AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
NEW IMAGE INDUSTRIES, INC.
WISDOM ACQUISITION CORP.
AND
INSIGHT IMAGING SYSTEMS, INC.
---------------------
MAY 9, 1996
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Effective Date; Effective Time. . . . . . . . . . . . . . . 5
2.4 Conversion of Insight Capital Stock . . . . . . . . . . . . 5
2.5 Insight Common Purchase Rights. . . . . . . . . . . . . . . 6
2.6 Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . 6
2.7 Exchange of Certificates Representing Insight
Capital Stock . . . . . . . . . . . . . . . . . . . . . . 6
2.8 Issuance of New Image Common for Pre-March Loans. . . . . . 8
2.9 Treatment of Fractional Shares. . . . . . . . . . . . . . . 9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF INSIGHT . . . . . . . . . 9
3.1 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Organization, Good Standing and Qualification . . . . . . . 9
3.3 Capitalization; Options and Warrants; Voting Rights;
and Securities Laws . . . . . . . . . . . . . . . . . . . 9
3.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . 10
3.5 Litigation, Claims and Potential Claims . . . . . . . . . . 10
3.6 Compliance with Law . . . . . . . . . . . . . . . . . . . . 11
3.7 Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 11
3.8 Related-Party Transactions. . . . . . . . . . . . . . . . . 12
3.9 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.10 Environmental and Safety Laws . . . . . . . . . . . . . . . 12
3.11 Manufacturing and Marketing Rights. . . . . . . . . . . . . 13
3.12 Title to Property and Assets. . . . . . . . . . . . . . . . 13
3.13 Financial Statements. . . . . . . . . . . . . . . . . . . . 13
3.14 Changes . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.15 Employees and Labor . . . . . . . . . . . . . . . . . . . . 15
3.16 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . 15
3.17 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.18 Purchase and Sale Obligations . . . . . . . . . . . . . . . 17
3.19 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.20 No Change of Control Provision. . . . . . . . . . . . . . . 17
3.21 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.22 Accounts Receivable . . . . . . . . . . . . . . . . . . . . 18
3.23 Warranty Obligations and Returns. . . . . . . . . . . . . . 18
3.24 Patents, Trademarks, etc. . . . . . . . . . . . . . . . . . 18
TABLE OF CONTENTS
(Continued)
Page
3.25 Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.26 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 19
3.27 HTMI License. . . . . . . . . . . . . . . . . . . . . . . . 19
3.28 Compliance with Covenants . . . . . . . . . . . . . . . . . 19
3.29 Payables Aging. . . . . . . . . . . . . . . . . . . . . . . 20
3.30 Pooling of Interests. . . . . . . . . . . . . . . . . . . . 20
ARTICLE IV REPRESENTATIONS AND WARRANTIES
OF NEW IMAGE AND SUB. . . . . . . . . . . . . . . . . . . 20
4.1 Organization, Good Standing and Qualification . . . . . . . 20
4.2 Capitalization and Voting Rights. . . . . . . . . . . . . . 20
4.3 Valid Issuance of New Image Exchange Shares . . . . . . . . 21
4.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . 21
4.5 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 22
4.6 Compliance With Law . . . . . . . . . . . . . . . . . . . . 22
4.7 Securities Exchange Commission Documents;
New Image Financial Statements. . . . . . . . . . . . . . 22
4.8 Changes . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.9 No Defaults . . . . . . . . . . . . . . . . . . . . . . . . 24
4.10 Patents, Trademarks, etc. . . . . . . . . . . . . . . . . . 24
4.11 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE V CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE
TIME; ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . 25
5.1 Conduct of Insight Business . . . . . . . . . . . . . . . . 25
5.2 Access to Information . . . . . . . . . . . . . . . . . . . 26
5.3 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.4 Transaction Costs . . . . . . . . . . . . . . . . . . . . . 27
5.5 Public Announcements. . . . . . . . . . . . . . . . . . . . 27
5.6 Tax and Pooling Status of Reorganization. . . . . . . . . . 27
5.7 Election or Appointment of New Image Director . . . . . . . 27
5.8 Insight Interim Financial Statements. . . . . . . . . . . . 28
5.9 No Negative Cash. . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE VI CONDITIONS TO EACH PARTY'S OBLIGATIONS TO
EFFECT THE MERGER . . . . . . . . . . . . . . . . . . . . . 28
6.1 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . 28
6.2 Shareholder Approval. . . . . . . . . . . . . . . . . . . . 28
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TABLE OF CONTENTS
(Continued)
Page
6.3 No Actions or Proceedings . . . . . . . . . . . . . . . . . 28
6.4 Government Approvals. . . . . . . . . . . . . . . . . . . . 28
6.5 Insight Affiliate Agreements. . . . . . . . . . . . . . . . 28
6.6 Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VII FURTHER CONDITIONS TO OBLIGATIONS OF
NEW IMAGE AND SUB . . . . . . . . . . . . . . . . . . . . 29
7.1 Representations and Warranties. . . . . . . . . . . . . . . 29
7.2 Performance of Obligations of Insight . . . . . . . . . . . 29
7.3 Opinion of Insight's Counsel. . . . . . . . . . . . . . . . 29
7.4 Pre-March Loans . . . . . . . . . . . . . . . . . . . . . . 30
7.5 Guaranties of Insight Shareholders. . . . . . . . . . . . . 30
7.6 Estimated Closing Date Balance Sheet. . . . . . . . . . . . 30
7.7 New Image Financing . . . . . . . . . . . . . . . . . . . . 30
7.8 Estoppel Statements . . . . . . . . . . . . . . . . . . . . 30
7.9 Affiliated Capital Corp.. . . . . . . . . . . . . . . . . . 30
7.10 Mortensen Agreement . . . . . . . . . . . . . . . . . . . . 30
7.11 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.12 CorDev Corporation Agreements . . . . . . . . . . . . . . . 30
7.13 Approval of New Image Board of Directors. . . . . . . . . . 30
7.14 Approval of Insight Disclosure Schedule and Exhibits. . . . 30
7.15 Environmental Risks . . . . . . . . . . . . . . . . . . . . 31
7.16 Failure to Agree on Exhibits. . . . . . . . . . . . . . . . 31
7.17 Pooling Letter. . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VIII FURTHER CONDITIONS TO OBLIGATIONS OF INSIGHT. . . . . . . . 31
8.1 Representations and Warranties. . . . . . . . . . . . . . . 31
8.2 Performance of Obligations of New Image and Sub . . . . . . 31
8.3 Opinion of New Image's Counsel. . . . . . . . . . . . . . . 31
8.4 Board Membership. . . . . . . . . . . . . . . . . . . . . . 32
8.5 Release of Shareholder Guarantee. . . . . . . . . . . . . . 32
8.6 Agreement on Exhibits . . . . . . . . . . . . . . . . . . . 32
ARTICLE IX INDEMNIFICATION BY INSIGHT SHAREHOLDERS . . . . . . . . . . 32
9.1 Survival of Representations, Warranties, Covenants
and Agreements. . . . . . . . . . . . . . . . . . . . . . 32
9.2 Liability Threshold . . . . . . . . . . . . . . . . . . . . 32
9.3 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . 32
iii
TABLE OF CONTENTS
(Continued)
Page
9.4 Notice of Claims. . . . . . . . . . . . . . . . . . . . . . 33
9.5 Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.6 Objections to Claim . . . . . . . . . . . . . . . . . . . . 33
9.7 Resolution of Conflicts . . . . . . . . . . . . . . . . . . 33
9.8 Third-Party Claims. . . . . . . . . . . . . . . . . . . . . 34
9.9 Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . 34
9.10 No Indemnity to Guarantors from Insight . . . . . . . . . . 34
ARTICLE X INDEMNIFICATION BY NEW IMAGE. . . . . . . . . . . . . . . . 35
ARTICLE XI TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . 35
11.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . 35
11.2 Effect of Termination . . . . . . . . . . . . . . . . . . . 36
11.3 Terminations Hereunder not Exclusive. . . . . . . . . . . . 36
ARTICLE XII GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . 36
12.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 36
12.2 Extension and Waiver. . . . . . . . . . . . . . . . . . . . 36
12.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 37
12.4 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 37
12.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 37
12.6 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 38
12.7 Third Party Rights. . . . . . . . . . . . . . . . . . . . . 38
12.8 Titles and Headings . . . . . . . . . . . . . . . . . . . . 38
12.9 Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . 38
12.10 Further Assurances. . . . . . . . . . . . . . . . . . . . . 38
12.11 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . 38
12.12 Successors and Assigns. . . . . . . . . . . . . . . . . . . 38
12.13 Partial Invalidity. . . . . . . . . . . . . . . . . . . . . 38
12.14 Attorneys Fees. . . . . . . . . . . . . . . . . . . . . . . 38
12.15 New Image and Sub One Party . . . . . . . . . . . . . . . . 39
12.16 Concerning Disclosure Schedules and Exhibits. . . . . . . . 39
iv
EXHIBITS
1 Audited Closing Date Financial Statements Procedure
2.1 Merger Agreement
2.7.2 Transmittal Letter and Instructions for Holders of Insight
Capital Stock
2.8 Transmittal Letter and Instructions for Payees Under Pre-March
Loans
3.3.1 Schedule of Insight Capital Stock
3.3.3 Schedule of Insight Common Purchase Rights
3.3.6 Schedule of Pre-March Loans
3.8 Schedule of Post-February Loans
3.9 Schedule of Insight Permits
3.12 Schedule of Assets
3.13A Estimated Closing Date Balance Sheet
3.13B Insight Financial Statements
3.15 Schedule of Employees (full-time and part-time)
3.17.1 Schedule of Insight Taxes, Interest, Penalties, and Agreements
with Tax Authorities
3.18 Schedule of Insight Purchase Orders in Excess of $25,000
3.19 Schedule of Insight Self-Insured Risks and Insurance Policies
3.24.1 Schedule of Insight Intellectual Property Rights and Related
Agreements
3.29 Schedule of Insight Payables as of the Date of the Latest Balance
Sheet
4.10 Schedule of New Image Intellectual Property Rights and Related
Agreements
6.5 Insight Affiliate Agreement
7.1 Insight Officers' Certificate
7.3 Opinion of Insight's Counsel
7.5 Insight Shareholder Guarantee
7.8 Estoppel Statements
8.2 New Image Officers' Certificate
8.3 Opinion of New Image Counsel
v
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made
and entered into as of May 9, 1996 by and among New Image Industries, Inc., a
Delaware corporation ("New Image"), Wisdom Acquisition Corp., a California
corporation and a wholly-owned subsidiary of New Image ("Sub"), and Insight
Imaging Systems, Inc., a California corporation ("Insight"):
WITNESSETH:
WHEREAS, the respective Boards of Directors of New Image, Sub, and
Insight deem it advisable and in the best interests of their respective
stockholders that Sub be merged with and into Insight pursuant to the Merger (as
hereinafter defined);
WHEREAS, the Merger is intended to be treated as a tax-free
reorganization pursuant to Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code") and is eligible to be accounted for as a pooling of
interests under applicable accounting rules;
NOW, THEREFORE, in order to consummate the Merger, and in consideration of
the mutual representations, warranties, covenants, and agreements contained
herein the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, certain terms shall have the meanings ascribed to
them, as follows:
"AGREEMENT" shall refer to this agreement.
"ASSETS" shall have meaning ascribed to it in Section 3.12.
"AUDITED CLOSING DATE FINANCIAL STATEMENTS" shall mean the audited closing
date financial statements of Insight derived pursuant to the procedures set
forth in Exhibit 1.
"BUSINESS CONDITION" shall, with respect to any corporate entity or group of
corporate entities, mean the business, financial condition, results of
operations, and assets of such corporate entity or group of corporate entities.
"CGCL" shall mean the California General Corporation Law.
"CLAIM" shall have the meaning ascribed to it in Section 9.1.
"CLAIM NOTICE" shall have the meaning ascribed to it in Section 9.4.
"CLOSING DATE" shall have the meaning ascribed to it in Section 2.2.
1
"CLOSING" shall have the meaning ascribed to it in Section 2.2.
"CODE" shall have meaning ascribed to it in the second Whereas clause.
"CONFIDENTIALITY AGREEMENT" shall have the meaning ascribed to it in Section
5.2.
"DAMAGES" shall have the meaning ascribed to it in Section 9.3.
"DATE OF THIS AGREEMENT" shall mean the date set forth in the introductory
paragraph of this Agreement.
"DECEMBER 31, 1995 FINANCIAL STATEMENTS" shall have meaning ascribed to it
in Section 3.13.1(i).
"DISPUTE" shall have the meaning ascribed to it in Section 9.9.
"DISSENTING SHARES" shall mean shares of Insight Capital Stock which qualify
as dissenting shares under CGCL Section 1300(b) and receive cash in lieu of New
Image Common in the Merger.
"EFFECTIVE DATE" shall have the meaning ascribed to it in Section 2.3.
"EFFECTIVE TIME" shall have the meaning ascribed to it in Section 2.3.
"ESTIMATED CLOSING DATE BALANCE SHEET" shall refer to Exhibit 3.13A.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"EXCHANGE AGENT" shall have the meaning ascribed to it in Section 2.7.1.
"EXCHANGE RATIO" shall have meaning ascribed to it in Section 2.4.
"FINANCIAL STATEMENTS" shall have meaning ascribed to it in Section 3.13.1.
"GAAP" shall refer to generally accepted accounting principles.
"HAZARDOUS MATERIAL" shall have the meaning ascribed to it in Section 3.10.
"HTMI" shall have meaning ascribed to it in Section 3.27.
"INSIGHT" shall have the meaning ascribed to it in the introductory
paragraph to this agreement.
"INSIGHT A PREFERRED" means the Insight Series A Preferred Stock described
in the Insight Restated Articles.
"INSIGHT B PREFERRED" means the Insight Series B Preferred Stock described
in the Insight Restated Articles.
2
"INSIGHT CAPITAL STOCK" shall refer, collectively, to the Insight Common,
the Insight A Preferred, and the Insight B Preferred.
"INSIGHT COMMON" means the Insight Common Stock described in the Insight
Restated Articles.
"INSIGHT COMMON PURCHASE RIGHTS" shall have the meaning ascribed to it in
Section 3.3.3.
"INSIGHT DISCLOSURE SCHEDULE" shall mean the disclosure schedule provided to
New Image as contemplated in Article III.
"INSIGHT GUARANTORS" shall refer to the shareholders of Insight who provide
guaranties as contemplated by Section 7.5 and Article IX.
"INSIGHT INTELLECTUAL PROPERTY RIGHTS" shall have the meaning ascribed to it
in Section 3.24.1.
"INSIGHT OFFICERS' CERTIFICATE" shall have the meaning ascribed to it in
Section 7.1.
"INSIGHT RESTATED ARTICLES" shall have the meaning ascribed to it in
Section 3.3.2.
"INSIGHT RETURNS" shall have the meaning ascribed to it in Section 3.17.1.
"INVENTORIES" shall have the meaning ascribed to it in Section 3.21.
"LATEST BALANCE SHEET" shall mean the Insight December 31, 1995, balance
sheet included in its unaudited financial statements attached as part of Exhibit
3.13B.
"LIENS" shall have the meaning ascribed to it in Section 3.12.
"MERGER" shall refer to the merger of Insight and Sub pursuant to the terms
of Exhibit 2.1.
"MERGER AGREEMENT" shall refer to Exhibit 2.1.
"NASD" shall refer to the National Association of Securities Dealers, Inc.
"NEW IMAGE" shall have the meaning ascribed to it in the introductory
paragraph to this agreement.
"NEW IMAGE PREFERRED" shall refer to New Image Industries, Inc. Preferred
Stock, $.001 par value.
"NEW IMAGE COMMON" shall refer to New Image Industries, Inc. common stock,
$.001 par value.
"NEW IMAGE COMMON PURCHASE RIGHTS" shall have the meaning ascribed to it in
Section 4.2.1.
3
"NEW IMAGE DISCLOSURE DOCUMENTS" shall refer to New Image filings under the
Exchange Act.
"NEW IMAGE DISCLOSURE SCHEDULE" shall have the meaning ascribed to it in the
introductory paragraph to Article IV.
"NEW IMAGE EXCHANGE SHARES" shall mean the shares of New Image Common
exchanged for Insight Capital Stock pursuant to this Agreement and the Merger
Agreement. New Image Exchange Shares do not include shares of New Image Common
(i) which would otherwise have been allocable to the shares of Insight Capital
Stock which qualify as Dissenting Shares or (ii) which are reserved for issuance
upon exercise of Insight Common Purchase Rights assumed hereunder.
"NEW IMAGE FINANCIAL STATEMENTS" shall have the meaning ascribed to it in
Section 4.7.
"NEW IMAGE INTELLECTUAL PROPERTY RIGHTS" shall have the meaning ascribed to
it in Section 4.10.1.
"NEW IMAGE LOAN EXCHANGE SHARES" shall mean the shares of New Image Common
issued in exchange for Pre-March Loans.
"NOTICES" shall have the meaning ascribed to it in Section 12.3.
"OFFICER CLAIM CERTIFICATE" shall have the meaning ascribed to it in Section
9.5.
"PERMITS" shall mean the franchises, permits, licenses, and other similar
authority described in Exhibit 3.9.
"POST-FEBRUARY LOANS" shall mean loans from Insight shareholders after
February 29, 1996.
"PRE-MARCH LOANS" shall mean loans from Insight shareholders and other
related parties to Insight made prior to March 1, 1996.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall refer to the Securities Act of 1933, as amended.
"SEPTEMBER 30, 1994 FINANCIAL STATEMENTS" shall have the meaning ascribed to
it in Section 3.13.1.
"SEPTEMBER 30, 1995 FINANCIAL STATEMENTS" shall have the meaning ascribed to
it in Section 3.13.1.
"SUB" shall have the meaning ascribed to it in the introductory paragraph to
this agreement.
"SURVIVING CORPORATION" shall have the meaning ascribed to it in Section
2.1.
"TAX," "TAXES," and "TAXABLE" shall have the meanings ascribed to them in
Section 3.17.4.
4
"TAXING AUTHORITY" shall have the meaning ascribed to it in Section 3.17.4.
"TRANSACTION COSTS" shall have the meaning ascribed to it in Section 5.4.
"1996 AUDIT RELEASE DATE" shall have meaning ascribed to it in Section 9.1.
ARTICLE II
THE MERGER
2.1 THE MERGER.
2.1.1 Subject to the terms and conditions of this Agreement and
the Agreement of Merger substantially in the form of Exhibit 2.1 ("Merger
Agreement"), Sub shall be merged with and into Insight (the "Merger"), and
Insight shall be the surviving corporation in the Merger (Insight, as the
surviving corporation is sometimes referred to herein as the "Surviving
Corporation"). At the Effective Time, the separate existence of Sub shall cease
and Insight, as the surviving corporation in the Merger, shall continue its
corporate existence under the CGCL. To effectuate the Merger, Insight and Sub
shall execute and file, among other things, the Merger Agreement (or other
appropriate documents) in the office of the California Secretary of State in
accordance with the applicable provisions of the CGCL.
2.1.2 At the Effective Time, the Articles of Incorporation and
Bylaws of Sub shall be the Articles of Incorporation and Bylaws of the Surviving
Corporation; and the officers and directors of Sub immediately prior to the
Merger shall become the officers and directors of the Surviving Corporation.
2.2 CLOSING. The closing of the Merger (the "Closing") shall take place
at an agreed time on the first business day (the "Closing Date") after
satisfaction or waiver of the latest to occur of the conditions set forth in
Articles VI through VIII, at the offices of Higgs, Fletcher & Mack LLP, 401 West
A Street, Suite 2000, San Diego, California unless a different date or place is
agreed to in writing by the parties. At the same time as the Closing or as soon
as practicable thereafter, the parties shall cause the Merger to become
effective under the CGCL.
2.3 EFFECTIVE DATE; EFFECTIVE TIME. The Merger shall become effective
on the date of the filing of the Merger Agreement, together with any other
required documents of Insight and Sub, with the California Secretary of State in
accordance with the CGCL. The date when the Merger becomes effective, is
referred to as the "Effective Date," and the time when the Merger becomes
effective is referred to as the "Effective Time."
2.4 CONVERSION OF INSIGHT CAPITAL STOCK. At the Effective Time, for all
of the issued and outstanding Insight Capital Stock and Insight Common Purchase
Rights, New Image shall exchange New Image Common and assume Insight Common
Purchase rights such that the sum of shares of New Image Common which are (i)
issued in exchange for Insight Capital Stock and (ii) subject to Insight Common
Purchase Rights assumed by New Image shall be 511,397. The exchange ratio shall
be a fraction (the "Exchange Ratio") the numerator of which is 511,397 and
5
the denominator of which is the sum of (i) the number of shares of Insight
Common issued and outstanding, (ii) the number of shares of Insight Common
issuable upon exercise of Insight Common Purchase Rights issued and outstanding,
(iii) the number of shares of Insight A Preferred, if any, issued and
outstanding, and (iv) the number of shares of Insight B Preferred, if any,
issued and outstanding. For each share of Insight Capital Stock, the holder
will be entitled to receive a number of shares of New Image Common equal to one
multiplied by the Exchange Ratio.
2.5 INSIGHT COMMON PURCHASE RIGHTS. At the Effective Time, each
outstanding option or warrant to purchase Insight Common, whether vested or
unvested, will be assumed by New Image. Each such purchase right so assumed
shall continue to have, and be subject to, the same terms and conditions set
forth in the agreements and plans, if any, under which such right was created as
in effect immediately prior to the Effective Time, except that (i) such purchase
right shall be exercisable (when vested) for that number of whole shares of New
Image Common equal to the product of the number of shares of Insight Common that
were issuable upon exercise of such right immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounded to the nearest whole number of
shares of New Image Common, and (ii) the per share exercise price for New Image
Common issuable upon exercise of such purchase right shall be equal to the
quotient determined by dividing the exercise price per share of Insight Common
at which such right was exercisable immediately prior to the Effective Time by
the Exchange Ratio, rounded up to the nearest whole cent.
2.6 DISSENTERS' RIGHTS. Notwithstanding anything in this Agreement to
the contrary, Dissenting Shares shall be converted into the right to receive
such consideration as may be determined to be due with respect to such shares
pursuant to the CGCL, provided, however, that Dissenting Shares outstanding
immediately prior to the Effective Date and held by a holder who shall after the
Effective Date, withdraw his demand for purchase or lose his right to demand
purchase, in either case pursuant to the CGCL, shall be deemed to be converted,
as of the Effective Date, into New Image Common as specified in Section 2.4,
without interest and the number of Dissenting Shares shall be decreased,
accordingly. Insight agrees that, except with the prior written consent of New
Image or as required under the CGCL, it will not voluntarily make any payment
with respect to, or settle or offer to settle, any demand for purchase of,
Insight Common prior to the Effective Date.
2.7 EXCHANGE OF CERTIFICATES REPRESENTING INSIGHT CAPITAL STOCK.
2.7.1 New Image or its agent shall act as exchange agent
("Exchange Agent") to effect the exchange of certificates representing Insight
Common, other than Dissenting Shares, for certificates representing New Image
Common in accordance with the provisions hereof and the Merger Agreement.
2.7.2 Promptly following the Effective Date, to each person who
was, at the Effective Date, a holder of record of Insight Capital Stock and who
is exchanging such stock for New Image Common pursuant to the provisions hereof:
6
(i) New Image shall cause to be mailed a letter of
transmittal and instructions in the form of Exhibit 2.7.2 for use in effecting
the surrender of each certificate that evidences Insight Capital Stock to be
exchanged pursuant to the Merger. Such letter of transmittal shall include
representations that the shareholder will not reoffer or resell the New Image
Common being received in exchange except in compliance with applicable state and
federal securities laws.
(ii) Insight shall cause to be mailed a statement setting
forth such shareholder's pro rata share of Transaction Costs.
2.7.3 Upon receipt of (i) a certificate evidencing a shareholder's
Insight Capital Stock together with a letter of transmittal duly completed and
validly executed in accordance with the instructions thereto and (ii) a letter
from the Escrow Holder identified in Section 2.7.4, stating that such
shareholder has remitted his share of the Transaction Costs, New Image shall
cause to be distributed to such shareholder, one or more certificates
representing the New Image Common to which such shareholder is entitled by
virtue of this Agreement and the Merger. In the event New Image receives a
letter of transmittal from a shareholder but not the letter from the Escrow
Holder relating to such shareholder, New Image shall register such shareholder's
certificate(s) for New Image Common in the name of the Escrow Holder as trustee
for such shareholder and shall deliver such certificates to the Escrow Holder.
2.7.4 The Escrow Holder shall be Ritchey Fisher Whitman & Klein,
Attorneys at Law and counsel to Insight. Pursuant to this Agreement and
resolutions to be approved by shareholders of Insight, and subject to (i)
limitations specified therein and in the letter of transmittal described in
Section 2.7.2 and (ii) compliance with applicable state and federal securities
laws, in the event such shareholder does not remit his share of the Transaction
Costs within the period ending 30 days after the 1996 Audit Release Date, the
Escrow Holder shall have the authority to sell, on behalf of the such
shareholder, as many of his shares of New Image Common as is necessary to pay
such shareholder's share of the Transaction Costs. If such shareholder pays his
share of the Transaction Costs in full at any time during the period after his
certificate(s) are delivered to Escrow Holder and within the period ending 30
days after the 1996 Audit Release Date, the Escrow Holder shall cause the
related certificate(s) to be reissued into the name of the shareholder and
delivered to him.
2.7.5 Until surrendered as contemplated in this Section 2.7, each
certificate (other than certificates representing Dissenting Shares) which
immediately prior to the Effective Date shall have represented Insight Capital
Stock, shall be deemed at and after the Effective Date to represent only a
number of shares of New Image Common equal to the number of shares of Insight
Capital Stock represented by such certificate multiplied by the Exchange Ratio.
2.7.6 On the Effective Date, the stock transfer books of Insight
shall be closed and there shall be no further registration of transfers of
shares of Insight Capital Stock or exercises of warrants or options for Insight
Common. From and after the Effective Date, the holders of certificates
evidencing ownership of Insight Capital Stock outstanding immediately
7
prior to the Effective Date shall cease to have any rights with respect to such
shares except as otherwise provided herein or by law.
2.8 ISSUANCE OF NEW IMAGE COMMON FOR PRE-MARCH LOANS.
2.8.1 At the Effective Time, for each Pre-March Loan then
outstanding, New Image will exchange a number of shares of New Image Common
equal to the principal amount of such loan together with interest accrued
thereon through the Closing Date multiplied by a fraction the numerator of which
is 296,603 and the denominator of which is the aggregate amount of all Pre-March
Loans then outstanding together with interest accrued thereon through the
Closing Date.
2.8.2 Promptly following the Effective Date, to each person who
was, at the Effective Date, a payee under a Pre-March Loan:
(i) New Image shall cause to be mailed a letter of
transmittal and instructions in the form of Exhibit 2.8 for use in effecting the
exchange of such loan for New Image Common. Such letter of transmittal shall
include representations that the exchanging payee will not reoffer or resell the
New Image Common being received in exchange except in compliance with applicable
state and federal securities laws.
(ii) Insight shall cause to be mailed a statement setting
forth such payee's pro rata share of Transaction Costs.
2.8.3 Upon receipt of (i) evidence satisfactory to New Image of a
payee's Pre-March Loan together with a letter of transmittal duly completed and
validly executed in accordance with the instructions thereto and (ii) a letter
from the Escrow Holder identified in Section 2.8.4, stating that such payee has
remitted his share of the Transaction Costs, New Image shall cause to be
distributed to such payee, one or more certificates representing the New Image
Common to which such payee is entitled by virtue of this Agreement. In the
event New Image receives a letter of transmittal from a payee but not the letter
from the Escrow Holder relating to such payee, New Image shall register such
payee's certificate(s) for New Image Common in the name of the Escrow Holder as
trustee for such payee and shall deliver such certificate(s) to the Escrow
Holder.
2.8.4 The Escrow Holder shall be Ritchey Fisher Whitman & Klein,
Attorneys at Law and counsel to Insight. Pursuant to this Agreement, and
agreements between parties whose services may give rise to Transaction Costs,
and subject to (i) limitations specified therein and in the letter of
transmittal and (ii) compliance with applicable state and federal securities
laws, in the event such payee does not remit his share of the Transaction Costs
within the period ending 30 days after the 1996 Audit Release Date the Escrow
Holder shall have the authority to sell, on behalf of the such payee, as many of
his shares of New Image Common as is necessary to pay such payee's share of the
Transaction Costs. If such payee pays his share of the Transaction Costs in
full at any time after his certificate(s) are delivered to the Escrow Holder and
within the period
8
ending 30 days after the 1996 Audit Release Date, the Escrow Holder shall cause
the related certificate(s) to be reissued into the name of the payee and
delivered to him.
2.9 TREATMENT OF FRACTIONAL SHARES. No fractional shares of New Image
Common shall be issued hereunder or in the Merger, and the number of shares of
New Image Common issued pursuant to the Merger shall be rounded up to the
nearest whole number. Subject to such rounding of fractions, such shares shall
be calculated for each Insight shareholder and each payee under a Pre-March Loan
based on the aggregate number of shares of New Image Common issuable to such
holder pursuant to the Merger or such payee pursuant to Section 2.8.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INSIGHT
Subject to the exceptions set forth in the Insight disclosure schedule (the
"Insight Disclosure Schedule") delivered to and acknowledged by New Image
concurrently herewith, Insight hereby represents and warrants to New Image as of
each of the following dates or times, except as a specific representation or
warranty may be expressly more limited, (i) the Date of this Agreement, (ii) the
Closing Date, and (iii) the Effective Time, as follows:
3.1 SUBSIDIARIES. Insight does not own or control, directly or
indirectly, any interest in any other corporation, association, partnership,
limited liability company, or other business entity.
3.2 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Insight is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as now conducted. Insight is duly qualified
to transact business and is in good standing in each jurisdiction in which the
failure so to qualify would have a material adverse effect on the Business
Condition of Insight.
3.3 CAPITALIZATION; OPTIONS AND WARRANTS; VOTING RIGHTS; AND SECURITIES
LAWS.
3.3.1 The authorized capital stock of Insight consists of
10,000,000 shares of Insight Common, without par value, and 6,000,000 shares of
Insight Preferred of which 1,500,000 have been designated Insight Series A
Preferred and 3,500,000 have been designated Insight Series B Preferred.
Exhibit 3.3.1 is a schedule of Insight Capital Stock which is issued and
outstanding on the Date of this Agreement showing as to each holder his name and
address and the number of shares and class of Insight Capital Stock owned.
Attached to the Insight Officers' Certificate delivered at the Closing will be a
true and correct revised list of the holders of Insight Capital Stock, showing
the same information as to ownership of Insight Capital Stock issued and
outstanding as of the Closing.
3.3.2 All of the issued and outstanding shares of Insight Capital
Stock have been duly authorized and are validly issued, fully paid, and
nonassessable. The designations, powers, preferences, rights, qualifications,
limitations, and restrictions in respect of each class and series of authorized
Insight Capital Stock are set forth in Insight's Amended and Restated Articles
of
9
Incorporation filed with the California Secretary of State on August 24, 1995
(the "Insight Restated Articles").
3.3.3 All outstanding options, warrants, rights (including
conversion or preemptive rights), agreements, or understandings for the purchase
or acquisition from Insight of any shares of Insight Capital Stock
(collectively, the "Insight Common Purchase Rights") as of the Date of this
Agreement are set forth in Exhibit 3.3.3. Attached to the Insight Officers'
Certificate delivered at the Closing will be a true and correct revised list of
the holders of Insight Common Purchase Rights outstanding as of the Closing.
3.3.4 Insight is not a party or subject to any agreement or
understanding and there is no agreement or understanding which, in any case,
affects or relates to the voting or giving of written consents (i) with respect
to any Insight Capital Stock or (ii) by any director of Insight.
3.3.5 All the outstanding securities of Insight were issued in
compliance with all applicable federal and state securities laws, except where
the failure to so comply would not have a material adverse effect on the
Business Condition of Insight.
3.3.6 Exhibit 3.3.6 is a schedule of the Pre-March Loans setting
forth as to each, the payee's name, address, tax-payer identification or social
security number, and the principal amount together with interest accrued thereon
through the Closing Date.
3.4 AUTHORIZATION. Insight has full corporate power and authority to
execute and deliver this Agreement and the Merger Agreement, and to perform its
obligations under and to consummate the transactions contemplated by this
Agreement and the Merger Agreement. As of the Date of this Agreement, other
than the shareholder approval of this Agreement and the Merger Agreement, all
corporate action on the part of Insight has been duly and validly taken. As of
the Closing Date and the Effective Date, all corporate action on the part of
Insight will have been duly and validly taken. Assuming due execution and
delivery by New Image and Sub, as applicable, this Agreement and the Merger
Agreement constitute the legal, valid, and binding obligations of Insight,
enforceable against Insight in accordance with their terms, except as such
enforcement may be limited by bankruptcy, insolvency, moratorium,
reorganization, or similar laws affecting creditors' rights generally, and to
general equitable principles.
3.5 LITIGATION, CLAIMS AND POTENTIAL CLAIMS. To its knowledge, there is
no action, claim, arbitration, suit, proceeding, or investigation pending or, to
its knowledge, currently threatened, against Insight which questions the
validity of this Agreement and/or the Merger Agreement or the right of Insight
to enter into either of them or to consummate the transactions contemplated
hereby or thereby, or which might result either individually or in the
aggregate, in any materially adverse change in the Business Condition of
Insight. The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to Insight) involving the prior
employment of any of Insight's employees, their use in connection with Insight's
business of any information or techniques allegedly proprietary or confidential
to any of their former employers, or their obligations under any agreements with
prior employers. Insight is
10
not a party or subject to the provisions of any order, writ, injunction,
judgment, or decree of any court or government agency or instrumentality. There
is no action, suit, proceeding, or investigation by Insight currently pending or
which Insight intends to initiate. To its best knowledge, there is no present
defect in any of Insight's products that have been manufactured by Insight, or
manufactured by others and sold by Insight, that would be likely to give rise to
a product liability claim, action, suit, arbitration, investigation, hearing,
notice of claim, or other legal, administrative, or governmental proceeding, the
ultimate outcome of which would have a material adverse effect on the Business
Condition of Insight.
3.6 COMPLIANCE WITH LAW. The business and operations of Insight have
been and are being conducted in accordance with all applicable federal, state,
and local laws, rules, and regulations, except in those instances in which
failure to comply would not have a material adverse effect on the Business
Condition of Insight. The execution and delivery by Insight of this Agreement
and the Merger Agreement, the performance by Insight of its obligations under
this Agreement and the Merger Agreement, and the consummation of the
transactions contemplated hereby and thereby, do not and will not, with or
without the giving of notice or the lapse of time, or both: (i) require any
authorization, consent, approval, license, exemption of, or filing or
registration with, any court or governmental department, commission, board,
bureau, agency, or instrumentality of government, the lack of which would have a
materially adverse effect on the Business Condition of Insight, (ii) violate or
conflict with any provision of law, statute, rule, regulation, or executive
order to which Insight is subject or by which the assets or properties of
Insight are bound or affected, where such violation or conflict would be
expected to have a material adverse effect on such Business Condition, (iii)
violate or conflict with any order, writ, judgment, injunction, decree,
determination, or award applicable to Insight, or by which the property or
assets of Insight are bound or affected, (iv) violate or conflict with any
provision of the Articles of Incorporation or Bylaws of Insight, (v) violate or
conflict with, result in a breach of, or constitute (with or without notice or
lapse of time or both) a default under, any indenture, loan, or credit
agreement, note agreement, deed of trust, mortgage, security agreement, or other
agreement, lease or instrument, commitment or arrangement to which Insight is a
party or by which Insight or any of its properties, assets, or rights is bound
or affected, where such violation would be expected to have a material adverse
effect on such Business Condition, (vi) result in the creation or imposition of
any lien, mortgage, security interest, charge, or encumbrance upon any of the
properties or assets of Insight under any agreement (written or oral) or other
instrument to which Insight is a party, or by which the properties or assets of
Insight are bound or affected, or (vii) violate or conflict with the terms or
conditions, or result in the loss or suspension of any license, legal privilege,
or legal right enjoyed by Insight where such loss or suspension would have a
material adverse effect on such Business Condition.
3.7 AGREEMENTS. Except for agreements explicitly contemplated hereby
and by the Merger Agreement, Insight is not a party or subject to any of the
following:
(i) any employee plan or contract that provides for
bonuses, pensions, options, stock purchase, deferred compensation, retirement
payments, or profit sharing plan or arrangement,
11
(ii) any collective bargaining or other contract or
agreement with any labor union,
(iii)any real property lease,
(iv) any employment agreement consulting contract or other
similar agreement not terminable at will without penalty to Insight,
(v) any noncompetition agreement or contract which
restricts Insight from doing business anywhere in the world,
(vi) any contract or agreement pursuant to which any person
has the right to receive any participation or other payment which is based or
measured in whole or in part upon the gross or net receipts of Insight, or
(vii)any other contract or agreement that includes a
purchase or other commitment that is substantially in excess of the normal
current requirements of its business or was made at a price or rate
substantially in excess of the then current market price or on terms and
conditions substantially more onerous than is usual and customary in its
business and which, either individually or in the aggregate, constitute payment
obligations for Insight in excess of $50,000.
3.8 RELATED-PARTY TRANSACTIONS. As of the Closing and the Effective
Time, (i) except for $450,000 of Post-February Loans (which are set forth in
Exhibit 3.8) and other loans approved by New Image, Insight will not be indebted
to any employee, officer, director, or shareholder; or member of his or her
family, and (ii) as of the Date of this Agreement, none of such persons will be
or is indebted to Insight, and (iii) as of the Date of this Agreement, Insight
will not have made (or committed to make) and has not made (or committed to
make) loans or extended or guaranteed credit to any of such persons. None of
such persons has any direct or indirect ownership interest in any firm or
corporation with which Insight is affiliated or with which Insight has a
business relationship, or any firm or corporation that competes with Insight,
except that employees, officers, or directors of Insight and members of their
families may own stock in publicly traded companies that may compete with
Insight. Except for the Post-February Loans, no member of the immediate family
of any officer or director of Insight is directly or indirectly interested in
any material contract with Insight.
3.9 PERMITS. Insight has all franchises, permits, licenses, and any
similar authority (collectively, "Permits") necessary for the conduct of its
business, the lack of which could materially and adversely affect the Business
Condition of Insight. Exhibit 3.9 sets forth all of Insight's Permits. Insight
is not in default in any material respect under any Permit.
3.10 ENVIRONMENTAL AND SAFETY LAWS. Insight has not received any notice
of any claim, proceeding, or investigation under federal, state, or local law,
or any law of any foreign jurisdiction, relating to air, soil, subsurface, or
water pollution; soil monitoring; or the storage, treatment, disposal, removal,
remediation, release, discharge, or emission of any Hazardous
12
Material (as defined below), with respect to the business activity of Insight.
Insight has never owned, leased, or operated or otherwise controlled any real
property at which a claim or proceeding is presently pending or threatened, nor,
to its knowledge, is there any condition on any such property which would give
rise to any such claim or proceeding under federal, state, or local law, or any
law of any foreign jurisdiction, relating to air, soil, subsurface, water
pollution, soil monitoring, or the storage, treatment, disposal, removal,
remediation, release, discharge or emission of any Hazardous Material. For the
purposes of this Agreement, "Hazardous Material" shall mean any flammables,
asbestos, explosives, radioactive materials, hazardous waste, toxic substances,
or related material, including, without limitation, any substances defined as or
included in the definition of "hazardous substances," "hazardous wastes,"
"hazardous materials," or "toxic substances," under any applicable federal,
state, local, or foreign law, rule, regulation, or order; or which any federal,
state, local, or foreign law, rule, regulation, or order designates as
potentially dangerous to public health and/or safety when present in the
environment.
3.11 MANUFACTURING AND MARKETING RIGHTS. Insight has not granted rights
to manufacture, produce, assemble, license, market, or sell its products to any
other person and is not bound by any agreement that affects Insight's exclusive
right to develop, manufacture, assemble, distribute, market, or sell its
products.
3.12 TITLE TO PROPERTY AND ASSETS. Insight has good and marketable title
to all of its properties and assets of every kind and nature, whether tangible
or intangible, wherever located, used in the conduct of its business all of
which are set forth in Exhibit 3.12 (the "Assets"), free and clear of all
mortgages, liens (including, without limitation, tax liens), charges, security
interests, claims of infringement, conditions, restrictions, encumbrances, and
obligations (collectively, "Liens"). Exhibit 3.12 includes a complete list of
all real property owned by or leased to Insight. All such leases are valid,
enforceable, and effective in accordance with their terms. There is not under
any such lease any existing or claimed default by Insight or any event or
condition which with notice or lapse of time or both would constitute a material
default by Insight, and all rentals, royalties, or other payments accruing
thereunder prior to the Date of this Agreement have been fully paid. No lease
under which Insight is lessee of any real property contains any provision which
either (i) treats a sale or transfer of any or all of the outstanding stock of
Insight or a merger of Insight with another person as an assignment of Insight's
leasehold interest or (ii) otherwise requires the consent of the lessor in the
event of any such sale, transfer, or merger. The Assets are adequate for the
operation of the business of Insight as presently conducted. The tangible
assets are in good operating condition and repair.
3.13 FINANCIAL STATEMENTS.
3.13.1 Insight has agreed to provide monthly interim financial
statements pursuant to Section 5.8. Attached as Exhibit 3.13A is Insight's
estimated Closing Date balance sheet (the "Estimated Closing Date Balance
Sheet"). Attached as Exhibit 3.13B are the following financial statements
(collectively such interim financial statements, the Estimated Closing Date
Balance Sheet and the following financial statements are referred to as the
"Financial Statements"):
13
(i) the unaudited consolidated balance sheet (the "Latest
Balance Sheet") of Insight at December 31, 1995, together with the related
statements of operations, shareholders' equity, and cash flow for the three-
month period then ended (collectively, the "December 31, 1995 Financial
Statements"); and
(ii) the audited consolidated balance sheets of Insight at
September 30, 1995 and 1994 together with the related statements of operations,
shareholders' equity, and cash flow for the twelve-month periods then ended (the
"September 30, 1995 Financial Statements" and "September 30, 1994 Financial
Statements," respectively), accompanied by the opinion thereon of Coopers &
Lybrand LLP, independent public accountants.
Each of the statements comprising the Financial Statements, including any notes
thereto are, or in the case of the interim statements will be, in accordance
with the books and records of Insight, have been prepared in accordance with
GAAP and fairly present the financial condition of Insight as of the dates
thereof and its results of operations, shareholders' equity, and cash flows for
the periods covered thereby. Except for the Estimated Closing Date Balance
Sheet, in the preparation of the Financial Statements, GAAP has or will be
applied on a basis consistent with prior periods. The Estimated Closing Date
Balance Sheet Shall be prepared on a basis consistent with prior internally
proposed financial statements. The notes evidencing the Post-February Loans
have and will be accounted for in accordance with their terms. Other than
liabilities which have arisen since December 31, 1995 in the ordinary course of
business, Insight has not incurred any material debt, liability, or obligation
of any kind, direct or indirect, whether accrued, fixed, contingent or
otherwise, except fees and expenses incurred in the ordinary course of business
and consistent with Insight's covenants and agreements in Article V.
3.13.2 Insight has no accrued liability or contingent liability
which is not provided for in the Insight December 31, 1995 Financial Statements
and the Estimated Closing Date Balance Sheet or where the amount of the payment
to discharge it will exceed the amount of the related accrual or reserve.
3.13.3 Insight's net asset value at the Closing Date will not be
less than a negative $2,900,000 plus a downward adjustment in an amount which
shall be mutually agreed to reflect a write-off for Chart-It.
3.14 CHANGES. Since December 31, 1995, there has not been:
3.14.1 any change in the assets, liabilities, financial condition,
or operating results of Insight from that reflected in the Financial Statements,
except changes in the ordinary course of business which have not been, in the
aggregate, materially adverse to the Business Condition of Insight;
3.14.2 any damage, destruction, or loss, whether or not covered by
insurance, materially and adversely affecting the Business Condition of Insight;
3.14.3 any waiver by Insight of a valuable right or of a material
debt owed to it;
14
3.14.4 any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by Insight, except in the ordinary
course of business and which is not material to the Business Condition of
Insight;
3.14.5 any change or amendment to a material contract or
arrangement by which Insight or any of its assets or properties is bound or
subject;
3.14.6 any material change in any compensation arrangement or
agreement with any employee;
3.14.7 any change in accounting methods or practices (including,
without limitation, any change in depreciation or amortization policies or
rates) of Insight;
3.14.8 any revaluation by Insight of any of its assets;
3.14.9 any declaration, setting aside, or payment of a dividend or
other distribution in respect of the capital stock of Insight, or any direct or
indirect redemption, purchase, or other acquisition by Insight of any of the
Insight Capital Stock;
3.14.10 any loan by Insight to any person or entity, or guaranty by
Insight of any loan;
3.14.11 any waiver or release of any material right or claim of
Insight, except in the ordinary course of business;
3.14.12 any commencement or notice or threat of commencement of any
civil litigation or any governmental proceeding against or investigation of
Insight or its affairs; or
3.14.13 any agreement entered into by Insight to do any of the
things described in the preceding clauses 3.14.1 through 3.14.12.
3.15 EMPLOYEES AND LABOR. Exhibit 3.15 is a complete list of all
employees (full-time or part-time) of Insight as of the date of this Agreement.
An updated list as of the Closing Date attached to the Closing Date Insight
Officers' Certificate will be a complete list of all employees as of the Closing
Date. Such schedule sets forth as to each Insight employee (i) the terms of
employment, (ii) the rate of compensation, and (iii) the applicable severance or
bonus arrangements upon termination, if any. Insight has delivered to New Image
accurate copies of all handbooks, manuals and writings describing Insight's
employment policies. Insight, has complied in all material respects with all
laws relating to the employment of labor, including provisions thereof relating
to wages, hours, equal opportunity, collective bargaining, and the payment and
withholding of taxes.
3.16 EMPLOYEE BENEFIT PLANS. Insight does not have any Employee Benefit
Plan as defined in the Employee Retirement Income Security Act of 1974.
15
3.17 TAXES.
3.17.1 All Tax (as defined herein) returns, statements, reports,
and forms (including estimated Tax returns and reports and information returns
and reports) required to be filed prior to the Closing and prior to the
Effective Date with any Taxing Authority (as defined herein) with respect to all
Taxable periods ending with the Effective Date, by or on behalf of Insight
(collectively, the "Insight Returns"), have been or will be completed and filed
when due (including any extensions of such due date), and all amounts shown due
thereon on or before the Closing Date and the Effective Date have been satisfied
or accrued in full on or before such dates. The Latest Balance Sheet and the
Estimated Closing Date Balance Sheet each (i) fully accrues all actual and
contingent liabilities for Taxes (including interest and penalties where
applicable) with respect to all periods through their respective dates, and
Insight has not, and will not, incur any Tax liability (including interest and
penalties where applicable) in excess of the amounts reflected on such balance
sheets for the periods ending on their respective dates, and (ii) fully accrues
all liabilities for Taxes (including penalties and interest) payable after the
dates of the Latest Balance Sheet and the Estimated Closing Date Balance Sheet,
in each case with respect to all transactions and events occurring on or prior
to its date. All withholding Tax requirements imposed on Insight for all
taxable periods ending with the Date of this Agreement, the Closing Date, and
the Effective Date will have been satisfied in full or accrued for as of such
dates. All information set forth in the notes to the Financial Statements
relating to Tax matters is true, complete, and accurate in all material
respects. Exhibit 3.17.1 is a schedule of all Taxes due as of the Date of this
Agreement, including all penalties and interest due in connection therewith, and
a description of all agreements with each Tax Authority with which Insight has
an agreement concerning the terms of payments of Taxes and related penalties and
interest, if any. A complete and accurate schedule of all Taxes due as of the
Closing Date, including all penalties and interest due in connection therewith,
and a description of all agreements with each Tax Authority with which Insight
has an agreement as of such date concerning the terms of payments of Taxes and
related penalties and interest, if any, will be attached to the Insight
Officers' Certificate.
3.17.2 No material Tax liability since the date of the Latest
Balance Sheet has been incurred other than in the ordinary course of business.
Insight has collected or withheld, and paid to the applicable financial
institutions or Taxing Authorities all amounts required to be collected or
withheld. Neither Insight nor any member of an affiliated or combined group of
which Insight has been a member has been granted any extension or waiver of the
limitation period applicable to any Insight Return.
3.17.3 There is no material claim, audit, action, suit, proceeding,
or investigation now pending or threatened against or with respect to Insight in
respect of any Tax or assessment. No notice of deficiency or similar document
of any Tax Authority has been received by Insight, and there are no liabilities
for Taxes (including liabilities for interest additions to tax and penalties
thereon and related expenses) with respect to the issues that have been raised
(and are currently pending) by any Tax Authority. (Any exception to this
warranty which is included in the Insight Disclosure Schedule shall set forth in
detail the amount and due dates of the taxes overdue, any
16
penalties and interest which have accrued, and any agreement concerning the
terms of payment of such taxes, penalties, and interest.)
3.17.4 For purposes of this Agreement, the following terms have the
following meanings: "Tax" (and, with correlative meaning "Taxes" and "Taxable")
means any foreign, federal, state, or local tax assessment or other like
governmental charge imposed by any governmental entity (a "Taxing Authority")
responsible for the imposition of any such Tax, including, without limitation,
payroll, withholding, and other payroll-related taxes.
3.18 PURCHASE AND SALE OBLIGATIONS. Since the date of the Latest Balance
Sheet, all purchase and sale orders made by or on behalf of Insight have been
made in the usual and ordinary course of its business in accordance with
Insight's normal practices. Exhibit 3.18 sets forth all outstanding purchase
orders issued after December 31, 1995, the original amount of which was $25,000
or more, and as to each (i) the vendor's name and address, (ii) a description of
the items covered, (iii) the current status of the order, and (iv) whether
Insight payments are current and within terms. After the Date of this
Agreement, Insight will not enter into any purchase obligation in excess of
$25,000 without the prior written consent of New Image.
3.19 INSURANCE. Insight has in full force and effect fire and casualty
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of its properties that might
be damaged or destroyed and Insight has insurance against other hazards, risks,
and liabilities to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated. Exhibit 3.19
is a complete and correct list and summary description of all self insured
risks, and all insurance policies held by Insight, disclosing the risks insured
against, coverage limits, deductible amounts, annual premiums, and other
material provisions. Insight has no potential liability with respect to
retrospective premium adjustments.
3.20 NO CHANGE OF CONTROL PROVISION. Insight is not a party or subject
to any agreement, contract, or other obligation which would require the making
of any payment other than payments as contemplated by this Agreement to any
employee of Insight or to any other person as a result of the consummation of
the transactions contemplated herein.
3.21 INVENTORY. The inventories of raw materials, work in process, and
finished goods (collectively, "Inventories") shown on the Latest Balance Sheet
and the Estimated Closing Date Balance Sheet consist of items of a quality and
quantity usable and salable in the ordinary course of business by Insight,
except for obsolete and slow-moving items and items below standard quality, all
of which have been written down on the books of Insight to net realizable market
value or have been provided for by adequate reserves. All items included in
Inventories are the property of Insight and in its possession and control, and
have been acquired by Insight in the ordinary course of business. No item
included in Inventories has been pledged as collateral or is held by Insight on
consignment from others. The Inventories shown on all Financial Statements and
the Estimated Closing Date Balance Sheet are based on quantities determined by
physical count or measurement, taken within the preceding twelve months, and are
valued at the lower of cost (determined on a first-in, first-out basis) or
market value and on a basis consistent with that of
17
prior years. The preceding sentence shall not be construed as requiring a
physical count or measurement of Insight inventory other than in connection with
the preparation of the September 30, 1995 Financial Statements and the Audited
Closing Date Financial Statements.
3.22 ACCOUNTS RECEIVABLE. Subject to changes in accounts receivable and
inventory which are within the scope of activities Insight is permitted to take
pursuant to Section 5.1.1, all accounts receivable of Insight are shown on the
Estimated Closing Date Balance Sheet and arose from valid sales in the ordinary
course of business and the net amount of accounts receivable shown in the
Estimated Closing Date Balance Sheet is good and will be collected net of the
allowance for doubtful accounts.
3.23 WARRANTY OBLIGATIONS AND RETURNS. Insight maintains in the ordinary
course of business adequate reserves for anticipated warranty liability or
obligations and/or return of products previously shipped to customers. The
reserves on the Estimated Closing Date Balance Sheet for customer returns and
warranty obligations which have occurred or may occur are adequate to cover the
profit margin previously recognized on items returned and to be returned and the
cost of repairs and replacements for all warranty claims, which in either case
may arise with respect to products manufactured prior to the Closing.
3.24 PATENTS, TRADEMARKS, ETC.
3.24.1 To its knowledge, Insight owns or has the right to use, or
prior to the Closing Date will own or have the right to use, free and clear of
all Liens, charges, claims, and restrictions, all patents, trade secrets,
trademarks, service marks, trade names, copyrights, licenses, and rights
necessary to its business as now conducted ("Insight Intellectual Property
Rights"), and, to Insight's knowledge, has not and is not infringing upon or
otherwise acting adversely to the right or claimed right of any person under or
with respect to any of the foregoing. Exhibit 3.24.1 sets forth all corporate
names, trade names, trademarks, service marks, patents, patent applications, and
registered copyrights comprising the Insight Intellectual Property Rights and
all options, licenses or agreements relating to such rights. There are no
outstanding options, licenses, or agreements of any kind relating to the
foregoing held by any third party of which Insight is aware except those made in
the ordinary course of business which will have no material adverse effect on
the Business Condition of Insight. Insight has not received any written
communications alleging that Insight has violated any patent, trademark, service
mark, trade name, copyright or trade secret, or other proprietary right of any
other person or entity. Insight is not aware that any of its employees is
obligated under any fiduciary duty or any contract (including licenses,
covenants, or commitments of any nature) or other agreement, or subject to any
judgment, decree, or order of any court or administrative agency, that would
limit the scope of the activities of such employee to promote the interests of
Insight or that would conflict with Insight's business as currently conducted or
proposed. Except for inventions to which it has gained ownership or rights
sufficient to carry on its business as currently conducted and proposed, and
subject only to exceptions noted in Section 3.24.1 of the Insight Disclosure
Schedule, no officer, director, or employee of Insight owns or has a license to
any patent, trade secret, trademark, service mark, trade name, copyright,
license or other rights which in any way conflicts with the Insight Intellectual
Property Rights or with Insight's business as currently or proposed to
18
be conducted. To Insight's knowledge, all filings with respect to Insight
Intellectual Property Rights which require a filing in order to achieve
protection under patent, trademark, or copyright laws, as applicable, have been
made in a timely manner so that none of the rights which would accrue upon a
timely filing have been or will be denied as a result of an untimely filing and
it has received no notice or assertion from any governmental agency or any other
person or entity that any of such filings was not a timely filing.
3.24.2 Insight has taken reasonable security measures to protect
the confidentiality of its trade secrets.
3.25 FRAUD. No officer, director, or principle shareholder of Insight
has willfully deceived any officer of New Image with the intent to induce New
Image to alter its position to its injury or risk. For this purpose a deceit is
either (i) the suggestion, as a fact, of that which is not true, by one who does
not believe it to be true, (ii) the assertion, as a fact, of that which is not
true, by one who has no reasonable ground for believing it to be true, (iii) the
suppression of a fact, by one who is bound to disclose it, or who gives
information of other facts which are likely to mislead for want of communication
of that fact, or (iv) a promise, made without any intention of performing it.
3.26 DISCLOSURE. All information relating to and concerning Insight
contained in this Agreement, any Exhibit to this Agreement, the Insight
Disclosure Schedule or in any other certificate, instrument, or schedule given
by Insight to New Image or its representatives in connection with this Agreement
or the Merger Agreement, is true and correct in all material respects, and
Insight has not omitted to state any material fact necessary to prevent the
statements made herein and therein, in light of the circumstances under which
they were made, from being misleading.
3.27 HTMI LICENSE. With respect to Insight's license(s) to use patent(s)
of High Tech Medical Instrumentation ("HTMI") as such patent(s) are currently
being used in Insight's products, such license(s):
(i) is/are valid and enforceable and in full force and
effect,
(ii) is/are not the subject of any dispute between Insight
and HTMI,
(iii) have no provision which would give HTMI grounds to
assert that Insight's entry into this Agreement or the Merger Agreement or the
transactions contemplated herein or therein is or would be a breach of its
license(s) to Insight, and
(iv) Insight has been and is performing all things on its
part to be performed thereunder in accordance with license terms.
3.28 COMPLIANCE WITH COVENANTS. As of the Closing Date and the Effective
Date, Insight will be in full compliance with its covenants and agreements
contained in Article V.
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3.29 PAYABLES AGING. Exhibit 3.29 is a schedule of Insight payables as
of the date of the Latest Balance Sheet categorized to show payables 30 days old
or less, from 31 to 60 days old, from 61 to 90 days old, and over 90 days old.
Neither the dollar amount of Insight payables which are or will be more than 30
days old as of (i) the Date of this Agreement or (ii) the Closing Date, will
exceed the dollar amount of payables which were more than 30 days old as of the
date of the Latest Balance Sheet by more than $600,000. In determining the
amount of such excess, accounts payable owing to Sony and Costar which have not
been outstanding longer than permitted by their respective payment terms shall
be disregarded. Insight represents that as of the Closing, Insight will have
paid $44,329 of amounts owing to the California EDD and $125,834 of the current
amounts owing to the Internal Revenue Service.
3.30 POOLING OF INTERESTS. To its knowledge, based upon consultation
with its independent accountants, neither Insight nor its directors, officers,
or stockholders has taken any action which would interfere with New Image's
ability to account for the Merger as a pooling of interests.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF NEW IMAGE AND SUB
Subject to the exceptions set forth in the New Image disclosure schedule
(the "New Image Disclosure Schedule") delivered to and acknowledged by Insight
concurrently herewith and except as disclosed in the New Image Disclosure
Documents, New Image and Sub each hereby represents and warrants to Insight as
of the Date of this Agreement, as follows:
4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of New Image
and Sub is a corporation duly organized, validly existing, and in good standing
under the laws of its state of incorporation and has all requisite corporate
power and authority to carry on its businesses as now being conducted. New
Image is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the Business Condition of New Image. New Image has delivered to
Insight complete and correct copies of the Certificate of Incorporation and
Bylaws of New Image and the Articles of Incorporation and Bylaws of Sub, as
amended to the date hereof.
4.2 CAPITALIZATION AND VOTING RIGHTS.
4.2.1 As of the Date of this Agreement, the authorized capital
stock of New Image consists of 10,000,000 shares of New Image Common and
1,000,000 shares of New Image Preferred. At the close of business on December
31, 1995, 4,794,438 shares of New Image Common were outstanding, and 1,384,677
shares of New Image Common were subject to issuance upon the exercise of
outstanding stock options, stock purchase rights, and warrants (collectively,
"New Image Common Purchase Rights"). No shares of New Image Common were held by
New Image in its treasury, and no shares of New Image Preferred were
outstanding. As of the close of business on the day prior to the Closing Date,
the number of shares of New Image
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Common issued and outstanding will be as set forth in the New Image Officers'
Certificate delivered on the Closing Date.
4.2.2 All of the outstanding shares of New Image Common have been
duly authorized and are validly issued, fully paid, nonassessable and free of
preemptive rights. As of the Date of this Agreement, the authorized capital
stock of Sub consists of 100,000 shares of Common Stock without par value, all
of which are owned by New Image and have been duly authorized and are validly
issued, fully paid, nonassessable.
4.2.3 Except for New Image Common Purchase Rights, there are no
outstanding options, warrants, calls, conversion rights, agreements, or
understandings for the purchase or acquisition from New Image or Sub of any
shares of either of their capital stock. New Image is the owner of all
outstanding shares of capital stock of each of its subsidiaries and all such
shares have been duly authorized and are validly issued, fully paid, and
nonassessable.
4.3 VALID ISSUANCE OF NEW IMAGE EXCHANGE SHARES. The New Image Exchange
Shares have been duly authorized and, when issued in accordance with the terms
of this Agreement and the Merger Agreement, will be validly issued, fully paid,
nonassessable, free of preemptive rights, and issued in compliance with all
applicable securities laws as presently in effect of the United States and each
of the states whose securities laws govern the issuance of such securities. The
issuance of New Image Exchange Shares and New Image Loan Exchange Shares is
exempt from the registration requirements of Section 5 of the Securities Act, by
reason of Section 4(2) thereof and exempt from the qualification requirements of
California securities laws by reason of Section 25100(o) thereof.
4.4 AUTHORIZATION. As applicable, each of New Image and Sub has full
power and authority, whether corporate or otherwise, to execute and deliver this
Agreement and the Merger Agreement, and to perform its respective obligations
under, and to consummate the transactions contemplated by, this Agreement and
the Merger Agreement, and all corporate actions of New Image and Sub necessary
for such execution, delivery, and performance have been duly and validly taken,
including but not limited to, approvals under applicable corporation laws and
rules and regulations promulgated by the National Association of Securities
Dealers, Inc. ("NASD"). Assuming due execution and delivery by Insight, as
applicable, this Agreement and the Merger Agreement each constitutes the legal
valid, and binding obligation of New Image and Sub, enforceable against New
Image and Sub, as applicable, in accordance with its terms subject, as to
enforcement of remedies, to applicable federal and state bankruptcy, insolvency,
moratorium, reorganization, or similar law affecting creators' rights generally
and to general equitable principles. The execution and delivery of this
Agreement and the Merger Agreement by New Image and Sub, as applicable, do not,
and the performance and consummation by New Image and Sub of the applicable
transactions contemplated by such agreements will not (i) conflict with or
result in a breach or violation of or default under, or give rise to any right
of acceleration (whether by notice or lapse of time or both) or termination of
any of the terms, conditions or provisions of, any note, bond, mortgage,
indenture, lease, material license, material agreement, or other material
instrument or obligation to which New Image and/or Sub is a party or by which
any of New Image's assets or properties are bound; (ii) violate any judgment,
order, injunction or decree
21
applicable to New Image or any of its assets or properties; or (iii) violate any
federal or state statute, rule or regulation applicable to New Image or any of
its assets or properties; or (iv) contravene or violate the Certificate of
Incorporation or Bylaws of New Image or the Articles of Incorporation or Bylaws
of Sub, except for conflicts, breaches, violations, defaults, accelerations,
terminations or contraventions referred to in clause (i) above which would not
have a material adverse effect on the Business Condition of New Image. No
consent, approval, authorization, order, or registration, of or with any court
or any regulatory authority or any other governmental body is required for the
consummation by New Image or Sub of the transactions contemplated by this
Agreement and the Merger Agreement.
4.5 LITIGATION. There are no actions, proceedings, or litigation of any
nature, pending or, to the knowledge of New Image, threatened against or
involving New Image or any of its assets, or against or involving any of its
officers, directors, employees or consultants in connection with the business or
affairs of New Image, and New Image is not subject to and is not in default with
respect to any writ, order, judgment, injunction, or decree. New Image is not
aware of any facts which might if adversely determined, reasonably result in
matters described in this Section 4.5 having a material adverse effect on the
Business Condition of New Image. The foregoing includes, without limitation,
inquiries, claims, investigations or actions pending or threatened (or any basis
therefor known to New Image) by the NASD, the SEC, or any state securities
regulator.
4.6 COMPLIANCE WITH LAW. New Image holds all licenses, franchises,
permits, and authorizations necessary for the lawful conduct of its business and
has complied, and is currently in compliance, with all applicable statutes,
laws, ordinances, rules, and regulations of all federal state, local, and
foreign governmental bodies, agencies, and subdivisions having, asserting, or
claiming jurisdiction over it or over any part of its operations, except where
the failure to be in compliance has not had and is not reasonably expected to
have a material adverse effect on the Business Condition of New Image.
4.7 SECURITIES EXCHANGE COMMISSION DOCUMENTS; NEW IMAGE FINANCIAL
STATEMENTS. New Image has furnished Insight with true and complete copies of
its report on Form 10-Q for the quarter ended December 31, 1995, its 1995 Annual
Report, its Proxy Statement for its 1995 Annual Meeting, and its report on Form
10-K for its year ended June 30, 1995 (where applicable without exhibits,
although exhibits will be made available to Insight at its request). All such
filings were filed with the SEC and, as applicable, with the NASD, and state
securities regulatory agencies, on a timely basis. As of their respective
dates, the New Image Disclosure Documents complied in all material respects with
the requirements of the Exchange Act and/or the Securities Act as applicable,
and none of such documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a subsequently
filed New Image Disclosure Document. The financial statements of New Image
included in the New Image Disclosure Documents (the "New Image Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with GAAP consistently
applied (except as may be
22
indicated in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q) and fairly present the consolidated financial position
of New Image and its consolidated subsidiaries at the dates thereof together
with the related statements of operations, shareholders equity, and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal, recurring audit adjustments). There has been no change in New Image's
accounting policies except as described in the notes to the New Image Financial
Statements.
4.8 CHANGES. Since December 31, 1995, there has not been:
4.8.1 any change in the assets, liabilities, financial condition,
or operating results of New Image from that reflected in the New Image Financial
Statements, except changes in the ordinary course of business which have not
been, in the aggregate, materially adverse;
4.8.2 any damage, destruction, or loss, whether or not covered by
insurance, which materially and adversely affected the Business Condition of New
Image;
4.8.3 any waiver by New Image of a valuable right or of a material
debt owed to it;
4.8.4 any satisfaction or discharge of any lien, claim, or
encumbrance; or payment of any obligation by New Image, except in the ordinary
course of business or as was not material to the Business Condition of New
Image;
4.8.5 any change or amendment to a material contract or other
arrangement by which New Image or any of its assets or properties is bound or
subject;
4.8.6 any material change in any compensation arrangement or
agreement with any employee;
4.8.7 any revaluation by New Image of any of its assets;
4.8.8 any declaration, setting aside, or payment of a dividend or
other distribution in respect of the capital stock of New Image, or any direct
or indirect redemption, purchase, or other acquisition by New Image of any
material amount of its shares of capital stock;
4.8.9 any loan by New Image to any person or entity, or guaranty
by New Image of any loan, other than advances and loans to employees in the
ordinary course of business or in connection with New Image's headquarters move;
4.8.10 any waiver or release of any material right or claim of New
Image, except in the ordinary course of business;
4.8.11 any commencement, or notice or threat of commencement, of
any civil litigation or any governmental proceeding against or investigation of
New Image or its affairs; or
23
4.8.12 any agreement entered into by New Image to do any of the
things described in the preceding clauses 4.8.1 through 4.8.11.
4.9 NO DEFAULTS. Neither New Image nor any of its subsidiaries is, or
has received notice that it is or would be with the passage of time, (i) in
violation of any provision of its Certificate of Incorporation or Bylaws, or
(ii) in default or violation of any term condition or provision of (a) any
judgment, decree, order, injunction, or stipulation applicable to New Image or
any of its subsidiaries or (b) any agreement, note, mortgage, indenture,
contract, lease, instrument, permit, concession, franchise, or license to which
New Image or any of its subsidiaries is a party or by which New Image or any of
its subsidiaries or their properties or assets may be bound, which violation or
default referred to in clause (ii) would, individually or in the aggregate, have
a material adverse effect on the Business Condition of New Image.
4.10 PATENTS, TRADEMARKS, ETC.
4.10.1 To its knowledge, New Image owns or has the right to use, or
prior to the Closing Date will own or have the right to use, free and clear of
all Liens, charges, claims, and restrictions, all patents, trade secrets,
trademarks, service marks, trade names, copyrights, licenses, and rights
necessary to its business as now conducted ("New Image Intellectual Property
Rights"), and, to New Image's knowledge, has not and is not infringing upon or
otherwise acting adversely to the right or claimed right of any person under or
with respect to any of the foregoing. Exhibit 4.10 contains all corporate
names, trade names, trademarks, service marks, patents, patent applications, and
registered copyrights comprising the New Image Intellectual Property Rights.
There are no outstanding options, licenses, or agreements of any kind relating
to the foregoing held by any third party of which New Image is aware except
those made in the ordinary course of business which will have no material
adverse effect on the Business Condition of New Image. New Image has not
received any written communications alleging that New Image has violated any
patent, trademark, service mark, trade name, copyright or trade secret, or other
proprietary right of any other person or entity by reason of any such activity.
New Image is not aware that any of its employees is obligated under any
fiduciary duty or any contract (including licenses, covenants, or commitments of
any nature) or other agreement, or subject to any judgment, decree, or order of
any court or administrative agency, that would limit the scope of the activities
of such employee to promote the interests of New Image or that would conflict
with New Image's business as currently conducted or proposed. Except for
inventions to which it has gained ownership or rights sufficient to carry on its
business as currently conducted or proposed, New Image does not believe it is or
will be necessary to utilize any invention made by an employee prior to his or
her employment by New Image.
4.10.2 New Image has taken reasonable security measures to protect
the confidentiality of its trade secrets.
4.11 DISCLOSURE. No representation or warranty made by New Image in this
Agreement, nor any document, written information, statement, financial
statement, certificate, schedule, or exhibit prepared and furnished, or to be
prepared and furnished, by New Image or its representatives pursuant hereto or
in connection with the transactions contemplated hereby,
24
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary to make the statements or facts
contained herein or therein not misleading in light of the circumstances under
which they were furnished. To the knowledge of New Image after reasonable
inquiry, there is no event, fact, or condition that materially and adversely
affects the Business Condition of New Image and Sub taken as a whole, or that
reasonably could be expected to do so, that has not been set forth in this
Agreement, in the New Image Disclosure Schedule or the New Image Disclosure
Documents.
ARTICLE V
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE
TIME; ADDITIONAL AGREEMENTS
During the period from the Date of this Agreement and continuing until the
earlier of the termination of this Agreement and the Effective Time (except as
otherwise provided herein), the parties agree (except to the extent that the
other parties shall otherwise consent in writing) that:
5.1 CONDUCT OF INSIGHT BUSINESS. Insight shall run its business in the
usual, regular, and ordinary course of business in substantially the same manner
as heretofore conducted. Insight shall promptly notify New Image of any event
or occurrence not in the ordinary course of business of Insight, and any event
of which Insight is aware which reasonably would be expected to have a material
and adverse effect on the Business Condition of Insight. Except as expressly
contemplated by this Agreement or disclosed in the Insight Disclosure Schedule,
after the Date of this Agreement Insight shall not without the prior written
consent of New Image:
(i) except with respect to (a) terms of options or warrants
outstanding on the date hereof, or (b) conversion of Insight A Preferred and
Insight B preferred into Insight Common in accordance with their terms, issue,
deliver, or sell, authorize or propose the issuance, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock or
securities convertible into capital stock;
(ii) grant any severance or termination pay to any director,
officer, employee, or consultant;
(iii)transfer or license to any person or entity any right
to, or agree to an amendment to its rights under, the Insight Intellectual
Property Rights;
(iv) enter into or amend any agreement pursuant to which any
other party is granted manufacturing, marketing, distribution, or other similar
rights of any type or scope with respect to any product of Insight;
(v) commence a lawsuit other than for breach of this
Agreement;
(vi) except as contemplated herein, declare or pay any
dividend on or make any other distribution (whether in cash, stock, or property)
in respect of any of its capital stock, or split, combine, or reclassify any of
its capital stock or issue or authorize the issuance of
25
any other securities in respect of, in lieu of, or in substitution for shares of
its capital stock; or repurchase or otherwise acquire, directly or indirectly,
any shares of its capital stock;
(vii)acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association, or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which, in the case of assets, are material individually or in
the aggregate, to the Business Condition of Insight;
(viii)sell, lease, license, or otherwise dispose of any of
Insight's properties or assets except sales in the ordinary course of business
of products manufactured or distributed by it at customary prices on customary
terms;
(ix) incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or guarantee any debt
securities of others from March 1, 1996 to the Closing, except loans from its
shareholders in the amount of $450,000;
(x) adopt or amend any employee benefit plan, program,
policy or other arrangement, or enter into any employment contract, pay any
special bonus or special remuneration to any director, employee, or consultant,
or increase the salaries or wage rates of its employees or the aggregate amount
of its payroll;
(xi) without the prior written consent of New Image, enter
into any purchase order for goods or services, marketing, or advertising in an
amount exceeding $25,000; or
(xii)operate Insight so as to have a negative "cash" account
on the Insight balance sheet contained in the Audited Closing Date Financial
Statements.
5.2 ACCESS TO INFORMATION. Insight and New Image have entered into one
or more written agreements respecting the exchange of information between the
parties and related matters (collectively, the "Confidentiality Agreement"),
Insight and New Image shall each afford the other and their respective
accountants, counsel, and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time, to (i) all of its
properties, books, contracts, commitments, and records, and (ii) all other
information concerning its business, properties, and personnel as the other may
reasonably request. Insight and New Image each agrees to provide to the other
and its accountants, counsel, and other representatives copies of internal
financial statements promptly upon request. No information or knowledge
obtained in any investigation pursuant to this Section 5.2 shall affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger.
5.3 CONSENTS. Each of New Image and Insight shall promptly apply for or
otherwise seek, and use its commercially reasonable efforts to obtain, all
consents and approvals required to be obtained by it for the consummation of the
Merger. Insight shall use its best effort to obtain
26
approval of its shareholders of the Merger as well as to obtain all necessary
consents, waivers, and approvals under any of Insight's agreements, contracts,
licenses, or leases in connection with the Merger, except such consents and
approvals, if any, that New Image and Insight agree that Insight shall not seek
to obtain (as such agreement(s) not to obtain consents and approvals are
reflected in the Insight Disclosure Schedule).
5.4 TRANSACTION COSTS. All costs and expenses incurred by Insight in
connection with this Agreement, the Merger Agreement, and the transactions
contemplated hereby and thereby, including, without limitation, attorneys fees,
accounting fees, and fees of any brokers or advisors consulted in connection
with the transactions relating to this Agreement (collectively, the "Transaction
Costs") shall be borne and paid by Insight shareholders. New Image agrees to
pay up to one-half of the first $25,000 of the Coopers & Lybrand LLP fees
incurred and to be incurred in connection with services rendered in connection
with the preparation of the Audited Closing Date Financial Statements. The
Transaction Costs shall have had no net impact on the net asset value of Insight
as of the Closing Date.
5.5 PUBLIC ANNOUNCEMENTS. New Image and Insight each will consult in
advance with the other concerning the timing and content of any announcement,
press release, and public statement concerning the Merger and will not make any
such announcement, release, or statement without the other's prior written
consent; provided, however, that New Image may make any public statement
concerning the Merger without Insight's prior written consent if, in the
reasonable written opinion of counsel for New Image such statement or
announcement is required to comply with applicable law and, before making such
announcement New Image has provided to Insight copies of both such written
statement or announcement that it proposes to make and such written opinion of
counsel.
5.6 TAX AND POOLING STATUS OF REORGANIZATION. New Image and Insight
shall use commercially reasonable efforts to cause the Merger to be a
reorganization within the meaning of Section 368(a) of the Code and a
transaction which qualifies for pooling treatment under applicable accounting
rules. Each of New Image and Insight shall use its best efforts to cause itself
and each of its officers, directors, and 10% shareholders not to take any action
that would adversely affect the ability of New Image to account for the business
combination contemplated by this Agreement and the Merger Agreement as a pooling
of interests under applicable accounting rules.
5.7 ELECTION OR APPOINTMENT OF NEW IMAGE DIRECTOR. Promptly following
the Effective Date, Mark Stevens shall be appointed to the New Image Board of
Directors. Thereafter for so long as the recipients of New Image Exchange
Shares and New Image Loan Exchange Shares own seven percent (7%) or more of the
outstanding New Image Common, whenever Mark Stevens or other person serving as
the representative of the holders of New Image Exchange Shares and New Image
Loan Exchange Shares on the New Image board comes up for election, the board
will nominate Mark Stevens or other person acceptable to a majority of such
holders for reelection or election, as the case may be, to such board. This
Section shall not be construed as requiring the New Image directors to appoint
or nominate any person whose appointment or
27
election, in the good faith exercise of business judgment, would not be in the
best interests of all of the New Image shareholders.
5.8 INSIGHT INTERIM FINANCIAL STATEMENTS. Commencing with financial
statements for the month of January 1996, Insight agrees to provide New Image
monthly with an unaudited consolidated balance sheet at month-end together with
the related statements of operations, shareholders' equity, and cash flow for
the month and the period of its current fiscal year then ended. Such financial
statements shall meet the requirements of the final paragraph of Section 3.13.1.
Those for the months of January through February, 1996, shall be provided by
April 15, 1996, those for the month of March shall be provided by April 25,
1996, and those for the months of April 1996 through the Effective Date shall be
provided within 15 calendar days of the applicable month-end.
5.9 NO NEGATIVE CASH. Insight shall not permit its balance sheet cash
account to be negative at the Closing Date.
ARTICLE VI
CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER
The obligations of New Image and Insight to effect the transactions
contemplated hereby are subject to satisfaction or express waiver of each of the
following conditions:
6.1 DISSENTING SHARES. The combined amount of Dissenting Shares and
Insight Common owned by New Image shall not exceed ten percent (10%) of the
total number of shares of Insight Capital Stock outstanding immediately prior to
the Effective Date.
6.2 SHAREHOLDER APPROVAL. This Agreement and the Merger Agreement shall
have been approved by the shareholders of Insight in accordance with the CGCL
and Insight's Articles of Incorporation and Bylaws.
6.3 NO ACTIONS OR PROCEEDINGS. No claim, action, suit, investigation,
or proceeding shall be pending or threatened before any court or governmental
agency which presents a substantial risk of the restraint or prohibition of the
transactions contemplated by this Agreement or the Merger Agreement or the
obtaining of material damages or other relief in connection therewith.
6.4 GOVERNMENT APPROVALS. All authorizations, consents, orders, or
approvals of, or declarations or filings with, or expiration of waiting periods
imposed by, any governmental entity necessary for the consummation of the
transactions contemplated by this Agreement including, but not limited to, such
requirements under applicable state securities laws, shall have been filed,
occurred, or been obtained.
6.5 INSIGHT AFFILIATE AGREEMENTS. New Image shall have received
sufficient agreements in substantially the form of Exhibit 6.5 (the "Insight
Affiliate Agreement") from affiliates of
28
Insight and holders of Insight Capital Stock to satisfy continuity of interest
requirements for the transactions contemplated herein to qualify as a tax free
reorganization within the meaning of Section 368(a) of the Code and for pooling
of interests accounting under applicable accounting rules.
6.6 STATUTES. No action shall have been taken, and no statute, rule,
regulation, or order shall have been enacted, promulgated, or issued or deemed
applicable to the Merger by any governmental entity which would (i) make the
consummation of the Merger illegal, (ii) prohibit New Image's or Insight's
ownership or operation of all or a material portion of the business or assets of
Insight or New Image or compel New Image or Insight to dispose of or hold
separate all or a material portion of the business or assets of Insight or New
Image as a result of the Merger, or (iii) render New Image, Sub, or Insight
unable to consummate the Merger, except for any waiting period provisions.
ARTICLE VII
FURTHER CONDITIONS TO OBLIGATIONS OF NEW IMAGE AND SUB
The obligations of New Image and Sub to effect the transactions
contemplated hereby are subject to the satisfaction at or prior to the Closing
Date (or where so indicated the Effective Date) of the following further
conditions, any of which may be waived in whole or in part by New Image and Sub
in writing:
7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Insight set forth in this Agreement shall be true and correct in all material
respects (except for such representations and warranties which are qualified by
their terms by a reference to materiality, which representations and warranties
as so qualified shall be true in all respects) as of the Date of this Agreement,
the Closing Date, and the Effective Time, and New Image shall have received a
certificate signed by the chief executive officers and the chief financial
officers of Insight (the "Insight Officers' Certificate") in the form of
Exhibit 7.1 to such effect as of the Closing and a second such certificate as of
the Effective Time.
7.2 PERFORMANCE OF OBLIGATIONS OF INSIGHT. Insight shall have performed
in all material respects all obligations and covenants required to be performed
by it under this Agreement and the Merger Agreement prior to the Closing Date,
including, without limitation, the provision to New Image in a timely manner of
all information requested by it. A certification as to such performance shall
be included in the Insight Officers' Certificates as of the Closing and the
Effective Time.
7.3 OPINION OF INSIGHT'S COUNSEL. New Image shall have received an
opinion dated the Closing Date of Ritchey, Fisher, Whitman & Klein, counsel to
Insight, in form and substance reasonably satisfactory to New Image,
substantially in the form attached as Exhibit 7.3.
29
7.4 PRE-MARCH LOANS. Holders of the Pre-March Loans shall have agreed
to exchange amounts owing in connection with such loans for New Image Common as
contemplated in Section 2.8.
7.5 GUARANTEES OF INSIGHT SHAREHOLDERS. A percentage of recipients of
New Image Exchange Shares and New Image Loan Exchange Shares acceptable to New
Image shall have signed guarantees in the form of Exhibit 7.5 (which provides
for shareholder liability pro-rata to receipt of New Image Exchange Shares and
New Image Loan Exchange Shares).
7.6 ESTIMATED CLOSING DATE BALANCE SHEET. Insight shall have delivered
to New Image the Estimated Closing Date Balance Sheet which shall have been
reviewed for reasonableness by Coopers & Lybrand LLP.
7.7 NEW IMAGE FINANCING. New Image shall have obtained debt financing
from Coast Business Credit with an availability as of the Closing Date of not
less than $4,000,000.
7.8 ESTOPPEL STATEMENTS. Insight shall have obtained estoppel
statements in the form of Exhibit 7.8, dated the Closing Date, from its
directors and officers.
7.9 AFFILIATED CAPITAL CORP. There shall be no defaults, or events
which with the giving of notice or passage of time or both would constitute a
default, under the Insight contract with Affiliated Capital Corp.; and
Affiliated Capital Corp. shall have consented to this Agreement and the Merger.
7.10 MORTENSEN AGREEMENT. Suzanne Mortensen shall have agreed, in a
writing acceptable to New Image, to continue to supply Insight with
subassemblies in accordance with current volumes and prices.
7.11 CONSENTS. All consents required under Insight contracts for the
transactions contemplated in this Agreement and the Merger Agreement shall have
been obtained or waived by New Image.
7.12 CORDEV CORPORATION AGREEMENTS. All CorDev Corporation agreements
with Insight shall have terminated without further cost or obligation to
Insight, New Image, or the Surviving Corporation.
7.13 APPROVAL OF NEW IMAGE BOARD OF DIRECTORS. The Board of Directors of
New Image shall have approved this Agreement and the consummation of the
transactions contemplated herein.
7.14 APPROVAL OF INSIGHT DISCLOSURE SCHEDULE AND EXHIBITS. As of the
Date of this Agreement, New Image has not finished its review of items provided
by Insight as disclosures, schedules, and exhibits or completed its due
diligence activities on the Insight Disclosure Schedule or exhibits provided or
to be provided by Insight pursuant to this Agreement. In the completion of such
activities, New Image shall not have found any circumstance or combination of
30
circumstances, whether known to it prior to the Date of this Agreement or
learned thereafter, which it determines in its sole discretion to create a
material risk that its original business objectives (financial, manufacturing,
and marketing) in the transactions contemplated herein and in the Merger
Agreement will not be achieved or that the transactions contemplated in this
Agreement will not be eligible to be accounted for as a pooling of interests
under applicable accounting rules.
7.15 ENVIRONMENTAL RISKS. New Image shall have reached a level of
comfort satisfactory to it that Insight has no material environmental or safety
risk of the kind described in Section 3.10.
7.16 AGREEMENT ON EXHIBITS. New Image and Insight shall have come to
agreement with respect to the contents of their disclosure schedules and
Exhibits to be provided as contemplated in Section 12.16.
7.17 POOLING LETTER. Coopers & Lybrand LLP shall have issued and
delivered to New Image and Insight a letter stating that Insight is a poolable
entity as of the Closing Date.
7.19 REPLACEMENT OF CLOSING COSTS. To the extent Insight has paid
Transaction Costs prior to the Closing, such payment shall have been fully
reimbursed by recipients of New Image Exchange Shares and New Image Loan
Exchange Shares.
ARTICLE VIII
FURTHER CONDITIONS TO OBLIGATIONS OF INSIGHT
The obligations of Insight to effect the transactions contemplated hereby
are subject to the satisfaction at or prior to the Closing Date (or where so
indicated, the Effective Time) of the following further conditions, any of which
may be waived in whole or in part by Insight in writing:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of New Image and Sub set forth in this Agreement shall be true and correct in
all material respects (except for such representations and warranties which are
qualified by their terms by a reference to materiality, which representations
and warranties as so qualified shall be true in all respects) as of the Closing
Date and the Effective Time.
8.2 PERFORMANCE OF OBLIGATIONS OF NEW IMAGE AND SUB. New Image and Sub
shall have performed in all material respects all obligations and covenants
required to be performed by them under this Agreement and the Merger Agreement,
and Insight shall have received a certificate signed by the chief executive
officer and the chief financial officer of New Image in the form of Exhibit 8.2
to such effect.
8.3 OPINION OF NEW IMAGE'S COUNSEL. Insight shall have received an
opinion dated the Closing Date of Higgs, Fletcher & Mack LLP, counsel to New
Image, in form and substance reasonably satisfactory to Insight, substantially
in the form attached as Exhibit 8.3.
31
8.4 BOARD MEMBERSHIP. Prior to the Closing Date, the New Image Board of
Directors shall have taken steps to appoint Mark Stevens to the New Image Board
of Directors as of the Effective Time.
8.5 RELEASE OF SHAREHOLDER GUARANTEE. Any personal guarantee of the
Insight loan at Silicon Valley Bank shall have been canceled and released by
that Bank.
8.6 AGREEMENT ON EXHIBITS. New Image and Insight shall have come to
agreement with respect to the contents of the disclosure schedules and Exhibits
to be provided as contemplated in Section 1.16.
ARTICLE IX
INDEMNIFICATION BY INSIGHT SHAREHOLDERS
9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, AND AGREEMENTS.
The obligations of Insight with respect to its representations, warranties,
covenants, and agreements will survive the Closing and the Effective Date and
continue in full force and effect, except that following the Closing Date, the
liability of Insight shall shift to the Insight Guarantors who shall be solely
liable for Insight indemnities under this Article IX. Except as to (i) Claims
arising out of the matters scheduled on Exhibit A to Exhibit 7.5 and (ii) any
Claim for which a Claims Notice has been delivered to the Insight Guarantors on
or before the day New Image's audited consolidated financial statements for the
period ended June 30, 1996, are released (the "1996 Audit Release Date") and
which remains pending on such release date, the Guarantor's indemnity obligation
with respect to Damages arising out of breach of such representations,
warranties, covenants, and agreements shall terminate at midnight on such
release date. Except as to Claims arising out of the matters scheduled on
Exhibit A to Exhibit 7.5 which have been made and are unresolved as of midnight
on the second annual anniversary of the 1996 Audit Release Date, Guarantor's
indemnity obligation with respect to damages arising out of the matters
scheduled on Exhibit A to Exhibit 7.5 shall terminate at midnight on such second
annual anniversary date.
9.2 LIABILITY THRESHOLD. In considering liability for Damages, Damages
for all Claims shall be aggregated. The Insight Guarantors shall have no
liability with respect to Claims until the aggregate Damages for all Claims
exceeds $400,000. Notwithstanding the preceding sentence, with respect to
Claims arising under Section 3.17 involving criminal charges, Insight Guarantors
shall be liable for all Damages without regard to the $400,000 threshold or the
amount of other Claims, if any, which may arise out of this Agreement.
9.3 INDEMNITY. Except as limited by other provisions of this Article
IX, from and after the Effective Time New Image and the Surviving Corporation
(on and after the Closing Date) shall be indemnified and held harmless by
Insight Guarantors against, and reimbursed on demand for, any liability, damage,
loss, obligation, demand, judgment, fine, penalty, cost or expense (including
reasonable attorney's fees and expense, and the costs of investigation, incurred
in
32
connection therewith and any amounts paid in settlement thereof) (collectively
the "Damages") imposed on or reasonably incurred by New Image or the Surviving
Corporation because of any misrepresentation or breach of any representation,
warranty, covenant, or agreement ("Claim") on the part of Insight under this
Agreement. "Damages" as used herein is not limited to matters asserted by third
parties, but includes Damages incurred or sustained by New Image, in the absence
of Claims by a third party.
9.4 NOTICE OF CLAIMS. New Image or the Surviving Corporation shall give
notice (the "Claim Notice") to the Insight Guarantors promptly following New
Image or the Surviving Corporation's becoming aware of any Claim which has or
may give rise to Damages. Such notice shall specify the nature and amount of
the Claim asserted. Notwithstanding the foregoing, provided such Claim Notice
is given prior to termination of the Insight Guarantors' indemnity with regard
to the Claim involved, a delay by New Image in giving such notice shall not
limit the indemnity provided by Section 9.3 except to the extent the failure to
provide such notice in a timely fashion results in a material increase in the
Damages to be paid by the Insight Guarantors or materially prejudices the
defense of the Claim asserted.
9.5 CLAIMS. A Claim Notice shall be accompanied by a certificate signed
by an officer of New Image (an "Officer Claim Certificate") setting forth a
Claim against the Insight Guarantors:
(i) stating that New Image or the Surviving Corporation has
paid or properly accrued or knows of facts giving rise to a reasonable
probability that it will have to pay or accrue Damages in an aggregate stated
amount with respect to which New Image or the Surviving Corporation is entitled
to payment from such guarantors, and
(ii) specifying in reasonable detail the individual items of
Damages included in the amount so stated, the date each such item was paid or
properly accrued, or the basis for such anticipated liability, and the nature of
the misrepresentation or breach to which such item is related.
Each Insight Guarantor shall, subject to the provisions of Section 9.6, deliver
to New Image cash equal to the Damages claimed multiplied by the percentage
which the New Image Exchange Shares and New Image Loan Exchange Shares to which
such guarantor is entitled under this Agreement bears to all New Image Exchange
Shares and Loan Exchange Shares.
9.6 OBJECTIONS TO CLAIM. For a period of 30 days following the sending
of any Officer Claim Certificate to them, any or all of the Insight Guarantors
may notify New Image of any objection he or they may have to the Claim(s)
involved.
9.7 RESOLUTION OF CONFLICTS. In case any Insight Guarantor shall object
in writing to the indemnity of New Image in respect of any Claim, such guarantor
and New Image shall attempt in good faith to agree upon the rights of the
respective parties with respect to such Claim. If the Insight Guarantor(s) and
New Image are unable to agree or the required indemnity payments are
33
not made, New Image or any one or more of the Insight Guarantors may commence an
action pursuant to Section 9.9.
9.8 THIRD-PARTY CLAIMS. In the event New Image receives a written
third-party Claim or potential Claim which New Image believes may result in a
demand against the Insight Guarantors, New Image shall promptly notify the
Insight Guarantors of such Claim and they shall be entitled, at their expense
and option, to participate in any defense of such Claim. New Image shall have
the right to settle any such Claim with the written consent of Insight
Guarantors holding a majority of such shares, which consent shall not be
unreasonably withheld. In the event that holders of a majority of such shares
have consented to any such settlement of a Claim, the Insight Guarantors shall
have no power or authority to object to such settlement. New Image shall use
reasonable, diligent efforts to defend any third-party Claim which is not
settled with the consent of the Insight Guarantors.
9.9 DISPUTES. Any dispute or controversy between the parties arising
out of this Article IX (each dispute or controversy being referred to as a
"Dispute") shall be handled exclusively as provided in this Section and not
pursuant to litigation in a court of law or other tribunal. Any Dispute which
is not otherwise resolved shall, upon the demand of either party, be determined
and settled by arbitration in San Diego, California under California substantive
law and the Commercial Arbitration Rules of the American Arbitration
Association. The parties further agree that:
(i) ATTORNEYS FEES. The arbitrator shall include attorney
fees and costs in the award to the prevailing party.
(ii) DISCOVERY. The parties shall be entitled to reasonable
and necessary discovery in accordance with the provisions of California Code of
Civil Procedure Section 1283.05.
(iii) FINDINGS AND CONCLUSIONS. The award shall include
findings of fact and conclusions of law showing the legal and factual basis for
the arbitrator's decision.
(iv) ERRORS OF LAW. The award shall be subject to appeal to
the San Diego Superior Court with respect to errors of law (but not with respect
to errors of fact). For an appeal to be given effect, the party seeking to
appeal must give notice of intent to appeal to the arbitrator and the other
party to the arbitration within ten days following the date notice of the award
is received by such party and the appeal itself must be filed with the court
within 30 days of receipt of such notice of award.
(v) ENFORCEMENT. The final award may be entered by any
court of competent jurisdiction.
9.10 NO INDEMNITY TO GUARANTORS FROM INSIGHT. Insight Guarantors shall
have no right to contribution or indemnity from Insight with respect to any
amount incurred or paid by them with respect to Claims or Damages.
34
ARTICLE X
INDEMNIFICATION BY NEW IMAGE
New Image agrees to indemnify the officers and directors of Insight
against, and hold them harmless from, any liability for any penalty or interest
accruing after the Closing Date on Taxes (including interest and penalties)
owing by Insight on the Closing Date to the extent the accrual of such penalty
or interest is solely attributable to failure to pay the amounts owing on such
Taxes promptly following the Effective Time.
ARTICLE XI
TERMINATION
11.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing:
11.1.1 by mutual agreement of New Image and Insight;
11.1.2 by the Board of Directors of Insight or New Image if the
Closing shall not have occurred on or prior to May 20, 1996, through no fault of
the terminating party;
11.1.3 by either Insight or New Image if (i) there shall be a non-
appealable order of a Federal or state court in effect preventing consummation
of the Merger, (ii) there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated, or issued or deemed applicable to the
Merger by any governmental entity that would make consummation of the Merger
illegal, or (iii) any of the representations and warranties of the other party
set forth herein, in its exhibits, its disclosure schedules, or in its other
documents or information was materially false or such other party shall have
failed to comply with or perform any material covenant, agreement, or condition
to have been performed by it on or prior to the Closing; or
11.1.4 by New Image upon the occurrence of one or more events
beyond its control which prevent its performance of this Agreement or which the
members of its Board of Directors believe, in the reasonable exercise of their
business judgment, would, individually or in combination, have a material
adverse effect upon the operations or Business Condition of the combined
companies following the Merger.
11.1.5 by New Image upon a determination made in its sole
discretion in the course of its review of matters disclosed by Insight prior to
the Date of this Agreement or thereafter, that any of such matters, individually
or in combination, creates a material risk that its original business objectives
(financial, manufacturing, and marketing) in the transactions contemplated
herein and in the Merger Agreement will not be achieved or that the transactions
contemplated in this Agreement will not be eligible to be accounted for as a
pooling of interests under applicable accounting rules.
35
11.1.6 by New Image upon the commencement of an action by any
shareholder of Insight to enjoin any of the transactions contemplated in this
Agreement or the Merger Agreement.
11.2 EFFECT OF TERMINATION.
11.2.1 If Insight has performed all matters to be performed by it
prior to the Closing and the Closing has not occurred prior to May 9, 1996, and
Insight elects to terminate this Agreement pursuant to the provisions of 11.1.2,
New Image shall pay Insight a "break-up fee" equal to $125,000. Notwithstanding
the preceding sentence, if New Image's failure to close (i) is caused by
inability of New Image to obtain sufficient credit facilities to fund the
combined companies or (ii) occurs under circumstances which would permit it to
refuse to close because of the non-occurrence of a condition set forth in
Articles VI through VIII which is not within its control or which would permit
it to terminate this Agreement pursuant to Section 11.1.2, 11.1.3, 11.1.4,
11.1.5, or 11.1.6, then New Image shall not be liable for the break-up fee. In
the event Insight elects to terminate this Agreement and New Image owes Insight
the break-up fee, such fee shall be the sole damage recoverable by Insight from
New Image under this Agreement.
11.2.2 Except as provided in Section 11.2.1, in the event of the
termination and abandonment hereof prior to the Closing pursuant to the
provisions of this Article XI, this Agreement shall become void and have no
effect, without any liability on the part of any party or its directors,
officers, or stockholders; provided, however, that if either party fails to
perform its obligations hereunder, except as provided in Section 11.2.1, the
other party shall have the right to seek available legal and equitable remedies
except that in no event shall either party shall be liable to the other for
incidental or consequential damages.
11.3 TERMINATIONS HEREUNDER NOT EXCLUSIVE. Nothing in this Article XI
shall be construed as limiting the ability of either party from terminating this
Agreement at any time prior to the Effective Date based upon a material breach
of the other.
ARTICLE XII
GENERAL PROVISIONS
12.1 AMENDMENT. This Agreement may be amended or modified in whole or in
part at any time only by an agreement in writing executed in the same manner as
this Agreement.
12.2 EXTENSION AND WAIVER. At any time prior to the Closing Date, either
Insight or New Image may (i) extend the time for the performance of any of the
obligations or other acts of the other party, (ii) waive any inaccuracy in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance by the other
party with any of the agreements or conditions contained herein, the fulfillment
of which is a condition precedent to such party's obligation to consummate this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall only be valid if set forth in an instrument in writing signed on behalf of
such party by its president or other authorized person. Any such
36
waiver or extension shall not operate as a waiver or extension of any other or
subsequent condition or obligation.
12.3 NOTICES. All notices, demands, requests, consents, approvals, or
other communications (collectively, "Notices") required or permitted to be given
hereunder or which are given with respect to this Agreement shall be in writing
and may be personally served or may be deposited in the United States mail
registered or certified, return receipt requested, postage prepaid, addressed as
follows:
To New Image or Sub New Image Industries, Inc.
2283 Cosmos Court
Carlsbad, CA 92009
Attn.: President
With a copy to:
Higgs, Fletcher & Mack LLP
401 West A Street, Suite 2000
San Diego, CA 92101
Attention: Franklin T. Lloyd, Esq.
To Insight Insight Imaging Systems, Inc.
981 D Industrial Road
San Carlos, CA 94070
Attn: President
With a copy to:
Ritchey Fisher Whitman & Klein
1717 Embarcadero Road
Palo Alto, CA 94303
Attention: Lawrence A. Klein, Esq.
or such other address as such party shall have specified most recently by
written notice. Notice mailed as provided herein shall be deemed given on the
date of actual receipt.
12.4 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which taken together shall
constitute one and the same instrument.
12.5 GOVERNING LAW. This Agreement shall be governed by, interpreted
under, and construed and enforced in accordance with the laws of the State of
California applicable to agreements made and to be performed wholly within the
State of California.
37
12.6 ENTIRE AGREEMENT. The parties agree that the term sheet dated
February 29, 1996, has been entirely superseded by the term sheet signed by New
Image on April 13, 1996, and such February 29 term sheet is of no further force
or effect and that all versions of this Agreement not bearing the footer "69779
1H%02!.Doc 4.21.96 FINAL" and that certain "Supplemental Agreement, dated April
22, 1996, are superseded by this Agreement. They also agree that the terms of
this Agreement and other documents and instruments referred to herein are
intended by the parties as a final expression of their agreement with respect to
the subject matter of this Agreement (including the matters covered by the term
sheet signed by New Image on April 13, 1996) and may not be contradicted by
evidence of any prior or contemporaneous written or oral agreement. The parties
further intend that no extrinsic evidence whatsoever may be introduced to
impeach the written terms of this Agreement in any legal proceeding involving
this Agreement.
12.7 THIRD PARTY RIGHTS. The parties do not intend to confer any benefit
hereunder on any person, firm or corporation other than the parties and the
holders of New Image Exchange Shares and New Image Loan Exchange Shares.
12.8 TITLES AND HEADINGS. Titles and headings of sections of this
Agreement are for convenience of reference only and shall not affect the
construction of any provision of this Agreement.
12.9 EXHIBITS. When finalized as contemplated in Section 12.16, each of
the Exhibits shall be an integral part of this Agreement and incorporated herein
by this reference.
12.10 FURTHER ASSURANCES. Each of the parties agrees to do such further
acts and things and to execute and deliver such additional agreements and
instruments as the other may reasonably require to consummate, evidence, or
confirm the agreements contained herein in the manner contemplated hereby.
12.11 ASSIGNMENT. This Agreement and the rights, duties, and obligations
hereunder may not be assigned by either party without the prior written consent
of the other party, and any attempted assignment in the absence of the required
consent shall be void.
12.12 SUCCESSORS AND ASSIGNS. This Agreement and the provisions hereof
shall be binding upon each of the parties and their permitted successors and
assigns.
12.13 PARTIAL INVALIDITY. If any provision of this Agreement is found to
be invalid by any court, the invalidity of such provision shall not affect the
validity of the remaining provisions hereof.
12.14 ATTORNEYS FEES. In the event of litigation concerning this
Agreement the prevailing party or parties in such litigation shall be entitled
to reimbursement from the party or parties opposing such prevailing party or
parties of all reasonable attorneys fees and costs incurred in such litigation.
38
12.15 NEW IMAGE AND SUB ONE PARTY. For purposes of references to a
"party" other than Insight, the reference shall be deemed to be a reference to
both New Image and Sub unless the context clearly requires otherwise.
12.16 CONCERNING DISCLOSURE SCHEDULES AND EXHIBITS. The parties agree
that the disclosure schedules and Exhibits and all other material provided on
and before the Date of this Agreement are incomplete and/or not final and that
each party will deliver its disclosure schedule and Exhibits to the other no
later than the close of business on the third full business day prior to the
Closing Date. Such delivery shall be by hand delivery, addressed to the persons
named at the addresses provided in the Section 12.3; provided that an additional
copy of the schedule being delivered by Insight to New Image shall be delivered
to: Robert S. Colman, Colman, Furlong & Co., One Maritime Plaza #2535, San
Francisco, California 94111.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
signed and delivered.
NEW IMAGE INDUSTRIES, INC. INSIGHT IMAGING SYSTEMS, INC.
By: By:
--------------------------- ---------------------------
Dewey F. Edmunds, President Mark Stevens, President
WISDOM ACQUISITION CORP.
By:
---------------------------
Dewey F. Edmunds, President
39
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
NEW IMAGE INDUSTRIES, INC.
WISDOM ACQUISITION CORP.
AND
INSIGHT IMAGING SYSTEMS, INC.
_____________________
MAY 9, 1996
_____________________
EXHIBIT VOLUME
The accompanying exhibits are accepted as the exhibits to the above Agreement
and Plan of Reorganization.
Dated: May __, 1996.
New Image Industries, Inc. Insight Imaging Systems, Wisdom Acquisition
Inc. Corp.
- - -------------------------- ------------------------ ------------------
Dewey F. Edmunds Mark Stevens Dewey F. Edmunds
President President President
LIST OF EXHIBITS
1 Audited Closing Date Financial Statements Procedure
2.1 Merger Agreement
2.7.2 Transmittal Letter and Instructions for Holders of Insight Capital
Stock
2.8 Transmittal Letter and Instructions for Payees Under Pre-March Loans
3.3.1 Schedule of Insight Capital Stock
3.3.3 Schedule of Insight Common Purchase Rights
3.3.6 Schedule of Pre-March Loans
3.8 Schedule of Post-February Loans
3.9 Schedule of Insight Permits
3.12 Schedule of Assets
3.13A Estimated Closing Date Balance Sheet
3.13B Insight Financial Statements
3.15 Schedule of Employees (full-time and part-time)
3.17.1 Schedule of Insight Taxes, Interest, Penalties, and Agreements with
Tax Authorities
3.18 Schedule of Insight Purchase Orders in Excess of $25,000
3.19 Schedule of Insight Self-Insured Risks and Insurance Policies
3.24.1 Schedule of Insight Intellectual Property Rights and Related
Agreements
3.29 Schedule of Insight Payables as of the Date of the Latest Balance
Sheet
4.10 Schedule of New Image Intellectual Property Rights and Related
Agreements
6.5 Insight Affiliate Agreement
7.1 Insight Officers' Certificate
7.3 Opinion of Insight's Counsel
7.5 Insight Shareholder Guarantee
7.8 Estoppel Statements
8.2 New Image Officers' Certificate
8.3 Opinion of New Image Counsel
EXHIBIT 1
AUDITED CLOSING DATE FINANCIAL STATEMENT PROCEDURE
This procedure is attached as Exhibit 1 to that certain Agreement and Plan
of Reorganization by and among New Image Corporation, New Image Acquisition
Corp., and Insight Corporation, dated May 9, 1996 (the "Agreement"). Defined
terms used in this procedure shall have the same meanings as in the Agreement.
Within 30 days following the Closing Date, Insight shall cause Coopers &
Lybrand LLP to perform and deliver to New Image an audit of Insight as of the
Closing Date and for the period of the Insight fiscal year then ended and
prepare an audited consolidated balance sheet of Insight as of the Closing Date
and the related statements of operations shareholders equity, and cash flows for
the Insight fiscal year to date then ended, accompanied by the opinion thereon
of Coopers & Lybrand LLP, independent public accountants. If Coopers & Lybrand
LLP fails to deliver the Audited Closing Date Balance Sheet within such 30 day
period, Arthur Andersen LLP shall perform such audit and its audit shall be the
Audited Closing Date Balance Sheet for all purposes hereunder without any right
on the part of Insight or its shareholders to disagree.
If Coopers & Lybrand LLP delivers the Audited closing Date Balance Sheet
within such 30-day period, then within 15 days of receipt of the such financial
statements from Coopers & Lybrand LLP, New Image shall cause Arthur Andersen LLP
to review and deliver to New Image a report on disagreements, if any, concerning
such audited financial statements.
If there are disagreements between Coopers & Lybrand LLP and Arthur
Andersen LLP concerning the accuracy or completeness of such financial
statements and the parties are unable to resolve them voluntarily within 20 days
of delivery of the Arthur Andersen LLP report to Insight, such disputes shall be
resolved promptly by Deloitte & Touche LLP whose resolution shall be final and
binding on the parties.
The financial statements derived pursuant to the procedures set forth in
this Section shall be the Audited Closing Date Financial Statements for all
purposes under the Agreement.
EXHIBIT 2.1
AGREEMENT OF MERGER
This agreement of merger ("Agreement") is entered into on May __, 1996,
between Insight Imaging Systems, Inc. ("Survivor"), a California corporation,
Wisdom Acquisition Corp. ("Disappearing"), a California corporation, the
constituent corporations in this merger and New Image Industries, Inc., a
Delaware corporation, the parent of Disappearing ("Parent").
A. The issued and outstanding stock of Disappearing consists of 100,000
shares of Common Stock, without par value.
B. The pre-merger issued and outstanding stock of Survivor consists of
6,373,764 shares of Common Stock, without par value and no shares of Preferred
Stock.
C. Parent is a Delaware corporation that owns 100 percent of the issued
and outstanding shares of Disappearing.
WHEREFORE, the parties agree, as follows:
1. STATEMENT OF MERGER. The parties agree that Disappearing shall be
merged into Survivor, and that the terms and conditions of the merger are as
stated in this Agreement. At and as of the "Effective Time," as defined below,
the separate existence of Disappearing shall cease, and Survivor shall succeed,
without other transfer, to all the rights and property of Disappearing, and
shall be subject to all the debts and liabilities of Disappearing, in the same
manner as if Survivor itself had incurred them.
2. ARTICLES OF INCORPORATION. The Articles of Incorporation of Survivor
shall be amended and restated at and as of the Effective Time to read in full as
set forth in Exhibit A.
3. CONVERSION OF SURVIVOR'S SHARES. At and as of the Effective Time,
each share of Pre-Merger Common Stock of Survivor shall be converted into
.0554392 shares of common stock, $.001 par value, of Parent.
4. CONVERSION OF DISAPPEARING'S SHARES. At and as of the Effective Time,
each share of common stock, without par value, of Disappearing shall be
converted into one share of common stock, without par value, of Survivor.
5. EFFECTIVE TIME. An executed counterpart of this Agreement and
officers' certificates of each of the constituent corporations shall be filed in
the office of the California Secretary of State. The merger shall become
effective at the time of that filing (the "Effective Time").
IN WITNESS WHEREOF, Survivor, Disappearing, and Parent as duly authorized
by their respective boards of directors, have caused this Agreement to be
signed.
Wisdom Acquisition Corp. Insight Imaging Systems, Inc.
By _____________________________ By _____________________________
Dewey F. Edmunds, President Mark Stevens, President
By _____________________________ By _____________________________
Harold R. Orr, Secretary Frederick C. Walter, Secretary
New Image Industries, Inc.
By _____________________________
Dewey F. Edmunds, President
By ______________________________
Harold R. Orr, Assistant Secretary
2
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
Mark Stevens and Frederick C. Walter certify that:
1. They are the President and the Secretary, respectively, of Insight Imaging
Systems, Inc., a California corporation.
2. The Agreement of Merger in the form attached was duly approved by the board
of directors and shareholders of the corporation.
3. The classes of shares and the numbers of shares of each class which are
outstanding are:
Number of Shares of
Class Class Outstanding
------------------------- -------------------
Common Stock 6,373,764
Preferred Stock None
4. The shareholder approval was by a number of shares of each class which
equaled or exceeded the vote required. The vote required was a majority of
the common stock and a majority of the preferred stock voting separately.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
DATED: May __, 1996
______________________________
Mark Stevens, President
______________________________
Frederick C. Walter, Secretary
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
Dewey F. Edmunds and Harold R. Orr certify that:
1. They are the President and the Secretary, respectively, of Wisdom
Acquisition Corp., a California corporation.
2. The Agreement of Merger in the form attached was duly approved by the board
of directors and shareholders of the corporation.
3. The shareholder approval was by the holders of 100% of the outstanding
shares of the corporation.
4. There is only one class of shares and the number of shares outstanding is
100,000.
5. The corporation is a wholly-owned subsidiary of New Image Industries, Inc.,
a Delaware corporation. No vote of the shareholders of New Image
Industries, Inc. was required.
We declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of my own knowledge.
DATED: May __, 1996
______________________________
Dewey F. Edmunds, President
______________________________
Harold R. Orr, Secretary
EXHIBIT A TO AGREEMENT OF MERGER
RESTATED ARTICLES OF INCORPORATION
OF
INSIGHT IMAGING SYSTEMS, INC.
I
The name of this corporation is Insight Imaging Systems, Inc.
II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business, or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
III
This corporation is authorized to issue only one class of capital stock
designated "Common Stock." The number of shares of Common Stock is 100,000.
IV
The liability of the directors of the corporation for monetary damages shall
be eliminated to the fullest extent permissible under California law.
V
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the Corporations Code) for breach of duty to the
corporation and its stockholders through bylaw provisions or through
agreements with agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the Corporations Code, subject only to the
applicable limits set forth in Section 204 of the Corporations Code with
respect to actions for breach of duty to this corporation and its
shareholders.
EXHIBIT 3.24.1
INTELLECTUAL PROPERTY RIGHTS OF
INSIGHT IMAGING SYSTEMS, INC.
CORPORATE NAMES: Insight Imaging Systems, Inc.
C-I Acquisition Corp.
TRADE NAMES,TRADEMARKS Insight
AND SERVICE MARKS: Plug 'n Play
MultiLink
Show-It
Smile Gallery
Image-It (U.S. trademark denied 6/95)
Power-It
PowerPack
Chart-It Serial No. 74/498.572
Publication Date: 8/29/95
Applicant: Chart-It, Inc.
Capture-It Serial No. 74/615660
Application Filed: 12/27/94
Applicant: Chart-It, Inc.
PATENT APPLICATIONS: Apparatus and Method for Eliminating the Fogging of
Intraoral Camera Images.
Inventor: William W. Stevens
Assignee: Insight Imaging Systems, Inc.
Date of Deposit: 2/22/96
EXHIBIT 6.5
Affiliate Agreement
May ___, 1996
New Image Industries, Inc.
2283 Cosmos Court
Carlsbad, CA 92009
RE: Agreement and Plan of Reorganization (the "Agreement") by and among New
Image Industries, Inc. ("New Image"), a Delaware corporation, Wisdom
Acquisition Corp. ("Sub"), a California corporation and wholly-owned
subsidiary of New Image, and Insight Imaging Systems, Inc. ("Insight"), a
California corporation; and Agreement of Merger (the "Merger Agreement") by
and between Insight and Sub.
Gentlemen:
Terms used in this letter which are defined in the Agreement shall have the
same meanings herein as in the Agreement. I am a director, officer, or holder
of 10% or more of the voting power of Insight. I am delivering this letter
agreement to you as an inducement to you to engage in the Closing and Merger,
and to satisfy the covenant of Insight contained in Section 6.5 of the Agreement
and the condition to the New Image Closing obligation contained in Section 7.2
thereof. Pursuant to the Agreement and the Merger Agreement, I will acquire
shares of New Image Common at the Effective Time.
I understand that the Merger is intended to be effected in a manner which
will qualify the acquisition of Insight pursuant to the Agreement and the Merger
Agreement to be accounted for according to pooling of interests accounting
rules. I have also been informed that holding my shares in New Image following
the Merger may be a condition to the availability of such pooling of interests
accounting treatment. Accordingly, I agree that I will not sell, transfer, or
otherwise limit my economic risk associated with ownership of New Image Common
Stock received pursuant to the Agreement and the Merger Agreement until such
time as the financial results covering at least 30 days of post merger combined
operations have been published.
Very truly yours,
______________________________
(Print Name)
Exhibit 7.5
INSIGHT SHAREHOLDER GUARANTY
This guaranty ("Guaranty") is made as of the ____ day of May, 1996, by the
undersigned ("Guarantor," together with other shareholders also signing this
form of guaranty, "Guarantors") in favor of New Image Industries, Inc. ("New
Image"), a Delaware corporation, and Insight Imaging Systems, Inc. ("Insight"),
a California corporation. Guarantor is a former shareholder of Insight and this
Guaranty is provided to New Image and Insight pursuant to Section 7.5 of the
Agreement and Plan of Reorganization, dated May 9, 1996, entered into by and
among New Image, Insight, and Wisdom Acquisition Corp., a California
corporation, (the "Agreement"). Capitalized terms not defined herein have the
meanings set forth in the Agreement.
1. AGREEMENTS OF GUARANTOR. Guarantor represents, warrants, covenants,
agrees, and undertakes for the benefit of New Image and Insight, as follows:
1.1 AGREEMENT TO BE BOUND. As of the Closing, Guarantor makes and
agrees to be bound by and responsible for each and all of the representations,
warranties, covenants, and agreements of Insight made, or in effect, or to be
made, or to be in effect at or after the Closing, subject to the limitations set
forth herein.
1.2 TIME FOR ASSERTION OF CLAIMS. Except as to (i) Claims arising
out of the matters scheduled on Exhibit A and (ii) any Claim for which a Claims
Notice has been delivered to Guarantor on or before the day New Image's audited
consolidated financial statements for the period ended June 30, 1996, are
released (the "1996 Audit Release Date") and which remains pending on such
release date, the Guarantor's indemnity obligation with respect to Damages
arising out of breach of such representations, warranties, covenants, and
agreements shall terminate at midnight on such release date. Except as to
Claims arising out of the matters scheduled on Exhibit A to Exhibit 7.5 which
have been made and are unresolved as of midnight on the date of the second
annual anniversary of the 1996 Audit Release Date, Guarantor's indemnity
obligation with respect to Damages arising out of the matters scheduled on
Exhibit A to Exhibit 7.5 shall terminate on such second annual anniversary date.
3. LIABILITY THRESHOLD. In considering liability for Damages, as defined
below, Damages for all Claims shall be aggregated. The Insight Guarantors shall
have no liability with respect to Claims until the aggregate Damages for all
Claims exceed $400,000 ("the 400,000 threshold"). Notwithstanding the preceding
sentence, with respect to Claims arising under Section 3.17 of the Agreement
involving criminal charges, Guarantor shall be liable for all Damages without
regard to the $400,000 threshold or the amount of other Claims, if any, which
may arise out of the Agreement.
4. INDEMNITY. Except as limited by other provisions of this Guaranty,
from and after the Effective Time, Guarantor agrees to indemnify New Image and
Insight against; hold them harmless from; and reimburse them on demand for, any
liability, damage, loss, obligation, demand, judgment, fine, penalty, cost or
expense (including reasonable attorney's fees and expense, and the costs of
investigation incurred in connection therewith, and any amounts paid in
settlement thereof) (collectively the "Damages") imposed on or reasonably
incurred by New Image or Insight because of any misrepresentation or breach of
any representation, warranty, covenant, or agreement ("Claim") on the part of
Insight under the Agreement. "Damages" as used herein is not limited to matters
asserted by third parties, but includes Damages incurred or sustained by New
Image or Insight, in the absence of Claims by a third party. Notwithstanding
the foregoing, Guarantor's liability for indemnity shall be equal to the Damages
paid or incurred multiplied by the percentage which the New Image Exchange
Shares and New Image Loan Exchange Shares (collectively, herein "New Image
Shares") received by Guarantor bears to all New Image Shares.
5. CLAIMS.
5.1 NOTICE OF CLAIMS. New Image or Insight shall give notice (the
"Claim Notice") to the Guarantor and the other Guarantors promptly following New
Image or Insight's becoming aware of any Claim which has or may give rise to
Damages. Such notice shall specify the nature and amount of the Claim asserted.
Notwithstanding the foregoing, provided such Claim Notice is given prior to
termination of the Guarantor's indemnity with regard to the Claim involved, a
delay by New Image or Insight in giving such notice shall not limit the
indemnity provided hereunder except to the extent the failure to provide such
notice in a timely fashion results in a material increase in the Damages to be
paid by the Guarantor or materially prejudices the defense of the Claim
asserted.
5.2 CLAIMS. A Claim Notice shall be accompanied by a certificate
signed by an officer of New Image or Insight (an "Officer Claim Certificate")
setting forth a Claim against the Guarantor:
(i) stating that New Image or Insight has paid or properly
accrued or knows of facts giving rise to a reasonable probability that it will
have to pay or accrue Damages in an aggregate stated amount with respect to
which New Image or Insight is entitled to payment from such Guarantor, and
(ii) specifying in reasonable detail the individual items of
Damages included in the amount so stated, the date each such item was paid or
properly accrued, or the basis for such anticipated liability, and the nature of
the misrepresentation or breach to which such item is related.
5.3 OBJECTIONS TO CLAIM. For a period of 30 days following the
sending of any Officer Claim Certificate to him, Guarantor or any or all of the
other Guarantors may notify New Image of any objection he or they may have to
the Claim(s) involved.
5.4 SOLE METHOD OF PROVIDING INDEMNITY. Guarantor shall satisfy an
indemnity obligation first by offsetting the interest and then the principal
owing to him under any
2
subordinated note(s) for Post-March Loans he may own; and then, if he does not
own such a note or the amount of it is insufficient fully to offset the
indemnity obligation, by surrendering New Image Common. In the event Guarantor
surrenders New Image Common to satisfy such an obligation, the value of such
common for this purpose shall be equal to the average daily closing price of New
Image Common as reported on NASDAQ (or other market where the shares are
trading) during the 30 trading days preceding the approval or final
determination of the Claim.
5.5 INDEMNITY CAP. Guarantor's maximum liability for indemnities
hereunder shall not exceed the sum of (i) the principal sum of Post-March Loans
owned by him plus (ii) the New Image Shares received pursuant to the Agreement.
6. RESOLUTION OF CONFLICTS. In case any Guarantor shall object in
writing to the indemnity of New Image in respect of any Claim, such guarantor
and New Image shall attempt in good faith to agree upon the rights of the
respective parties with respect to such Claim. If the Guarantor(s) and New
Image are unable to agree or the required indemnity payments are not made, New
Image or any one or more of the Guarantors may commence an action pursuant to
Paragraph 11.
7. THIRD-PARTY CLAIMS. In the event New Image receives a written third-
party Claim or potential Claim which New Image believes may result in a demand
against the Guarantors, New Image shall promptly notify the Guarantor of such
Claim and he and the other Guarantors shall be entitled, at their expense and
option, to participate in any defense of such Claim. New Image shall have the
right to settle any such Claim on terms which it believes are reasonable in
light of the risks and costs involved. In the event that holders of a majority
of such shares have consented to settlement of a Claim, such settlement shall be
conclusively presumed to be fair to Guarantor. New Image and Insight shall use
reasonable, diligent efforts to defend any third-party Claim which is not
settled.
8. NO INDEMNITY TO GUARANTOR FROM INSIGHT. The Guarantor shall have no
right to contribution or indemnity from Insight with respect to any amount
incurred or paid with respect to Claims or Damages.
9. AUTHORIZATION. Guarantor represents and warrants that he has the
legal capacity, power and authority to execute, deliver and perform this
Guaranty and this Guaranty is the valid and binding obligation of the Guarantor
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally, and by general
principles of equity.
10. CONFLICTS. In the event of a conflict between terms of this Guaranty
and the terms of the Agreement, the terms of this Guaranty shall govern.
11. DISPUTES. Any dispute or controversy between the parties arising out
of this Guarantee (each dispute or controversy being referred to as a "Dispute")
which is not resolved by agreement shall be resolved by arbitration as provided
in this paragraph and not pursuant to litigation in a court of law or other
tribunal. Any Dispute which is not otherwise resolved shall, upon the demand of
either party, be determined and settled by arbitration in San Diego, California
3
under California substantive law and the Commercial Arbitration Rules of the
American Arbitration Association. The parties further agree that:
(i) ATTORNEYS FEES. The arbitrator shall include attorney fees and
costs in the award to the prevailing party.
(ii) DISCOVERY. The parties shall be entitled to reasonable and
necessary discovery in accordance with the provisions of California Code of
Civil Procedure Section 1283.05.
(iii) FINDINGS AND CONCLUSIONS. The award shall include findings of
fact and conclusions of law showing the legal and factual basis for the
arbitrator's decision.
(iv) ERRORS OF LAW. The award shall be subject to appeal to the San
Diego Superior Court with respect to errors of law (but not with respect to
errors of fact). For an appeal to be given effect, the party seeking to appeal
must give notice of intent to appeal to the arbitrator and the other party to
the arbitration within ten days following the date notice of the award is
received by such party and the appeal itself must be filed with the court within
30 days of receipt of such notice of award.
(v) ENFORCEMENT. The final award may be entered by any court of
competent jurisdiction.
WHEREFORE, the parties have caused this Guaranty to be signed.
New Image Industries, Inc. Insight Imaging Systems, Inc.
By ________________________ By _______________________
Dewey F. Edmunds, President Mark Stevens, President
GUARANTOR:
_______________________
ATTACHMENT:
Exhibit A
4
EXHIBIT A
1. Litigation Matters:
- HIGH TECH MEDICAL INSTRUMENTATION, INC. ("HTMI"). This matter relates
to allegations of flaws in the HTMI license with Insight and the way in
which the license was negotiated, including the allegations (the "HTMI
allegations") contained in the letters of (i) June 30, 1995, from HTMI
to Mr. William W. Stevens, (ii) September 6, 1995, from Mr. Thomas H.
Carlson to Mr. Miles C. Milbank, and (iii) of April 11, 1996, from to
Robert L. Anderson to Mr. Thomas H. Carlson. Without regard to whether
the matters giving rise to Damages were disclosed in the Insight
Disclosure Schedule or otherwise known to New Image prior to the date
of the Agreement or thereafter, subject to the $400,000 threshold, only
the following Damages relating to the HTMI Allegations shall be
recoverable under this indemnity:
- The amount of any judgment or award which is based on the HTMI
Allegations.
- 50% of the attorney's fees and costs paid or incurred in
defending against the HTMI Allegations if the trier of fact in
the forum where the matter is tried makes findings which are
inconsistent with the representations of Mr. Stevens in the
attached statement (the other 50% are recoverable pursuant to a
separate agreement).
- PERRY M. WILLIAMS. This matter relates to potential litigation by or
on behalf of Mr. Williams related to the items discussed in that
certain letter from David A. Prentice to the Board of Directors of
Insight Imaging Systems, Inc., dated May 6, 1996. All damages arising
out of such potential litigation shall, subject to the $400,000
threshold, be included in Damages against which New Image is
indemnified under this Guaranty without regard to whether the matters
giving rise to the Damages were disclosed in the Insight Disclosure
Schedule or otherwise known to New Image prior to the date of the
Agreement or thereafter.
2. Tax Matters:
- SALES TAXES. This matter relates to liabilities arising out of failures
to meet sales tax reporting, collection, and payment obligations,
including interest and penalties thereon, if any, to the extent such
obligations in all jurisdictions for sales through the Closing Date
exceed $830,000. All Damages in excess of $830,000 arising out of such
failures shall, subject to the $400,000 threshold, be included in
Damages against which New Image is indemnified under this Guaranty
without regard to whether the matters giving rise to the Damages were
disclosed in the Insight Disclosure Schedule or otherwise known to
New Image prior to the date of the Agreement or thereafter.
- PAYROLL TAXES. This matter relates to liabilities arising out of
failures to meet federal and state payroll tax reporting, collection,
and payment obligations in all jurisdictions for payrolls through the
Closing Date to the extent such liabilities exceed $614,000. All
Damages in excess of $614,000 arising out of such failures shall,
subject to the
5
$400,000 threshold, be included in Damages against which New Image is
indemnified under this Guaranty without regard to whether the matters
giving rise to the Damages were disclosed in the Insight Disclosure
Schedule or otherwise known to New Image prior to the date of the
Agreement or thereafter.
- PAYROLL TAX LIABILITIES - INTEREST AND PENALTIES. This matter relates
to penalties and interest on federal and state payroll tax reporting,
collection, and payment obligations in all jurisdictions for payrolls
through the Closing Date to the extent such penalties and interest
exceed $265,000. All Damages in excess of $265,000 related to such
penalties and interest shall, subject to the $400,000 threshold, be
included in Damages against which New Image is indemnified under this
Guaranty without regard to whether the matters giving rise to the
Damages were disclosed in the Insight Disclosure Schedule or otherwise
known to New Image prior to the date of the Agreement or thereafter.
- CRIMINAL LIABILITIES RELATING TO TAX MATTERS. This matter relates to
criminal charges with respect to Tax Matters. Guarantor shall be
liable for all Damages without regard to the $400,000 threshold or the
amount of other Claims, if any, which may arise out of the Agreement,
whether the matters giving rise to the Damages were disclosed in the
Insight Disclosure Schedule or otherwise known to New Image prior to
the date of the Agreement or thereafter.
STATEMENT OF WILLIAM S. STEVENS ATTACHED
6
REPRESENTATIONS OF WILLIAM W. STEVENS
IN RE EXHIBIT "A" TO INSIGHT SHAREHOLDER GUARANTY
AS IT PERTAINS TO LITIGATION MATTERS
INVOLVING HIGH TECH MEDICAL INSTRUMENTS, INC. ("HTMI")
------------------------------------------------------
William W. Stevens ("Williams") hereby represents that he agreed
personally to pay up to $100,000 of HTMI's legal costs in connection with the
litigation between HTMI and Fuji (the "HTMI/Fuji Litigation"). Stevens paid
these costs out of his personal funds. Such payments and the agreement
between Stevens and HTMI were Stevens' personal acts and did not involve
Insight Imaging Systems, Inc. ("Insight").
Stevens represents that he knows of no action or inaction of his which
he believes could constitute fraud in regard to any of his dealings with HTMI
or its representatives with regard to the HTMI/Fuji Litigation.
Stevens represents that he did not wrongfully cause HTMI to experience
economic duress or other economic hardship as a result of any of Stevens'
actions or inactions with respect to the payment of legal fees and costs with
respect to the HTMI/Fuji Litigation.
Stevens represents that he did not withhold any money to be paid to
HTMI's counsel in order to obtain any favorable treatment from HTMI including
receiving a favorable license agreement for Insight with respect to certain
patents owned by HTMI.
Stevens represents that he was not directly involved with the request
of HTMI that Insight turn over to HTMI a "patent defensibility opinion" and
to the best of his knowledge that belief there never was an improper refusal
by Insight to turn over such "patent defensibility opinion."
Stevens represents that he did not directly take part in any license
negotiations between HTMI and Insight.
Stevens represents that to the best of his knowledge, no employees,
agents, or representatives of Insight improperly used any knowledge that
Stevens had agreed to pay any of HTMI's legal costs in connection with the
HTMI/Fuji Litigation in their negotiations with HTMI concerning a patent
license agreement.
Stevens represents that prior to January 22, 1993, he had not received
any correspondence or documents regarding payment or legal costs in
connection with the HTMI/Fuji Litigation.
Stevens represents that he received an invoice dated January 22, 1993
for HTMI's counsel for approximately $3,000 but did not receive any other
invoices in regard to the HTMI/Fuji Litigation until June, 1993.
Stevens represents that on July 20, 1993 he sent a check to HTMI's
attorneys, Banchero & Lasater, for $31,879.64 which paid all costs presented
to Stevens as of that date with regard to the HTMI/Fuji Litigation.
Stevens represents that on December 1, 1993 he paid $54,606.61 to
Banchero & Lasater, which represented all costs that Stevens was aware of
that had accrued and were outstanding at that date with regard to the
HTMI/Fuji Litigation that he owed.
Stevens represents that prior to June, 1995 he was never contacted by
anyone at HTMI (including Miles C. Milbank) or Banchero & Lasater alleging
that any purportedly delay in his payment of costs in connection with the
HTMI/Fuji Litigation had improperly given Insight leverage over HTMI in their
negotiations with respect to a patent license.
EXHIBIT 7.8
ESTOPPEL STATEMENT
TO: Insight Imaging Systems, Inc. ("Insight"), a California corporation
New Image Industries, Inc. ("New Image'), a Delaware corporation
Wisdom Acquisition Corp. ("Sub"), a California corporation
I, the undersigned, am a director and/or officer and/or 10% or greater
shareholder of Insight. In connection with its acquisition by New Image and
merger with Sub, a wholly-owned subsidiary of New Image, I represent and warrant
to Insight, New Image and Sub, knowing and intending that they rely upon such
representation and warranty and knowing and intending that I will be estopped
from raising any dispute or claim which I do not now mention, that I do not now
have any dispute with or claim against Insight, do not know of any facts which
could or will give rise to any dispute with or claim against Insight, and claim
no personal ownership interest in any real or personal property of Insight,
including without limitation, any personal ownership interest in any technology
or proprietary information used by Insight.
Date: May ___, 1996
Signed: ________________________
Print Name: _______________________