HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE
SECURITIES LAWS, AND THEREFORE CANNOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR ASSIGNED UNLESS IT IS REGISTERED UNDER THE SECURITIES ACT OF
Page 43
1933, AS AMENDED, AND UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR UNLESS AN
EXEMPTION THEREFROM IS AVAILABLE.
11. Set-Off.
(a) This Paragraph (a) shall only apply to Holder if Holder is a Signing
Shareholder as defined in the Reorganization Agreement. For such Signing
Shareholder, any amount thereon due under the terms of this Note may be reduced
or offset pursuant to the indemnity set-off provision contained in Section 6.2
of the Reorganization Agreement.
(b) This Paragraph (b) shall only apply to Holder if Holder is also a party
to a Loan and Security Agreement between Holder and Celerity. For such Holder,
any amount thereon due from Celerity under the terms of this Note pursuant to
the specific payment provisions set forth in Sections 1 and 2 hereof may be
reduced or offset against the amount owed by the Holder to Celerity under the
terms of the Loan and Security Agreement at the time such amount is due under
this Note, pursuant to the set-off provision contained in Section 9 of the Loan
and Security Agreement applicable to Holder, which is attached as Exhibit A
hereto.
12. Amendments; Waivers. No amendments, modification or waiver of or
consent with respect to, any provision of this Note, shall be effective unless
the same shall be in writing and signed and delivered by Holder and Obligors.
Any amendment, modification, waiver or consent hereunder shall be effective only
in the specific instance and for the specific purpose for which given.
13. Severability. Any provision of this Note which is prohibited or
unenforceable in any jurisdiction shall be, only as to such jurisdiction,
ineffective to the extent of such prohibition or unenforceability, but all the
remaining provisions of this Note shall remain valid.
14. Notices. Any notice which Holder or Obligors may be required or may
desire to give to the other party under any provision of this Note shall be in
writing by overnight delivery service, certified mail, telex or electronic
facsimile transmission and shall be deemed to have been given or made when
received and addressed as follows:
To Obligors:
Celerity Solutions, Inc.
000 Xxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, XX 00000
Attn: CFO
To Holder:
Shareholdername
Address1
Address2
Page 44
Any party may change the address to which all notices, requests and other
communications are to be sent to it by giving written notice of such address
change to the other parties in conformity with this paragraph, but such change
shall not be effective until notice of such change has been received by the
other parties.
15. Governing Law. THE VALIDITY, CONSTRUCTION AND EFFECT OF THIS AGREEMENT
WILL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
16. Headings and Sections. Captions, headings and the table of contents in
this Note are for convenience only, and are not to be deemed part of this Note.
Unless otherwise specified, references in this Note to Sections, Articles,
Exhibits or Schedules are references to sections and articles of and exhibits
and schedules to, this Note.
17. Change of Control. In the event of an acquisition of Somerset
Subsidiary or the Collateral by another party ("Purchaser"), or any change of
control of the Somerset Subsidiary or of the Collateral, such Purchaser will be
obligated to assume the obligations under this Note with Holder's consent or
unless this Note shall become due and payable at the time of the change of
control.
Page 45
IN WITNESS WHEREOF, the parties hereto have executed this Note as of the date
and year first above written.
CELERITY SOLUTIONS, INC.,
a Delaware corporation
By:________________________________
Its:_______________________________
SOMERSET, INC.,
a Delaware corporation
By:________________________________
Its:_______________________________
HOLDER:
__________________________________
Name:
AGENT:
__________________________________
Name:
Page 46
EXHIBIT C
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is made as of the ____ day of ___________, 1997,
by and between Celerity Solutions, Inc., a Delaware corporation ("Company"), and
Xxx Xxxxxxxxx ("Consultant").
WITNESSETH
WHEREAS, Consultant and the Company desire to embody in this Agreement the
terms and conditions under which Consultant shall be engaged with the Company;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Consultant and the Company,
intending to be legally bound hereby, AGREE AS FOLLOWS:
1. SERVICES TO BE PROVIDED BY CONSULTANT
During the term of this Agreement, Consultant shall provide such consulting
services as may reasonably be requested from time to time by the Company's
President pertaining to (a) the integration effort between Celerity and Somerset
including the Company-wide product packaging; (b) developing a process for
integration of future acquisitions; and (c) strategic development and expansion
of the Company's business. Such services shall be provided primarily at the
facilities of the Company's subsidiary located at 00000 Xxx Xxxxxx, Xxxxxx,
Xxxxxxxxxx. Consultant will, however from time to time travel as may reasonably
be necessary in order to perform the services contemplated by this Agreement.
The Company will provide reasonable prior notice of any travel required of
Consultant.
2. TERM OF AGREEMENT
The term of this agreement shall commence on the date hereof and terminate
on the first anniversary of such date, subject to earlier termination as
provided below.
(a) Termination by the Company For Cause. The foregoing notwithstanding,
the Company may terminate this Agreement by sending the Consultant a written
notice of such termination for Cause. The date of Consultant's receipt of such
notice shall be the date of Consultant's termination. For purposes of this
Agreement, "Cause" shall mean the following: (1) dishonesty or fraud resulting
in injury to the business of the Company; (2) embezzlement or theft of assets of
the Company; (3) conviction for a felony resulting in damage to the business of
the Company or its affiliates; (4) activities which constitutes a serious
conflict of interest to the Company; (5) material breach of Section 4 or 5 of
this Agreement, (6) any
Page 47
other willful misconduct by Consultant which is materially injurious to the
Company, monetary or otherwise. If the Company terminates the Consultant
engagement for Cause, all compensation under Section 3 will terminate on the
date of the termination except for all accrued Expenses up to the date of such
termination will be payable immediately upon such termination.
(b) Termination by the Company Without Cause. The foregoing
notwithstanding, the Company may terminate this Agreement without Cause
effective upon written notice to the Consultant, provided that all of the
compensation in Section 3 shall continue to be paid through the first
anniversary of this Agreement as if this Agreement had not been terminated, and
all accrued Expenses up to the date of such termination will be payable
immediately upon such termination.
(c) Termination by the Consultant. The Consultant may terminate his
engagement with the Company with not less than 90 days written notice. Upon such
termination of this Agreement by the Consultant, the compensation set forth in
Schedule 3 to which Consultant would otherwise be entitled shall terminate,
except for (a) Non-Compete Compensation, the remaining portion of which that is
to be payable through the first anniversary of this Agreement, and (b) all
accrued business expenses up to the date of the termination, which will be
payable immediately upon such termination. The Consultant may terminate this
Agreement by written notice to the Company, effective ten days after the notice
("Notice Period"), in the event that the Consultant has not been paid by the
Company for a period of fourteen days prior to the date of the notice, and the
Company has not cured the breach within the Notice Period. In the event of such
termination, the Non-Compete Period pursuant to Section 5 of this Agreement will
be reduced to a portion of the Non-Compete Period for which the Consultant had
been reimbursed prior to such termination proportionately.
(d) Survival of Sections. The provisions of Sections 4 and 6 of this
Agreement will survive the termination of this Agreement for any reason
whatsoever. The provisions of Section 5 will survive until the expiration of the
Non-Compete Period notwithstanding the termination of the Agreement for any
reason whatsoever.
(e) Delivery of Material. Consultant agrees that upon the termination of
this Agreement, he will deliver to the Company all documents, papers, materials
and other property of the Company relating to its affairs which may then be in
his possession or under his control.
3. CONSULTING COMPENSATION; NON-COMPETE CONSIDERATION;EXPENSES
(a) As compensation and consideration for the performance by Consultant of
his consulting services under this Agreement, Consultant shall be entitled to a
consulting fee of XXXXXXXXXXXXXX Dollars ($XXXXXXXXX) payable in bi-weekly
installments (the "Consulting Compensation"). It is understood by both parties
that Consultant is an independent contractor with respect to Company, and not an
employee of
Page 48
Company.
(b) Non-Compete Compensation. As consideration for Consultant's obligation
under Section 5 of this Agreement, the Company shall pay Consultant the amount
of $XXXXXXX (the "Non-Compete Compensation"), which shall be paid in equal
bi-weekly installments commencing at the date of this Agreement.
(e) Expenses. The Company shall promptly, on a monthly basis, reimburse the
Consultant for all reasonable business expenses incurred by the Consultant in
connection with his performance under this Agreement (the "Expenses").
4. CONFIDENTIALITY
(a) Confidentiality. Consultant acknowledges that during the course of his
engagement with the Company he will, from time to time, be invested with
confidential information relating to the business practices, products, product
plans, development ideas and schedules and other confidential and proprietary
information regarding the Company. Consultant hereby agrees to keep all such
information confidential. Consultant also agrees that he will not, except as
required in the conduct of Company business, or as authorized in writing by the
Company, publish, disclose or make use of any such information or knowledge
unless and until such information or knowledge shall have ceased to be secret or
confidential without his fault.
(b) Exclusive Property. All business records, papers and other documents
kept or made by Consultant relating to the business of the Company shall be and
remain the property of the Company. Upon the termination of his engagement with
the Company or upon the request of the Company at any time, Consultant shall
promptly deliver to the Company, and shall retain no copies of, any written
materials, records and documents made by Consultant or coming into his
possession concerning the business or affairs of the Company other than personal
notes or correspondence of Consultant not containing proprietary information
relating to such business or affairs.
(c) Inventions, Rights to Improvements. Consultant hereby sells, transfers
and assigns to the Company any right, title and interest in any and all
inventions, improvements, discoveries, and ideas (whether or not patentable or
copyrightable) (collectively the "Intellectual Property") which Consultant may
make or conceive during the term of this Agreement, and which relate to or are
applicable to any phase of the Company's business (the "Work"). Consultant
acknowledges that all Work and all of the results and proceeds of such work
shall be deemed "works made for hire" within the meaning of the U.S. Copyright
Act, and the Company shall own exclusively and forever all rights therein and
thereto, including without limitation the right to add to or subtract from,
alter or change the same, combine the same with the work of others, modify,
create derivative works and otherwise exploit and use the same throughout the
universe. Consultant hereby agrees to communicate promptly and disclose to the
Company all information, details and data pertaining to the aforementioned
Intellectual Property and to execute any
Page 49
document and do any act reasonably necessary to perform Consultant's duties
under this Section 4(c). Consultant also affirms that if any such Intellectual
Property shall be deemed confidential by the Company, he will not disclose any
such Intellectual Property without prior written authorization from the
Company's President.
5. EXCLUSIVITY / NON-COMPETITION
(a) Exclusivity / Non Competing. The Consultant agrees that for a period of
twelve months subsequent to his termination of this Agreement for any reason
("Non-Compete Period"), he will not compete directly or be employed in any way
by individuals, companies, interests or entities that compete directly with the
Company. The Consultant also acknowledges that for twelve months subsequent to
his termination of engagement with the Company for any reason, he will not
utilize the Company's customer lists for any business related purpose.
(b) No Interference. During the twelve months subsequent to his
termination, Consultant shall not, whether for his own account or for the
account of any other individual, partnership, firm, corporation or other
business organization which is engaged in marketing or selling a product or
products competitive with any product sold by the Company, intentionally
solicit, endeavor to entice away from the Company, or otherwise interfere with
the relationship of the Company with any person who is employed by the Company,
or any person or entity who is, or was within the most recent twelve-month
period, a customer or client of the Company.
(c) Stock Ownership. Nothing in this Agreement shall prohibit Consultant
from acquiring or holding any securities of any company listed on a national
securities exchange or quoted on the automated quotation system of the National
Association of Securities Dealers, Inc., provided that at any time during the
six months subsequent to his termination Consultant and members of his immediate
family do not own more than XXXXX percent (XXX%) of any voting securities of
such company.
6. REMEDIES
(a) Specific Performance. Consultant hereby acknowledges that a breach of
Sections 4 or 5 of this Agreement may result in material irreparable injury to
the Company for which there is no adequate remedy at law, that it will not be
possible to measure damages for such a breach, and that in the event of such a
breach or threat thereof the Company's sole and exclusive remedy shall be to
obtain a temporary restraining order, a preliminary injunction, and a permanent
injunction restraining Consultant from engaging in activities constituting the
breach of Sections 4 and 5. Consultant further acknowledges that in the event of
such a breach or threat thereof the Company shall be entitled to obtain such
other or further relief as may be required to specifically enforce the
provisions of Sections 4 and 5 of this Agreement.
Page 50
(b) Suspension of Payments. Consultant hereby acknowledges that should a
breach of Sections 5 of this Agreement occur, the Company shall be entitled to
withhold payment of the then remaining unpaid balance of the Non-Compete
Compensation.
7. DISCLOSURE
Consultant is required to disclose any outside activities or interests
including ownership or participation in the development of prior inventions,
that conflict or may conflict with the best interests of Company. Prompt
disclosure is required under this paragraph if the activity or interest is
related, directly or indirectly, to: a) any activity that Consultant may be
involved with on behalf of the Company; b) warehouse or supply chain management
software development.
8. NOTICES
All notices given hereunder shall be in writing and shall be deemed
delivered when served personally or on the third business day after being
deposited in the United States mail, certified or registered mail, postage
prepaid, addressed as follows:
If to the Company:
Celerity Solutions, Inc.
000 Xxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, XX 00000
Attention: CEO
Telecopier: (000) 000-0000
If to Consultant:
Xxx Xxxxxxxxx
Any party may change its address for notices by communicating its new
address in writing to the other party.
9. MISCELLANEOUS
(a) Agreement is Non-Assignable. This Agreement is a personal service
contract and shall not be assignable by Consultant or by the Company, except
that the Company may assign this Agreement to a Person which succeeds to the
Company's rights and liabilities by merger, sale of assets as a going concern,
or consolidation with the Company.
(b) Binding Effect. All rights and obligations and agreements of the
parties under this Agreement shall be binding upon and enforceable against,
Page 51
and inure to the benefit of the parties and their personal representatives,
heirs, legatees and devises, and any person succeeding by operation of law to
their rights under this Agreement, except that such personal representatives,
heirs, legatees, devises and other persons shall have no obligation to perform
Consultant's duties described in Section 1 hereof.
(c) Representations. Consultant and the Company each represent and warrant
that there are no restrictions, agreements or limitations on their rights or
ability to enter into and perform the terms of this Agreement.
(d) Further Assurances. Consultant and the Company, as the case may be,
shall execute and deliver such further instruments and do such further acts and
things as may be required to carry out the terms or conditions of this Agreement
or as may be consistent with the intent and purpose of this Agreement.
(e) Rights of Third Parties. Nothing in this Agreement expressed or
implied, is intended to confer upon any person other than the parties hereto any
rights or remedies under or by reason of this Agreement.
(f) Effect of Waiver. A waiver of, or failure to exercise, any rights
provided for in this Agreement, in any respect, shall not be deemed a waiver of
any further or future rights hereunder. Except for rights which must be
exercised within a specified time period under this Agreement, no rights herein
shall be considered as waived, whether intentionally or not, unless waived in a
writing signed by the party to be charged with the waiver.
(g) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California applicable to contracts
made and performed in that jurisdiction, without regard to the principles of
conflicts of laws.
(h) Amendments. This Agreement may not be changed or amended orally, but
only by an agreement in writing signed by all parties hereto.
(i) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, and such counterparts shall together
constitute but one and the same instrument.
(j) Severability. If a court of competent jurisdiction declares that any
term or provision of this Agreement is invalid or unenforceable, then:
(1) the remaining terms and provisions hereof shall be unimpaired, and
(2) the invalid or unenforceable term or provision shall be deemed
replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable
term or provision.
Page 52
(k) Captions. The captions to the Sections contained in this Agreement are
for reference only, do not form a substantive part of this Agreement, and shall
not restrict or enlarge any substantive provision of this Agreement.
(l) Entire Agreement. This Agreement supersedes all prior agreements, oral
or written, between the parties hereto with respect to the engagement of
Consultant by the Company. This Agreement contains the entire agreement of the
parties with respect to the subject matter hereof, and the parties shall not be
bound by any terms, conditions, statements, covenants, representations or
warranties, oral or written, not herein contained.
(m) Board Participation. The Consultant will be invited to participate on
the Board of Directors when future acquisition decisions are discussed for the
duration of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement
effective as of the date first written above.
Celerity Solutions, Inc.,
a Delaware corporation
By:______________________________ ____________________________________
Xxx Xxxxxxxxx
Its:_____________________________
Page 53
Financial Statements and Conditions
Schedule 3.3a
Financial Statements
Somerset Automation, Inc.
Eight Months ended September 30, 1997
and Years ended January 31, 1997 and
1996 with Report of Independent
Auditors
Page 54
Somerset Automation, Inc.
Financial Statements
Eight Months ended September 30, 1997 and Years ended January 31, 1997 and 1996
Contents
Report of Independent Auditors............................................... 56
Financial Statements
Balance Sheets............................................................... 57
Statements of Income......................................................... 58
Statements of Shareholders' Equity........................................... 59
Statements of Cash Flows..................................................... 60
Notes to Financial Statements................................................ 61
Page 55
Report of Independent Auditors
The Board of Directors
Somerset Automation, Inc.
We have audited the accompanying balance sheets of Somerset Automation, Inc. as
of September 30, 1997 and January 31, 1997 and 1996, and the related statements
of income, shareholders' equity and cash flows for the eight months ended
September 30, 1997 and the years ended January 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Somerset Automation, Inc. at
September 30, 1997 and January 31, 1997 and 1996, and the results of its
operations and its cash flows for the eight months ended September 30, 1997 and
the years ended January 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young
December 3, 1997
Page 56
Somerset Automation, Inc.
Balance Sheets
September 30 January 31
1997 1997 1996
-----------------------------------------------
Assets
Current assets:
Cash $ 860,938 $ 583,648 $ 183,767
Accounts receivable, net of allowance of $19,000, $19,000 and
$16,700 at September 30, 1997 and January 31, 1997 and 1996,
respectively 698,588 462,761 368,964
Prepaid expenses and other current assets 41,329 23,841 28,676
-----------------------------------------------
Total current assets 1,600,855 1,070,250 581,407
Property and equipment, at cost:
Computer equipment 215,557 183,760 137,929
Office equipment 74,680 74,680 72,275
Furniture and fixtures 72,538 38,377 42,632
Computer software 51,287 44,002 32,233
-----------------------------------------------
414,062 340,819 285,069
Less accumulated depreciation and amortization 225,568 183,158 119,938
-----------------------------------------------
188,494 157,661 165,131
Software development costs, net of accumulated amortization of
$200,181, $170,534 and $126,063 at September 30,1997 and
January 31, 1997 and 1996, respectively 22,174 51,821 96,292
Deferred income taxes -- -- 28,262
-----------------------------------------------
Total assets $ 1,811,523 $ 1,279,732 $ 871,092
===============================================
Liabilities and shareholders' equity
Current liabilities:
Line of credit $ 14,211 $ 14,211 $ 14,211
Accounts payable 151,451 178,445 45,486
Income taxes payable 164,607 88,000 --
Other accrued liabilities 82,559 62,685 44,240
Deferred revenue 60,000 -- --
Deferred income taxes 172,262 99,262 121,262
Note payable to officer -- -- 50,000
Current portion of long-term debt 47,446 29,713 29,932
-----------------------------------------------
Total current liabilities 692,536 472,316 305,131
Long-term debt, net of current portion 5,031 22,942 52,421
Deferred income taxes 50,738 41,738 --
Commitments
Shareholders' equity:
Common stock, no par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 1,711,780, 1,711,780
and 1,743,030 at September 30, 1997 and January 31, 1997
and 1996, respectively 198,471 198,471 226,596
Note receivable (31,739) (31,739) (31,739)
Retained earnings 896,486 576,004 318,683
-----------------------------------------------
Total shareholders' equity 1,063,218 742,736 513,540
-----------------------------------------------
Total liabilities and shareholders' equity $ 1,811,523 $ 1,279,732 $ 871,092
===============================================
See accompanying notes.
Page 57
Somerset Automation, Inc.
Statements of Income
Eight months
ended
September 30, Year ended January 31,
1997 1997 1996
---------------------------------------
Revenues:
Systems integration and consulting services $ 2,458,210 $ 2,601,479 $ 1,195,223
Hardware sales 81,359 306,089 795,265
Licensing fees 375,600 650,000 670,325
---------------------------------------
Total revenues 2,915,169 3,557,568 2,660,813
Costs and operating expenses:
Cost of revenues:
Consulting and integration services 1,318,978 1,847,246 1,017,895
Hardware 65,601 207,035 577,083
Selling, general and administrative expense
981,638 1,126,739 1,052,858
---------------------------------------
Total costs and operating expenses 2,366,217 3,181,020 2,647,836
---------------------------------------
Operating income 548,952 376,548 12,977
Interest income, net of interest expense of $3,741,
$10,469 and $7,139 for the eight months ended
September 30, 1997 and the years ended
January 31, 1997 and 1996, respectively 11,530 17,773 9,934
---------------------------------------
Income before provision for income taxes 560,482 394,321 22,911
Provision (benefit) for income taxes 240,000 137,000 (38,000)
---------------------------------------
Net income $ 320,482 $ 257,321 $ 60,911
=======================================
See accompanying notes.
Page 58
Somerset Automation, Inc.
Statements of Shareholders' Equity
Common stock
------------------------ Note Retained
Shares Amount receivable earnings Total
---------------------------------------------------------------------
Balance at January 31, 1995 1,763,030 $ 242,096 $ (31,739) $ 257,772 $ 468,129
Issuance of common stock 5,000 4,500 -- -- 4,500
Repurchase of common stock (25,000) (20,000) -- -- (20,000)
Net income -- -- -- 60,911 60,911
-----------
Balance at January 31, 1996 1,743,030 226,596 (31,739) 318,683 513,540
Repurchase of common stock (31,250) (28,125) -- -- (28,125)
Net income -- -- -- 257,321 257,321
-----------
Balance at January 31, 1997 1,711,780 198,471 (31,739) 576,004 742,736
Net income -- -- -- 320,482 320,482
-----------
Balance at September 30, 1997 1,711,780 $ 198,471 $ (31,739) $ 896,486 $ 1,063,218
===========
See accompanying notes.
Page 59
Somerset Automation, Inc.
Statements of Cash Flows
Eight months
ended
September 30, Year ended January 31,
1997 1997 1996
---------------------------------------
Operating activities
Net income $ 320,482 $ 257,321 $ 60,911
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 72,057 107,691 88,942
Provision (benefit) for deferred income taxes 82,000 48,000 (39,000)
Changes in operating assets and liabilities:
Accounts receivable (235,827) (93,797) 32,259
Prepaid expenses and ot her current assets (17,488) 4,835 28,244
Accounts payable and accrued expenses (7,120) 151,404 (1,270)
Income taxes payable 76,607 88,000 --
Deferred revenue 60,000 -- (146,044)
---------------------------------------
Net cash provided by operating activities 350,711 563,454 24,042
Investing activities
Purchases of property and equipment (39,980) (55,750) (60,698)
Financing activities
Proceeds from issuance of common stock -- -- 4,500
Repurchases of common stock -- (28,125) (20,000)
Repayments of debt and capital lease obligations (33,441) (29,698) (17,877)
Proceeds (repayment) from note payable to officer -- (50,000) 50,000
---------------------------------------
Net cash provided by (used in) financing activities (33,441) (107,823) 16,623
---------------------------------------
Increase (decrease) in cash 277,290 399,881 (20,033)
Cash at beginning of year 583,648 183,767 203,800
---------------------------------------
Cash at end of year $ 860,938 $ 583,648 $ 183,767
=======================================
Supplemental information:
Cash paid for:
Interest $ 3,741 $ 10,469 $ 7,139
Income taxes 81,800 800 1,978
Noncash financing transactions:
Property and equipment acquired pursuant to
capital lease obligations 33,263 -- 49,397
See accompanying notes.
Page 60
Somerset Automation, Inc.
Notes to Financial Statements
September 30, 1997
1. Accounting Policies
Business
Somerset Automation, Inc. (the Company) was incorporated in California on March
7, 1990 to develop and implement warehousing software. The Company operates
principally in the distribution industry on a nationwide basis.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Systems Integration and Consulting Services
The Company recognizes revenue from the development and implementation of
software systems based on when the services are rendered.
Hardware Sales
Hardware sales are recognized upon delivery of the equipment.
Licensing Fees
The Company recognizes revenue from the licensing of its software systems after
contract consummation and delivery of software and related documentation. With
respect to certain customers, the Company defers revenue otherwise recognizable
until realization is reasonably assured.
Impact of Recently Issued Accounting Standards
The Company currently recognizes revenue based on the guidelines set forth in
Statement of Position (SOP) 91-1, Software Revenue Recognition. In October 1997,
the Accounting Standards Executive Committee of the AICPA issued SOP 97-2,
Software Revenue Recognition which supersedes SOP 91-1 and provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 is intended to reduce the diversity in
accounting for software revenue recognition and changes certain of the specific
criteria for recognizing revenue related to software
Page 61
Somerset Automation, Inc.
Notes to Financial Statements (continued)
1. Accounting Policies (continued)
Revenue Recognition (continued)
Impact of Recently Issued Accounting Standards (continued)
licensing arrangements. Specifically, the new SOP contains more restrictive
revenue recognition provisions for software arrangements containing multiple
elements (i.e. upgrades, enhancements, implementation and other services)
similar to the arrangements entered into by the Company. SOP 97-2 is effective
for transactions entered into in fiscal years beginning after December 15, 1997.
The Company is currently evaluating the provisions of the new SOP and the impact
that it will have on the Company's revenue recognition policies and the terms
under which it provides its products and services to customers.
Concentrations of Credit Risk
The Company sells its products primarily to large commercial companies. Credit
is extended based on evaluation of the customer's financial condition and
collateral is generally not required. Credit losses have traditionally not been
material and such losses have been within management's expectations.
Revenues from four customers aggregated 47%, 23%, 15% and 15% of total revenues
for the eight months ended September 30, 1997. These customers represented 49%,
14%, 25% and 9%, respectively, of accounts receivable at September 30, 1997.
Revenues from two customers aggregated 84% and 11% of total revenues for the
year ended January 31, 1997. These customers represented 90% and 6%,
respectively, of accounts receivable at January 31, 1997. Revenues from four
customers aggregated 38%, 14%, 12% and 12% of total revenues for the year ended
January 31, 1996. These customers represented 37%, 46%, 4% and 3%, respectively,
of accounts receivable at January 31, 1996.
Software Development Costs
The Company capitalizes costs incurred to develop new marketable software and
enhance the acquired systems software. Costs incurred in creating the Company's
software are charged to expense when incurred as research and development until
technological feasibility has been established through the development of a
detailed program design. Once technological feasibility has been established,
software development costs are
Page 62
Somerset Automation, Inc.
Notes to Financial Statements (continued)
1. Accounting Policies (continued)
Software Development Costs (continued)
capitalized and reported at the lower of amortized cost or net realizable value.
During the eight months ended September 30, 1997 and the years ended January 31,
1997 and 1996, no amounts were capitalized as software development costs.
Research and development expenses aggregated approximately zero, $317,142 and
$171,549 during the eight months ended September 30, 1997 and the years ended
January 31, 1997 and 1996, respectively.
Depreciation and Amortization
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives of three to seven years.
Software development costs are amortized over an estimated life of five years.
Advertising
The Company expenses advertising costs as incurred except for tradeshow costs
which are expensed at the time of first showing. Advertising expense aggregated
$23,234, $75,404 and $73,066 for eight months ended September 30, 1997 and the
years ended January 31, 1997 and 1996, respectively.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles to
be disposed of. The adoption of this standard on February 1, 1995 did not
materially affect the Company's financial position, results of operations or
cash flows.
Stock Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value; however, the Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related Interpretations.
Page 63
Somerset Automation, Inc.
Notes to Financial Statements (continued)
2. Debt and Lease Commitments
Line of Credit
On February 13, 1997, the Company entered into a $250,000 revolving line of
credit agreement with a financial institution. The line of credit matures in
February 2002 and is secured by substantially all of the Company's assets.
Advances under the line bear interest at the bank's prime rate (8.5% at
September 30, 1997) plus .5% and interest payments are made on a monthly basis.
The line is also subject to an unused commitment fee of .625% per annum on the
daily unused amount of the commitment and provisions of the credit agreement
include terms, among others, that restrict expenditures for capital
improvements, divided distributions, certain asset distributions and
investments.
Note Payable to Officer
In December 1995, the Company entered into a noninterest bearing promissory note
payable agreement with an officer and director of the Company for $50,000. The
note was repaid in August 1996.
Long-Term Debt
Long-term debt consists of the following:
September 30, January 31,
1997 1997 1996
---------------------------------
Term loans $21,162 $32,559 $47,449
Obligations under capital leases 31,315 20,096 34,904
---------------------------------
52,477 52,655 82,353
Less current portion 47,446 29,713 29,932
---------------------------------
$ 5,031 $22,942 $52,421
=================================
Term Loans
In November 1995 and January 1996, the Company entered into term loans of
$40,505 and $8,892, respectively, with a financial institution, bearing interest
at 9.65% and 9.30%, respectively. The loans have terms of three years and are
secured by the property and equipment with a net book value of $19,454 at
September 30, 1997.
Page 64
Somerset Automation, Inc.
Notes to Financial Statements (continued)
2. Debt and Lease Commitments (continued)
Term Loans (continued)
Scheduled maturities relating to the Company's term loans as of September 30,
1997 are as follows:
Fiscal year ended January 31:
1998 $ 6,336
1999 14,826
=======
$21,162
=======
Obligations Under Capital and Operating Lease Commitments
The Company leases office space, computer hardware and office equipment under
capital and operating leases which expire on various dates through 1999. Future
annual minimum lease payments under noncancelable operating and capital lease
arrangements at September 30, 1997 are as follows:
Capital Operating
Fiscal year ended January 31: leases leases
------------------
1998 $16,442 $ 6,989
1999 23,974 79,780
2000 -- 3,780
2001 -- 3,780
2002 -- 3,780
2003 -- 1,260
------------------
Total minimum lease payments 40,416 $99,369
=======
Less amount representing interest 9,101
-------
Present value of minimum lease payments 31,315
Less current portion (included in current portion of
long-term debt) 29,720
-------
Obligations under capital leases due after one year $ 1,595
=======
Page 65
Somerset Automation, Inc.
Notes to Financial Statements (continued)
2. Debt and Lease Commitments (continued)
Obligations Under Capital and Operating Lease Commitments (continued)
Rent expense under operating leases was approximately $81,744, $122,226 and
$65,308 for the eight months ended September 30, 1997 and the years ended
January 31, 1997 and 1996, respectively. Equipment under capital leases with a
net book value of approximately $38,720, $15,066 and $29,232 at September 30,
1997 and January 31, 1997 and 1996, respectively, is included in property and
equipment.
3. Income Taxes
The provision for income taxes consists of the following:
Eight months ended
September 30, Year ended January 31,
1997 1997 1996
------------------------------------------------
Current:
Federal $ 124,000 $ 86,000 $ --
State 34,000 3,000 1,000
---------
158,000 89,000 1,000
Deferred:
Federal 65,000 25,000 (20,000)
State 17,000 23,000 (19,000)
---------
82,000 48,000 (39,000)
---------
Total $ 240,000 $ 137,000 $ (38,000)
=========
Page 66
Somerset Automation, Inc.
Notes to Financial Statements (continued)
3. Income Taxes (continued)
Deferred income taxes reflect the tax effect, using enacted tax rates, of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
September 30, January 31,
1997 1997 1996
-----------------------------------
Deferred tax liabilities:
Accrual to cash adjustment $(199,000) $(110,000) $(124,000)
Software development costs (9,000) (18,000) (36,000)
Tax over book depreciation (44,000) (46,000) (19,000)
-----------------------------------
Total deferred liabilities (252,000) (174,000) (179,000)
Deferred tax assets:
Research and development tax credits -- 20,000 76,000
State income taxes 27,000 11,000 3,000
Net operating loss carryforward -- -- 5,000
Other 2,000 2,000 2,000
-----------------------------------
Total deferred assets 29,000 33,000 86,000
-----------------------------------
Net deferred tax liability $(223,000) $(141,000) $ (93,000)
===================================
The Company's effective tax rates for the eight months ended September 30, 1997
and the years ended January 31, 1997 and 1996 differ from the federal statutory
rates primarily due to state income taxes and the recognition of benefits
related to federal and state research and development tax credits.
4. Shareholders' Equity
Common Stock
The Company has a right of first refusal to repurchase 506,224 common shares
available to be sold by shareholders for a price per share equal to the lesser
of book value or the price offered by a proposed acquirer. Upon termination of
service due to retirement or disability, these shareholders shall have the
option to require that the Company repurchase all common shares held by these
shareholders at a price per share equal to book value. In the event of
termination of service for reasons other than retirement or disability, the
Company shall have the option, but not the requirement, to reacquire the shares
held by the terminated shareholder at a price per share equal to book value. In
the event of death of a shareholder, the Company is required to purchase, and
the spouse and estate of the shareholder are required to sell, all shares of
common stock owned at the date of death at a price per share equal to book
value.
Page 67
Somerset Automation, Inc.
Notes to Financial Statements (continued)
4. Shareholders' Equity (continued)
Note Receivable
On October 26, 1994, the Company issued 35,265 shares of restricted common stock
in exchange for a $31,739 note receivable. The note receivable bears interest at
8% per annum with interest due quarterly. Principal is due on October 25, 1999.
Stock Option Plan
In October 1994, the Company adopted the 1994 Incentive Stock Option,
Nonqualified Stock Option, and Restricted Stock Purchase Plan (the Plan). The
Plan provides for the issuance to employees, consultants, directors and business
associates of up to 750,000 shares of common stock through the grant of stock
purchase rights (SPRs), incentive stock options (ISOs) and nonqualified stock
options (NSOs) to purchase shares of the Company's common stock. The options
have terms of ten years and generally vest ratably over five years from the date
of grant. At September 30, 1997, the Company had 416,500 shares of common stock
available for grant under the plan.
ISOs may be granted only to employees and the exercise price per share may not
be less than 100% of the fair market value of a share of common stock on the
grant date. NSOs and SPRs may be granted to employees, consultants, directors
and business associates and the exercise price and purchase price, respectively,
shall not be less than 85% of the fair market value of a share of common stock
on the date of grant. Options and SPRs expire no later than ten years and ninety
days, respectively, after the date of grant. Vested options are exercisable for
90 days after an optionee's termination, except in the case of death for which
vested options are exercisable for one year.
Page 68
Somerset Automation, Inc.
Notes to Financial Statements (continued)
4. Shareholders' Equity (continued)
Stock Option Plan (continued)
The following table summarizes stock option activity for the eight months ended
September 30, 1997 and the years ended January 31, 1997 and 1996.
Exercise
Number of Price
shares per share
-----------------------
Outstanding on January 31, 1995 25,575 $0.90
Granted 220,385 $0.90
Expired or forfeited (15,550) $0.90
-----------------------
Outstanding on January 31, 1996 230,410 $0.90
Granted 338,270 $0.90
Expired or forfeited (211,055) $0.90
-----------------------
Outstanding on January 31, 1997 357,625 $0.90
Granted 20,000 $0.90
Expired or forfeited (44,125) $0.90
-----------------------
Outstanding on September 30, 1997 333,500 $0.90
=======================
As of September 30, 1997, 140,668 of these options were exercisable and 750,000
shares of the Company's common stock are reserved for issuance pursuant to the
Plan.
In calculating pro forma information regarding net income and earnings per
share, as required by SFAS 123, the fair value was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the options on the Company's common stock:
risk-free interest rate of 6.5%; a dividend yield of 0%; volatility of the
expected market price of the Company's common stock of 0; and a weighted-average
expected life of the option of 5 years. The weighted-average fair value of all
the options at the dates of grant was $0.16 and the weighted-average remaining
contractual life of the options at September 30, 1997 was 8.83 years.
Page 69
Somerset Automation, Inc.
Notes to Financial Statements (continued)
4. Shareholders' Equity (continued)
Stock Option Plan (continued)
In management's opinion existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. The Company's pro forma information is
summarized below:
Eight months
ended
September 30, Year ended January 31,
1997 1997 1996
---------------------------------------------
Pro forma net income $308,057 $248,961 $59,864
5. Subsequent Events
On November 6, 1997, the Company entered into a non-binding letter of intent to
merge the Company into a subsidiary of another company. Upon consummation of the
merger, the Company's shareholders are to receive shares of the other company's
common stock, cash and promissory notes in exchange for all of the Company's
common stock outstanding immediately prior to the merger. The proposed merger
assumes that the vested portion of all outstanding options will be exercised in
accordance with their terms and all nonvested portions of such options will be
terminated prior to the completion of the merger without further obligation of
the Company.
On November 21, 1997, the Company's directors approved the proposed merger and
the terms and conditions of the letter of intent dated November 6, 1997.
Page 70
