EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PHONETIC SYSTEMS, LTD.
PHONETICS ACQUISITION LTD.
SCANSOFT, INC.
AND
MAGNUM COMMUNICATIONS FUND L.P., AS SHAREHOLDER REPRESENTATIVE
DATED AS OF NOVEMBER 15, 2004
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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ARTICLE I THE MERGER..................................................................................................2
1.1 THE MERGER..........................................................................................2
1.2 EFFECTIVE TIME......................................................................................2
1.3 EFFECT OF THE MERGER................................................................................2
1.4 MEMORANDUM OF ASSOCIATION; ARTICLES OF ASSOCIATION..................................................2
1.5 DIRECTORS AND OFFICERS..............................................................................3
1.6 EFFECT OF MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS...............................3
1.7 INTENTIONALLY OMITTED..............................................................................14
1.8 SURRENDER OF COMPANY SHARES........................................................................14
1.9 NO FURTHER OWNERSHIP RIGHTS IN COMPANY SHARES......................................................15
1.10 LOST, STOLEN OR DESTROYED COMPANY SHARES...........................................................16
1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION.........................................................16
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................................................16
2.1 ORGANIZATION OF THE COMPANY........................................................................16
2.2 COMPANY CAPITAL STRUCTURE..........................................................................17
2.3 SUBSIDIARIES.......................................................................................19
2.4 AUTHORITY..........................................................................................19
2.5 NO CONFLICT; CONSENTS..............................................................................20
2.6 COMPANY FINANCIAL STATEMENTS.......................................................................21
2.7 NO UNDISCLOSED LIABILITIES.........................................................................21
2.8 NO CHANGES.........................................................................................21
2.9 TAX MATTERS........................................................................................24
2.10 RESTRICTIONS ON BUSINESS ACTIVITIES................................................................27
2.11 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF EQUIPMENT.....................27
2.12 INTELLECTUAL PROPERTY..............................................................................28
2.13 AGREEMENTS, CONTRACTS AND COMMITMENTS..............................................................32
2.14 INTERESTED PARTY TRANSACTIONS......................................................................33
2.15 GOVERNMENTAL AUTHORIZATION.........................................................................33
2.16 LITIGATION.........................................................................................34
2.17 MINUTE BOOKS.......................................................................................34
2.18 ENVIRONMENTAL MATTERS..............................................................................34
2.19 BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES...................................................34
2.20 EMPLOYEE BENEFIT PLANS AND COMPENSATION............................................................34
2.21 INSURANCE..........................................................................................40
2.22 COMPLIANCE WITH LAWS...............................................................................41
2.23 WARRANTIES; INDEMNITIES............................................................................41
2.24 COMPLETE COPIES OF MATERIALS.......................................................................41
2.25 INAPPLICABILITY OF CERTAIN STATUTES................................................................41
</Table>
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TABLE OF CONTENTS
(CONTINUED)
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2.26 GRANTS, INCENTIVES AND SUBSIDIES...................................................................41
2.27 ENCRYPTION AND OTHER RESTRICTED TECHNOLOGY.........................................................42
2.28 INFORMATION STATEMENTS.............................................................................42
2.29 REPRESENTATIONS COMPLETE...........................................................................42
ARTICLE III INTENTIONALLY OMITTED....................................................................................42
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB..........................................................42
4.1 ORGANIZATION, STANDING AND POWER...................................................................42
4.2 AUTHORITY..........................................................................................43
4.3 CONSENTS...........................................................................................43
4.4 CAPITAL RESOURCES..................................................................................43
4.5 BROKER'S AND FINDERS' FEES.........................................................................44
4.6 NO CONFLICTS.......................................................................................44
4.7 SEC REPORTS; FINANCIAL STATEMENTS..................................................................44
4.8 INTERIM OPERATIONS OF SUB..........................................................................45
4.9 SUB BOARD APPROVAL.................................................................................45
4.10 LITIGATION.........................................................................................45
ARTICLE V CONDUCT PRIOR TO THE EFFECTIVE TIME........................................................................45
5.1 CONDUCT OF BUSINESS OF THE COMPANY.................................................................45
5.2 PROCEDURES FOR REQUESTING PARENT CONSENT...........................................................48
ARTICLE VI ADDITIONAL AGREEMENTS.....................................................................................49
6.1 MERGER PROPOSAL....................................................................................49
6.2 COMPANY GENERAL MEETING............................................................................50
6.3 MERGER SUB GENERAL MEETING.........................................................................51
6.4 ISRAELI APPROVALS..................................................................................51
6.5 ACCESS TO INFORMATION..............................................................................53
6.6 CONFIDENTIALITY....................................................................................53
6.7 EXPENSES...........................................................................................53
6.8 PUBLIC DISCLOSURE..................................................................................53
6.9 CONSENTS...........................................................................................54
6.10 REASONABLE EFFORTS; REGULATORY FILINGS.............................................................54
6.11 NOTIFICATION OF CERTAIN MATTERS....................................................................55
6.12 ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES........................................................55
6.13 NO SOLICITATION....................................................................................55
6.14 NEW EMPLOYMENT ARRANGEMENTS........................................................................56
6.15 TERMINATION OF BENEFIT PLANS.......................................................................56
6.16 SHAREHOLDER QUESTIONNAIRE; INFORMATION STATEMENT...................................................57
6.17 FINANCIALS.........................................................................................57
</Table>
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TABLE OF CONTENTS
(CONTINUED)
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6.18 OBSERVER RIGHTS....................................................................................58
ARTICLE VII CONDITIONS TO THE MERGER.................................................................................58
7.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER.......................................58
7.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB....................................................59
7.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY...........................................................60
ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES..............................................................61
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.........................................................61
8.2 INDEMNIFICATION....................................................................................62
8.3 INDEMNIFICATION CLAIMS.............................................................................62
8.4 SHAREHOLDER REPRESENTATIVE.........................................................................64
8.5 MAXIMUM PAYMENTS; REMEDY...........................................................................65
ARTICLE IX EARNOUT...................................................................................................66
9.1 EARNOUT ARRANGEMENTS...............................................................................66
9.2 EARNOUT TARGETS; DEFINITIONS.......................................................................67
9.3 ACHIEVEMENT OF MILESTONES..........................................................................69
9.4 FAILURE TO ACHIEVE MILESTONES......................................................................71
9.5 CALCULATION OF EARNOUT DISTRIBUTIONS; SHAREHOLDER REPRESENTATIVE OBJECTIONS........................71
9.6 RIGHT TO SET OFF...................................................................................72
ARTICLE X INTENTIONALLY OMITTED......................................................................................73
ARTICLE XI TERMINATION, AMENDMENT AND WAIVER.........................................................................73
11.1 TERMINATION........................................................................................73
11.2 EFFECT OF TERMINATION..............................................................................74
11.3 AMENDMENT..........................................................................................74
11.4 EXTENSION; WAIVER..................................................................................74
ARTICLE XII GENERAL PROVISIONS.......................................................................................74
12.1 NOTICES............................................................................................74
12.2 INTERPRETATION.....................................................................................75
12.3 COUNTERPARTS.......................................................................................75
12.4 ENTIRE AGREEMENT; ASSIGNMENT.......................................................................76
12.5 SEVERABILITY.......................................................................................76
12.6 OTHER REMEDIES.....................................................................................76
12.7 GOVERNING LAW......................................................................................76
12.8 RULES OF CONSTRUCTION..............................................................................76
12.9 WAIVER OF JURY TRIAL...............................................................................76
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INDEX OF EXHIBITS
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<Caption>
EXHIBIT DESCRIPTION
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Exhibit A-1 Shareholders Executing Voting Agreements
Exhibit A-2 Form of Voting Agreement
Exhibit B Form of Proprietary Information, Confidentiality and Assignment Agreement
Exhibit C Form of Merger Proposal
Exhibit D Earnout Warrants
</Table>
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THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is made and entered
into as of November 15, 2004 by and among ScanSoft, Inc., a Delaware corporation
("PARENT"), Phonetics Acquisition Ltd., an Israeli corporation and a
wholly-owned subsidiary of Parent ("SUB"), Phonetic Systems Ltd., an Israeli
corporation (the "COMPANY"), and Magnum Communications Fund L.P. (the
"SHAREHOLDER REPRESENTATIVE").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in SECTION 1.2 below) and in accordance with the Israeli Companies
Law-5759-1999 (the "ISRAELI COMPANIES LAW"), Parent, Sub and the Company intend
to effect the merger of Sub with and into the Company, pursuant to which Sub
will cease to exist and the Company will become a wholly-owned subsidiary of
Parent.
B. The Board of Directors of each of Parent and Sub (i) has approved
this Agreement, the Merger (as defined in SECTION 1.1) and the other
transactions contemplated by this Agreement, and the Board of Directors of Sub
has determined that considering the financial position of the merging companies,
no reasonable concern exists that the Surviving Corporation (as defined in
SECTION 1.1) will be unable to fulfill the obligations of Sub to its creditors,
and (ii) the Board of Directors of Sub has determined to recommend that the
shareholders of Sub vote to approve this Agreement, the Merger and the other
transactions contemplated by this Agreement.
C. The Board of Directors of Company has unanimously (i) determined
that this Agreement, the Merger and the other transactions contemplated by this
Agreement are fair to, and in the best interests of, the Company and its
shareholders, and that, considering the financial position of the merging
companies, no reasonable concern exists that the Surviving Corporation will be
unable to fulfill the obligations of the Company to its creditors; (ii) approved
this Agreement, the Merger and the other transactions contemplated by this
Agreement; and (iii) determined to recommend that the shareholders of the
Company approve this Agreement, the Merger and the other transactions
contemplated by this Agreement.
D. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, all of the issued and outstanding capital
shares of the Company shall be converted into the right to receive the
consideration set forth herein.
E. The Company, on the one hand, and Parent and Sub, on the other hand,
desire to make certain representations, warranties, covenants and other
agreements in connection with the Merger.
F. Concurrent with the execution and delivery of this Agreement, as a
material inducement to Parent and Sub to enter into this Agreement, certain
Shareholders of the Company listed on EXHIBIT A-1 are entering into Voting
Agreements, in substantially the form attached hereto as EXHIBIT A-2 (the
"VOTING AGREEMENTS"), with Parent, pursuant to which such Shareholders have
irrevocably agreed to vote in favor of the Merger and the transactions
contemplated thereby and to other matters set forth therein.
NOW, THEREFORE, in consideration of the mutual agreements, covenants
and other promises set forth herein, the mutual benefits to be gained by the
performance thereof, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged and accepted, the parties
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in SECTION 1.2
hereof) and subject to and upon the terms and conditions of this Agreement and
the applicable provisions of the Israeli Companies Law, Sub shall be merged with
and into the Company in accordance with Sections 314 through 327 of the Israeli
Companies Law (the "MERGER"), the separate corporate existence of Sub shall
cease, and the Company shall continue as the surviving corporation and as a
wholly-owned subsidiary of Parent, and shall succeed to an assume all of the
rights, properties and obligations of Sub in accordance with the foregoing
sections of the Israeli Companies Law. The surviving corporation after the
Merger is sometimes referred to hereinafter as the "SURVIVING CORPORATION."
1.2 EFFECTIVE TIME. Unless this Agreement is earlier terminated
pursuant to SECTION 11.1 hereof, the closing of the Merger (the "CLOSING") will
take place as promptly as practicable after the execution and delivery hereof by
the parties hereto, and following the later of (i) satisfaction or waiver of the
conditions set forth in ARTICLE VII hereof, and (ii) the 71st day after the
delivery of the Merger Proposal (as defined in SECTION 6.1) to the office of the
Registrar of Companies of the State of Israel (the "COMPANIES REGISTRAR"), at
the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 12
East 49th Street, 30th Floor, New York, New York, unless another time or place
is mutually agreed upon in writing by Parent and the Company. The date upon
which the Closing actually occurs shall be referred to herein as the "CLOSING
DATE." The Merger shall be effective upon the issuance by the Companies
Registrar of a certificate evidencing the completion of the Merger in accordance
with Section 323(5) of the Israeli Companies Law (such time shall be referred to
herein as the "EFFECTIVE TIME").
1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the Israeli
Companies Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, except as otherwise agreed to pursuant to the
terms of this Agreement, all of the property, rights, privileges, powers and
franchises of the Company and Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 MEMORANDUM OF ASSOCIATION; ARTICLES OF ASSOCIATION. At the
Effective Time, the Memorandum of Association and Articles of Association of
Sub, as in effect immediately prior to the Effective Time, shall be the
Memorandum of Association and the Articles of Association of the Surviving
Corporation until thereafter amended as provided by law and such Memorandum of
Association and Articles of Association of the Surviving Corporation; provided,
however, that at the Effective Time the Memorandum of
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Association of the Surviving Corporation shall be amended so that the name of
the Surviving Corporation shall be PHONETIC SYSTEMS LTD.
1.5 DIRECTORS AND OFFICERS.
(a) DIRECTORS OF COMPANY. Unless otherwise determined by
Parent prior to the Effective Time, the directors of Sub immediately prior to
the Effective Time shall be the directors of the Surviving Corporation
immediately after the Effective Time, each to hold the office of a director
until their successors are duly elected and qualified in accordance with the
provisions of the Articles of Association of the Surviving Corporation. The
directors of the Company prior to the Effective Time shall resign from such duty
effective at the Effective Time.
(b) OFFICERS OF COMPANY. Unless otherwise determined by Parent
prior to the Effective Time, the officers of Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation immediately
after the Effective Time, each to hold office in accordance with the provisions
of the Articles of Association of the Surviving Corporation. The officers of the
Company prior to the Effective Time shall resign from such duty effective at the
Effective Time.
1.6 EFFECT OF MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS.
(a) DEFINITIONS. For all purposes of this Agreement, the
following terms shall have the following respective meanings:
(i) "BUSINESS DAY[S]" shall mean each day that is not
a Saturday, Sunday or holiday on which banking institutions located in New York,
New York are authorized or obligated by law or executive order to close.
(ii) "CHANGE IN CONTROL" of Parent shall be deemed to
have occurred after the date hereof upon (i) the acquisition by any individual,
corporation or other entity or group within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (each, a "PERSON") of
beneficial ownership, directly or indirectly, through a purchase, merger or
other transaction or series of related transactions, of shares of capital stock
of Parent entitling such Person to exercise more than 50% of the total voting
power of all shares of capital stock of Parent entitled to vote generally (other
than any such acquisition by Parent), (ii) any consolidation or merger of Parent
into any other Person, any merger of another Person with or into Parent, or any
conveyance, transfer, sale, lease or other disposition of all or substantially
all of the assets of Parent to another Person (other than any transaction
pursuant to which holders of Parent Common Stock immediately prior to such
transaction have the entitlement to exercise, directly or indirectly, more than
50% of the total voting power of all shares of capital stock entitled to vote
generally of the surviving or successor corporation in such transaction), or
(iii) individuals who, as of the Effective Date, are members of the Board of
Directors of Parent (the "INCUMBENT BOARD"), ceasing for any reason to
constitute at least fifty percent (50%) of the Board of Directors of Parent,
provided, however, that if the appointment, election, or nomination for election
by the Incumbent Board or the shareholders of Parent of any new member of the
Parent Board of Directors is approved by a vote of at least fifty
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percent (50%) of the then remaining members of the Incumbent Board, such new
member of the Parent Board of Directors shall be considered as a member of the
Incumbent Board.
(iii) "COMPANY SHARES" shall mean the Ordinary
Shares, the Preferred Shares and any other shares, if any, of the Company, taken
together.
(iv) "COMPANY MATERIAL ADVERSE EFFECT" shall mean any
change, event or effect that impacts the business, assets (whether tangible or
intangible), financial condition, operations or capitalization of the Company,
taken as a whole, which resulted or is reasonably likely to result in Losses (as
defined in ARTICLE VIII) in an amount equal to or in excess of $5,000,000;
provided, however, that any change, event or effect (a) relating to the industry
in which the Company operates as a whole and which does not affect the Company
disproportionately in any material respect, (b) resulting from a change
generally affecting the United States or world economy or capital markets and
which does not affect the Company disproportionately in any material respect, or
(c) stockholder class action litigation brought by a stockholder or stockholders
of Parent arising from allegations of a breach of fiduciary duty by Parent's
board of directors relating to this Agreement, shall not be deemed to constitute
a Company Material Adverse Effect.
(v) "COMPANY OPTIONS" shall mean all issued and
outstanding options (including commitments to grant options, but excluding
Company Warrants) to purchase or otherwise acquire Company Shares (whether or
not vested) held by any person or entity, each of whom are listed on SECTION
2.2(b) of the Disclosure Schedule.
(vi) "COMPANY PREFERRED SHAREHOLDER" shall mean a
holder of Preferred Shares, each of whom are listed on SECTION 2.2(a) of the
Disclosure Schedule.
(vii) "COMPANY WARRANTS" shall mean all issued and
outstanding warrants or other rights (including commitments to grant warrants or
other rights, but excluding Company Options) to purchase or otherwise acquire
Company Shares (whether or not vested) held by any person or entity, each of
whom are listed on SECTION 2.2(a) of the Disclosure Schedule.
(viii) "COMPONENT ONE CONSIDERATION" shall mean
$17,500,000, plus any Exercise Proceeds, less any Excess Third Party Expenses.
(ix) "COMPONENT TWO CONSIDERATION" shall mean
$17,500,000, less any remaining Excess Third Party Expenses not deducted from
the Component One Consideration; provided, however, that in the event the
Component Two Consideration is not deposited with the Exchange Agent as provided
in SECTION 1.6(b)(II) within forty five (45) days of the Anniversary Date, an
additional $1,000,000 shall be added to the Component Two Consideration, and any
Component Two Consideration amounts that are late and are then due and owing
shall accrue penalty interest at the rate of ten percent (10%) per annum from
the Anniversary Date until paid; and provided further, that in the event the
Component Two Consideration is not deposited with the Exchange Agent as provided
in SECTION 1.6(b)(ii) within one hundred eighty days (180) days of the
Anniversary Date, a further additional $1,000,000 shall be added to the
Component Two
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Consideration, in addition to said interest which will continue to accrue until
the Component Two Consideration is paid.
(x) "EARNOUT WARRANTS" shall mean warrants in the
form of Exhibit D to be issued to the Shareholder Representative on the date
hereof as nominee for the Company Shareholders and deposited into escrow.
(xi) "EXCESS THIRD PARTY EXPENSES" shall have the
meaning set forth in SECTION 6.7.
(xii) "EXEMPT PERSON" shall mean any person or entity
that, in connection with the issuance of securities, does not count towards the
maximum number of holders or purchasers which if exceeded would require the
publication of a prospectus pursuant to Israeli securities laws.
(xiii) "EXERCISE PROCEEDS" shall mean the cash
proceeds received by the Company at or prior to the Effective Time (but after
the date of this Agreement) in consideration for the exercise of any Company
Options or Company Warrants, which exercises and proceeds received shall be set
forth on a schedule delivered to Parent two (2) Business Days prior to the
Effective Time and shall be updated immediately prior to the Effective Time.
(xiv) "GAAP" shall mean United States generally
accepted accounting principles consistently applied.
(xv) "KNOWLEDGE" or "KNOWN" shall mean, with respect
to the Company, the knowledge of the Company's executive officers, directors and
the five key managers set forth on SCHEDULE 1.6(a)(xv); provided, however, that
such persons shall have made due and diligent inquiry of those employees of the
Company whom such persons reasonably believe would have actual knowledge of the
matters represented.
(xvi) "KNOWLEDGE" or "KNOWN" shall mean, with respect
to Parent, the knowledge of Parent's executive officers, directors and the five
key managers set forth on SCHEDULE 1.6(a)(xv); provided, however, that such
persons shall have made due and diligent inquiry of those employees of Parent
whom such persons reasonably believe would have actual knowledge of the matters
represented.
(xvii) "LIQUIDATION PREFERENCE" shall mean the
applicable liquidation preference per share for each series of Preferred Shares,
respectively.
(xviii) "LIQUIDATION PREFERENCE CAP" shall mean, with
respect to any Preferred Share, an amount equal to two (2) times the Liquidation
Preference applicable to such Preferred Share.
(xix) "LIQUIDATION PREFERENCE CAP TERMINATION AMOUNT"
shall mean, with respect to any Preferred Share, an amount of aggregate
consideration distributed under this
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Agreement which, if distributed to all shareholders of the Company in a
distribution in which all Preferred Shares had been converted into Ordinary
Shares at the Effective Time, would result in the holder of such Preferred Share
receiving an amount equal to his Liquidation Preference Cap.
(xx) "LIEN" shall mean any lien, pledge, charge,
claim, mortgage, security interest or other encumbrance of any sort.
(xxi) "ORDINARY SHARES" shall mean the Company's
Ordinary Shares, NIS 0.01 par value per share.
(xxii) "PARENT COMMON STOCK" shall mean the Common
Stock of Parent, par value $0.001 per share.
(xxiii) "PLANS" shall mean the Phonetic Systems Ltd.
1999 Stock Option and Restricted Stock Incentive Plan for U.S. Employees, the
Phonetic Systems Ltd. 1999 Stock Option and Restricted Stock Incentive Plan for
Israeli Employees, and the Phonetic Systems Ltd. 2003 Stock Option and
Restricted Stock Incentive Plan for Israeli Employees.
(xxiv) "PREFERRED SHARES" shall mean the Series A
Preferred Shares, the Series B Preferred Shares, the Series C Preferred Shares,
the Series D Preferred Shares and the Series E Preferred Shares, taken together.
(xxv) "REIMBURSED EXPENSES" shall have the meaning
set forth in SECTION 6.7.
(xxvi) "RELATED AGREEMENTS" shall mean the Voting
Agreements.
(xxvii) "SEC" shall mean the United States Securities
and Exchange Commission.
(xxviii) "SERIES A LIQUIDATION PREFERENCE PER SHARE"
shall mean (1) $4.00 with respect to the Series A Preferred Shares issued
pursuant to (A) that certain Share Purchase Agreement of the Company, dated
August 28, 1995, as amended (the "1995 SPA") and (B) the "First Option" as such
term is defined in the Second Amendment to the 1995 SPA, dated November 12, 1995
(the "AMENDED 1995 SPA"); (2) $6.00 with respect to the Series A Preferred
Shares issued pursuant to the "Second Option" as such term is defined in the
Amended 1995 SPA; (3) $6.96 with respect to the Series A Preferred Shares issued
pursuant to that certain Share Purchase Agreement of the Company, dated January
29, 1998; and (4) $5.57 with respect to the Series A Preferred Shares issued
upon conversion of those certain Convertible Debentures of the Company issued on
November 11, 1998 and February 17, 1999, or such other amount or amounts as may
be provided in the Company's Articles of Association in effect immediately prior
to the Closing.
(xxix) "SERIES A PREFERRED SHARES" shall mean the
Company's Series A Preferred Shares, NIS 0.01 par value per share.
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(xxx) "SERIES B AGGREGATE LIQUIDATION PREFERENCE"
shall mean the amount equal to the Total Series B Preferred Shares Outstanding
multiplied by the Series B Liquidation Preference Per Share.
(xxxi) "SERIES B LIQUIDATION PREFERENCE PER SHARE"
shall mean $8.00, or such other amount as may be provided in the Company's
Articles of Association in effect immediately prior to the Closing.
(xxxii) "SERIES B PREFERRED SHARES" shall mean,
except where expressly set forth otherwise, the Company's Series B Preferred
Shares, NIS 0.01 par value per share, the Company's Series B-1 Preferred Shares,
NIS 0.01 par value per share, the Company's Series BB Preferred Shares, NIS 0.01
par value per share, and the Company's Series BB-1 Preferred Shares, NIS 0.01
par value per share.
(xxxiii) "SERIES C AGGREGATE LIQUIDATION PREFERENCE"
shall mean the amount equal to the Total Series C Preferred Shares Outstanding
multiplied by the Series C Liquidation Preference Per Share.
(xxxiv) "SERIES C LIQUIDATION PREFERENCE PER SHARE"
shall mean $16.20, or such other amount as may be provided in the Company's
Articles of Association in effect immediately prior to the Closing.
(xxxv) "SERIES C PREFERRED SHARES" shall mean the
Company's Series C Preferred Shares, NIS 0.01 par value per share.
(xxxvi) "SERIES D AGGREGATE LIQUIDATION PREFERENCE"
shall mean the amount equal to the Total Series D Preferred Shares Outstanding
multiplied by the Series D Liquidation Preference Per Share.
(xxxvii) "SERIES D LIQUIDATION PREFERENCE PER SHARE"
shall mean $19.38, or such other amount as may be provided in the Company's
Articles of Association in effect immediately prior to the Closing.
(xxxviii) "SERIES D PREFERRED SHARES" shall mean the
Company's Series D Preferred Shares, NIS 0.01 par value per share.
(xxxix) "SERIES E AGGREGATE LIQUIDATION PREFERENCE"
shall mean the amount equal to the Total Series E Preferred Shares Outstanding
multiplied by the Series E Liquidation Preference Per Share.
(xl) "SERIES E LIQUIDATION PREFERENCE PER SHARE"
shall mean $21.07, or such other amount as may be provided in the Company's
Articles of Association in effect immediately prior to the Closing.
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(xli) "SERIES E PREFERRED SHARES" shall mean the
Company's Series E Preferred Shares, NIS 0.01 par value per share.
(xlii) "STATEMENT OF EXPENSES" shall have the meaning
set forth in SECTION 6.7.
(xliii) "THIRD PARTY EXPENSES" shall have the meaning
set forth in SECTION 6.7.
(xliv) "TOTAL ORDINARY SHARES OUTSTANDING" shall mean
the aggregate number of shares of Ordinary Shares issued and outstanding
immediately prior to the Effective Time.
(xlv) "TOTAL SERIES A PREFERRED SHARES OUTSTANDING"
shall mean the aggregate number of Series A Preferred Shares issued and
outstanding immediately prior to the Effective Time.
(xlvi) "TOTAL SERIES B PREFERRED SHARES OUTSTANDING"
shall mean the aggregate number of Series B Preferred Shares issued and
outstanding immediately prior to the Effective Time.
(xlvii) "TOTAL SERIES C PREFERRED SHARES OUTSTANDING"
shall mean the aggregate number of Series C Preferred Shares issued and
outstanding immediately prior to the Effective Time.
(xlviii) "TOTAL SERIES D PREFERRED SHARES
OUTSTANDING" shall mean the aggregate number of Series D Preferred Shares issued
and outstanding immediately prior to the Effective Time.
(xlix) "TOTAL SERIES E PREFERRED SHARES OUTSTANDING"
shall mean the aggregate number of Series E Preferred Shares issued and
outstanding immediately prior to the Effective Time.
(l) "TOTAL OUTSTANDING SHARES" shall mean the Total
Ordinary Shares Outstanding, Total Series A Preferred Shares Outstanding, Total
Series B Preferred Shares Outstanding, Total Series C Preferred Shares
Outstanding, Total Series D Preferred Shares Outstanding, and Total Series E
Preferred Shares Outstanding.
(b) EFFECT ON CAPITAL STOCK. By virtue of the Merger and
without any action on the part of Sub, the Company or the holders of the Company
Shares, each Company Share (excluding, for the avoidance of doubt, unexercised
Company Options and Company Warrants) issued and outstanding immediately prior
to the Effective Time, upon the terms and subject to the conditions set forth in
this SECTION 1.6 and throughout this Agreement, will be cancelled and
extinguished and be converted automatically into the right to receive, in the
manner provided in SECTION 1.8 hereof, the Component One Consideration, the
Component Two Consideration and the
-8-
Earnout Consideration (collectively, the "AGGREGATE MERGER CONSIDERATION") as
follows in this SECTION 1.6(b) and SECTION 1.6(b)(ii)(4):
(i) Component One Consideration. The Component One
Consideration shall be deposited at the Effective Time with the Exchange Agent,
in cash, and payable to the shareholders of the Company as follows and in
accordance with SECTION 1.8:
(1) First, holders of:
a) Series D Preferred Shares shall receive,
with respect to each such Series D Preferred Share, the lesser of (i) the Series
D Liquidation Preference Per Share, and (ii) (A) (x) the Component One
Consideration, multiplied by (y) the Series D Aggregate Liquidation Preference,
divided by the Series D Aggregate Liquidation Preference plus the Series E
Aggregate Liquidation Preference, divided by (B) the Total Series D Preferred
Shares Outstanding; and
b) Series E Preferred Shares shall receive,
with respect to each such Series E Preferred Share, the lesser of (i) the Series
E Liquidation Preference Per Share, and (ii) (A) (x) the Component One
Consideration, multiplied by (y) the Series E Aggregate Liquidation Preference,
divided by the Series D Aggregate Liquidation Preference plus the Series E
Aggregate Liquidation Preference, divided by (B) the Total Series E Preferred
Shares Outstanding.
(2) Second, if any Component One Consideration
remains after application of subparagraph (1) above (such remaining amount, the
"SECOND LEVEL COMPONENT ONE DISTRIBUTION"), holders of:
a) Series B Preferred Shares shall receive,
with respect to each such Series B Preferred Share, the lesser of (but in no
event less than $0) (i) the Series B Liquidation Preference Per Share, and (ii)
(A) (x) the Second Level Component One Distribution, multiplied by (y) the
Series B Aggregate Liquidation Preference, divided by the Series B Aggregate
Liquidation Preference plus the Series C Aggregate Liquidation Preference,
divided by (B) the Total Series B Preferred Shares Outstanding; and
b) Series C Preferred Shares shall receive,
with respect to each such Series C Preferred Share, the lesser of (but in no
event less than $0) (i) the Series C Liquidation Preference Per Share, and (ii)
(A) (x) the Second Level Component One Distribution, multiplied by (y) the
Series C Aggregate Liquidation Preference, divided by the Series B Aggregate
Liquidation Preference plus the Series C Aggregate Liquidation Preference,
divided by (B) the Total Series C Preferred Shares Outstanding.
(3) Third, if any Component One Consideration remains
after application of subparagraphs (1) and (2) above (such remaining amount, the
"THIRD LEVEL COMPONENT ONE DISTRIBUTION"), holders of Series A Preferred Shares
shall receive, with respect to each such Series A Preferred Share, the lesser of
(but in no event less than $0) (i) the Series A Liquidation Preference Per Share
applicable to each such share, and (ii) (A) (x) the Third Level
-9-
Component One Distribution, multiplied by (y) the aggregate Series A Liquidation
Preference Per Share of all Series A Preferred Shares with the same Series A
Liquidation Preference Per Share as each such share, divided by the aggregate
Series A Liquidation Preference Per Share for all Series A Preferred Shares,
divided by (B) the Series A Preferred Shares outstanding with the same Series A
Liquidation Preference Per Share as each such share.
(4) Fourth, if any Component One Consideration
remains after application of subparagraphs (1), (2) and (3) above, such
remaining amount shall be distributed pro rata on an as converted to Ordinary
Shares basis to holders of Ordinary Shares and Preferred Shares; provided,
however, that upon a holder of a Preferred Share receiving, in the aggregate,
its Liquidation Preference Cap under this Agreement, such holder shall not be
entitled to further consideration under this Agreement with respect to such
Preferred Share until the aggregate amount of consideration distributed under
this Agreement is equal to the Liquidation Preference Cap Termination Amount for
such holder; provided, further, however, that the foregoing proviso shall not
apply to a holder of Preferred Shares with respect to whom the Liquidation
Preference Cap Termination Amount is lower than the amount of consideration
which results in such holder receiving its Liquidation Preference Cap hereunder.
(ii) Component Two Consideration. The Component Two
Consideration shall be deposited on the second anniversary of the Closing Date
(the "ANNIVERSARY DATE") with the Exchange Agent, in cash, and payable to the
shareholders of the Company as follows and in accordance with SECTION 1.8;
provided, however, that in the event of a Change in Control of Parent prior to
the Anniversary Date, all payments of Component Two Consideration shall be
deposited with the Exchange Agent immediately prior to such Change in Control,
and shall be payable to the shareholders of the Company as follows and in
accordance with SECTION 1.8. The right to receive Component Two Consideration
shall be non-transferable to the same extent as the rights to the Earnout
Amounts as set forth in SECTION 9.5(d).
(1) Except pursuant to subparagraph (4) below,
holders of the Series D Preferred Shares and Series E Preferred Shares shall not
be entitled to any Component 2 Consideration.
(2) First, holders of:
a) Series B Preferred Shares. If holders of
Series B Preferred Shares received, with respect to each such Series B Preferred
Share, an amount at least equal to the Series B Liquidation Preference Per Share
pursuant to this Agreement, then, except pursuant to subparagraph (4) below,
holders of the Series B Preferred Shares shall not be entitled to any Component
Two Consideration. If holders of Series B Preferred Shares did not receive
pursuant to this Agreement, with respect to each such Series B Preferred Share,
an amount at least equal to the Series B Liquidation Preference Per Share, then
each holder of Series B Preferred Shares shall receive, with respect to each
such Series B Preferred Share, the lesser of (but in no event less than $0) (i)
the amount by which the amounts received pursuant to this Agreement were less
than the Series B Liquidation Preference Per Share, and (ii) (A) (x) the
Component Two Consideration, multiplied by (y) the Series B Aggregate
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Liquidation Preference, divided by the Series B Aggregate Liquidation Preference
plus the Series C Aggregate Liquidation Preference, divided by (B) the Total
Series B Preferred Shares Outstanding; and
b) Series C Preferred Shares. If holders of
Series C Preferred Shares received, with respect to each such Series C Preferred
Share, an amount at least equal to the Series C Liquidation Preference Per Share
pursuant to this Agreement, then, except pursuant to subparagraph (4) below,
holders of the Series C Preferred Shares shall not be entitled to any Component
Two Consideration. If holders of Series C Preferred Shares did not receive
pursuant to this Agreement, with respect to each such Series C Preferred Share,
an amount at least equal to the Series C Liquidation Preference Per Share, then
each holder of Series C Preferred Shares shall receive, with respect to each
such Series C Preferred Share, the lesser of (but in no event less than $0) (i)
the amount by which the amounts received pursuant to this Agreement were less
than the Series C Liquidation Preference Per Share, and (ii) (A) (x) the
Component Two Consideration, multiplied by (y) the Series C Aggregate
Liquidation Preference, divided by the Series B Aggregate Liquidation Preference
plus the Series C Aggregate Liquidation Preference, divided by (B) the Total
Series C Preferred Shares Outstanding.
(3) Second, after application of subparagraph (2)
above, any remaining Component Two Consideration (such remaining amount, the
"SECOND LEVEL COMPONENT TWO DISTRIBUTION") shall be distributed as follows: If
holders of Series A Preferred Shares received, with respect to each such Series
A Preferred Share, an amount at least equal to the Series A Liquidation
Preference Per Share applicable to each such share pursuant to this Agreement,
then, except pursuant to subparagraph (4) below, holders of the Series A
Preferred Shares shall not be entitled to any Component Two Consideration. If
holders of Series A Preferred Shares did not receive pursuant to this Agreement,
with respect to each such Series A Preferred Share, an amount at least equal to
the Series A Liquidation Preference Per Share applicable to each such share,
then each holder of Series A Preferred Shares shall receive, with respect to
each such Series A Preferred Share, the lesser of (but in no event less than $0)
(i) the amount by which the amounts received for each such share pursuant to
this Agreement were less than the Series A Liquidation Preference Per Share
applicable to such share, and (ii) (A) (x) the Second Level Component Two
Distribution, multiplied by the aggregate Series A Liquidation Preference Per
Share of all Series A Preferred Shares with the same Series A Liquidation
Preference Per Share as such share, divided by the aggregate Series A
Liquidation Preference Per Share for all Series A Preferred Shares, divided by
(B) the Total Series A Preferred Shares Outstanding.
(4) Third, if any Component Two Consideration remains
after application of subparagraphs (2) and (3) above, such remaining amount
shall be distributed pro rata on an as converted to Ordinary Shares basis to
holders of Ordinary Shares and Preferred Shares ; provided, however, that upon a
holder of a Preferred Share receiving, in the aggregate, its Liquidation
Preference Cap under this Agreement, such holder shall not be entitled to
further consideration under this Agreement with respect to such Preferred Share
until the aggregate amount of consideration distributed under this Agreement is
equal to the Liquidation Preference Cap Termination Amount for such holder;
provided, further, however, that the foregoing proviso shall not apply to a
holder of Preferred Shares with respect to whom the Liquidation Preference Cap
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Termination Amount is lower than the amount of consideration which results in
such holder receiving its Liquidation Preference Cap hereunder.
(c) EARNOUT.
(i) The "EARNOUT AMOUNTS" shall mean, respectively,
the amounts set forth in ARTICLE IX with respect to any particular measurement
period. The Earnout Amounts will not be paid initially, but instead will be
earned pursuant to ARTICLE IX herein. Upon such time as any portion of the
Earnout Amount is earned in accordance with ARTICLE IX, Parent shall, within
five (5) days, deposit such amount with the Exchange Agent, and such earned
amount shall thereafter be paid to shareholders of the Company in accordance
with SECTIONS 1.6(b)(ii)(1)-(4).
(ii) On the date hereof, Parent shall issue the
Earnout Warrants to the Shareholder Representative, on behalf of and as nominee
for, the shareholders of the Company. Upon issuance, the Earnout Warrants shall
be deposited into escrow with Wilson Sonsini Goodrich & Rosati, Professional
Corporation ("WSGR"), until compliance with SECTION 6.16 and the Closing have
occurred. At such time, WSGR shall release the Earnout Warrants to the
Shareholder Representative to hold, and to distribute to the shareholders of the
Company upon the achievement of the specified milestones set forth therein. The
Shareholder Representative shall not transfer, distribute or exercise the
Earnout Warrants except as provided therein. Notwithstanding anything to the
contrary herein, in the event that the portion of the Israeli Income Tax Ruling
set forth in SECTION 6.4(b)(i)(b) is not obtained prior to the Closing, the
Earnout Warrants shall terminate as of the Closing and be of no further force
and effect. In accordance with the terms of the Earnout Warrants, in the event
delivery of the Earnout Warrants would require the publishing of a prospectus
pursuant to Israeli securities laws, all persons who are not Exempt Persons
shall, in lieu of receiving its allotted distribution of Earnout Warrants, be
entitled to receive cash in the amount of $1.33 for each share of Parent Common
Stock subject to Earnout Warrants that would have otherwise been distributed to
such person. Parent shall deposit the aggregate amount of such cash with the
Exchange Agent at the time the distribution of Earnout Warrants to such persons
would have occurred, and the Exchange Agent shall distribute such cash in
accordance with SECTION 1.8.
(d) OTHER PROVISIONS CONCERNING PAYMENT OF CONSIDERATION. For
purposes of determining whether the Liquidation Preference, the Liquidation
Preference Cap or the Liquidation Preference Cap Termination Amount of any
series of Preferred Shares has been satisfied from the payment of consideration
pursuant to this Agreement, any Earnout Warrants received by such holders of
Preferred Shares shall be valued at $1.33 per share of Parent Common Stock
subject to such Earnout Warrants. If, prior to the Closing, the Company's
Articles of Association are amended in a way such that the distribution of the
Merger Consideration as contemplated by this SECTION 1.6 and the provisions
regarding such distribution under the Articles of Association, as so amended,
are no longer consistent, the Company and Parent shall in cooperate in good
faith to amend this SECTION 1.6 in order to comply with the Articles of
Association, as so amended; provided, however, that in no event shall Parent be
obligated to pay aggregate consideration pursuant to this Agreement in excess of
the Aggregate Merger Consideration. The Company hereby agrees and acknowledges
that upon delivery of the Merger Consideration by Parent to the Exchange Agent
at the times and in the
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amounts provided by this Agreement, Parent shall have satisfied its obligations
in full with respect to the payment of such consideration.
(e) TREATMENT OF COMPANY OPTIONS AND COMPANY WARRANTS.
(i) Parent shall not assume any Company Options or
Company Warrants. The Company shall cause the termination, effective immediately
prior to the Effective Time, of all outstanding Company Options and Company
Warrants that then remain unexercised so that no Company Options or Company
Warrants remain outstanding immediately prior to the Effective Time. Thereafter,
the holders of Company Options and Company Warrants shall, as of the Effective
Time, cease to have any further right or entitlement to acquire any Company
Shares or any shares of capital stock or other securities of Parent or the
Surviving Corporation under the terminated Company Options or Company Warrants.
(ii) The Company shall cause the termination,
effective immediately prior to the Effective Time, of all Plans.
(iii) The Company shall obtain all consents necessary
to cause the termination of all Company Options and Company Warrants as provided
under subparagraph (i) above. The Company shall take all other actions necessary
or appropriate so that, immediately prior to the Effective Time and as a result
of the Merger, (i) no options, warrants or other rights to acquire any Company
Shares or any securities, debt or other rights convertible into or exchangeable
or exercisable for Company Shares are outstanding, (ii) no person holding
Company Shares, Company Options or Company Warrants shall, on and after the
Closing, have any right, title or interest in or to the Company or the Surviving
Corporation or any securities of the Company or the Surviving Corporation, other
than, in the case of the holders of Company Shares, the right to payments in the
manner described in this Agreement, and (iii) no person holding Company Shares,
Company Options or Company Warrants shall by virtue of any such securities have
any right to acquire any securities of Parent other than in the case of holders
of Company Shares, the right to receive Earnout Warrants if the conditions to
distribution set forth therein shall have been satisfied and such holders
otherwise qualify to receive such Earnout Warrants.
(f) WITHHOLDING TAXES. Notwithstanding any other provision in
this Agreement, Parent, the Company, Sub, and the Exchange Agent (as defined in
SECTION 1.8) shall have the right to deduct and withhold Taxes (as defined in
SECTION 2.9) from any payments to be made hereunder (including with respect to
the Earnout Amount) if such withholding is required by law and to request any
necessary Tax forms, including Form W-9 or the appropriate series of Form W-8,
as applicable, or any similar information, from the shareholders of the Company
and any other recipients of payments hereunder. To the extent that amounts are
so withheld, such withheld amounts shall be treated for all purposes of this
Agreement as having been delivered and paid to the shareholders of the Company
or other recipient of payments in respect of which such deduction and
withholding was made. Without derogating from Parent's representations and
warranties set forth in ARTICLE IV hereof, Parent represents and warrants that
it is not aware of any requirement under any applicable U.S. law to withhold any
Taxes from any payments to be made hereunder.
-13-
(g) SHAREHOLDER LOANS. In the event that any shareholder of
the Company has outstanding loans from the Company as of the Effective Time, the
consideration payable to such shareholder pursuant to this SECTION 1.6 shall be
reduced by the amount of the outstanding principal plus accrued interest of such
shareholder's loans as of the Effective Time. Such loans shall be satisfied as
to the amount by which the consideration is reduced pursuant to this SECTION
1.6(g).
(h) SHARES OF SUB. Each Ordinary Share of Sub issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable Ordinary Share of
the Surviving Corporation. Each certificate of Sub evidencing ownership of any
such shares shall continue to evidence ownership of such shares of the Surviving
Corporation.
1.7 INTENTIONALLY OMITTED.
1.8 SURRENDER OF COMPANY SHARES.
(a) EXCHANGE AGENT. Prior to the Effective Time, the Company
and Parent shall jointly select a bank or trust company to act as the paying and
exchange agent (the "EXCHANGE AGENT") for the Merger to receive the funds to
which the shareholders of the Company are or may be entitled to pursuant to this
Agreement.
(b) PARENT TO PROVIDE CONSIDERATION. Upon the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this ARTICLE I the cash payable at the Effective Time pursuant to SECTION
1.6 hereof in exchange for outstanding Company Shares. Prior to the payment of
any consideration to shareholders of the Company pursuant to this Agreement that
becomes payable after the Effective Time, Parent shall make available to the
Exchange Agent the cash then payable as set forth in this Agreement.
(c) EXCHANGE PROCEDURES. As soon as reasonably practicable
after the Effective Time, Parent shall cause the Exchange Agent to mail to each
holder of record (as of the Effective Time) of Company Shares whose shares were
converted into the right to receive the consideration pursuant to SECTION 1.6,
(i) a letter of transmittal in customary form (which shall specify that delivery
and surrender shall be effected, and risk of loss and title to the Company
Shares shall pass, only upon the surrender of such Company Shares to the
Exchange Agent and shall contain such other provisions as Parent may reasonably
specify), (ii) a declaration form in which the holder of record states whether
the holder is a resident of Israel as defined in the Income Tax Ordinance of
Israel [New Version], 1961, as amended (the "ORDINANCE"), and (iii) instructions
for use in effecting the surrender of the Company Shares in exchange for the
consideration to be paid in the Merger. Upon surrender of the Company Shares for
cancellation to the Exchange Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the surrender
of the Company Shares shall be registered at the Company's register of
shareholders, and the holders of such Company Shares shall be entitled to
receive in exchange therefor the consideration into which their Company Shares
were converted at the Effective Time (rounded to the nearest whole cent after
aggregating all Company Shares held by such holder), at such time as payment
shall be due in
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accordance with SECTION 1.6. Any consideration which becomes payable after the
Effective Time shall be distributed promptly (and in any event within four (4)
Business Days) by the Exchange Agent to each holder of Company Shares who has
surrendered its Company Shares in accordance with the foregoing after deposit by
Parent of such consideration with the Exchange Agent. Until so surrendered,
outstanding Company Shares will be deemed from and after the Effective Time, for
all corporate and other legal purposes, to evidence only the ownership of the
right to receive the consideration in the Merger which such Company Shares shall
be entitled to receive.
(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No
interest shall be payable on any cash deliverable upon the exchange of any
Company Shares for cash.
(e) TRANSFERS OF OWNERSHIP. If any amounts are to be disbursed
pursuant to SECTION 1.6 hereof to a person other than the person or entity whose
name is reflected on the Certificate surrendered in exchange therefor, it will
be a condition of the issuance or delivery thereof that the Certificate so
surrendered will be properly endorsed and otherwise in proper form for transfer
and that the person requesting such exchange will have paid to Parent or any
agent designated by it any transfer or other Taxes required by reason of the
disbursement of cash amounts to a person other than that of the registered
holder of the certificate surrendered, or established to the satisfaction of
Parent or any agent designated by it that such Tax has been paid or is not
payable.
(f) EXCHANGE AGENT TO RETURN CASH CONSIDERATION. At any time
following the last day of the sixth (6th) month following the deposit of any
amounts with the Exchange Agent, Parent shall be entitled to require the
Exchange Agent to deliver to a third party agreeable to the Shareholder
Representative (which approval shall not be unreasonably withheld or delayed)
all such cash amounts that have been deposited with the Exchange Agent pursuant
to SECTION 1.8(b) hereof, and any and all interest thereon or other income or
proceeds thereof, not disbursed to the holders of Company Shares pursuant to
SECTION 1.8(c) hereof, and thereafter the holders of Company Shares shall be
entitled to look only to Parent (subject to the terms of SECTION 1.8(g) hereof)
only as general creditors thereof with respect to any and all amounts that may
be payable to such holders of Company Shares pursuant to SECTION 1.6 hereof upon
the due surrender of such Company Shares in the manner set forth in SECTION
1.8(c) hereof.
(g) NO LIABILITY. Notwithstanding anything to the contrary in
this SECTION 1.8, neither the Exchange Agent, the Surviving Corporation, nor any
party hereto shall be liable to a holder of Company Shares for any amount
properly paid to a public official pursuant to any applicable abandoned
property, escheat or similar law; provided, that it gives the Shareholder
Representative reasonable advance notice of its intent to pay an amount to a
public official hereunder so that the Shareholder Representative may assess
whether to oppose such payment.
1.9 NO FURTHER OWNERSHIP RIGHTS IN COMPANY SHARES. The amounts paid in
respect of the surrender for exchange of Company Shares in accordance with the
terms hereof shall be deemed to be full satisfaction of all rights pertaining to
such Company Shares, and there shall be no further registration of transfers on
the records of the Surviving Corporation of Company Shares
-15-
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Company Shares are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this ARTICLE I.
1.10 LOST, STOLEN OR DESTROYED COMPANY SHARES. In the event any Company
Shares shall have been lost, stolen or destroyed, the Exchange Agent shall issue
in exchange for such lost, stolen or destroyed certificates, upon the making of
an affidavit of that fact by the holder thereof, such amount, if any, as may be
required pursuant to SECTION 1.6 hereof; provided, however, that Parent may, in
its discretion and as a condition precedent to the issuance thereof, require the
shareholder who is the owner of such lost, stolen or destroyed certificates to
either (i) deliver a bond in such amount as it may reasonably direct or (ii)
provide an indemnification agreement in a form and substance acceptable to
Parent, against any claim that may be made against Parent or the Exchange Agent
with respect to the certificates alleged to have been lost, stolen or destroyed.
1.11 TAKING OF NECESSARY ACTION; FURTHER ACTION. If at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company, Parent, Sub, and the officers and directors of
the Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Sub, subject
to such exceptions as are specifically disclosed in the disclosure schedule
(referencing the appropriate section and paragraph numbers) supplied by the
Company to Parent (the "DISCLOSURE SCHEDULE") and dated as of the date hereof,
on the date hereof and as of the Effective Time, as though made at the Effective
Time, as follows (it being agreed and understood that references to the
"Company" in this ARTICLE II shall, unless the context otherwise provides, refer
to the Company and its subsidiaries, and references to any conduct of the
Company's business currently planned by the Company does not include Parent's
conduct of the business after Closing if different from such plans of the
Company):
2.1 ORGANIZATION OF THE COMPANY. Each of the Company and its
subsidiaries is a corporation duly organized, validly existing and, where
applicable, in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority to own its properties
and to carry on its business as currently conducted. Each of the Company and its
subsidiaries is duly qualified or licensed to do business and, where applicable,
in good standing as a foreign corporation in each jurisdiction in which the
failure to be so qualified would be reasonably likely to result in a Company
Material Adverse Effect. The Company has delivered a true and correct copy of
its Memorandum of Association and Articles of Association, (collectively, the
"CHARTER DOCUMENTS") and a complete and correct copy of the equivalent
organizational documents of each of its subsidiaries to Parent, each as amended
to date. Such Charter Documents and equivalent organizational documents of each
of Company's subsidiaries are in full force and effect.
-16-
The Company is not in violation of any of the provisions of the Charter
Documents, and no subsidiary of the Company is in violation of its equivalent
organizational documents. SECTION 2.1 of the Disclosure Schedule lists the
directors and officers of the Company as of the date hereof. The operations now
being conducted by the Company are not now and have never been conducted by the
Company under any other name. SECTION 2.1 of the Disclosure Schedule also lists
every state or foreign jurisdiction in which the Company has employees or
facilities or otherwise carries on business. The Company is not incorporated in
the United States, is not organized under the laws of the United States, and
does not have its principal offices within the United States. The aggregate
total value of all assets located in the United States held by the Company
(including any entities it controls) is less than $50 million. The aggregate
sales in or into the United States made by the Company (including any entities
it controls) was less than $50 million in its most recent fiscal year.
2.2 COMPANY CAPITAL STRUCTURE.
(a) The registered share capital of the Company consists of
7,338,412 Ordinary Shares, NIS 0.01 par value per share, of which 462,235 shares
are issued and outstanding, 4,261,388 Preferred Shares, NIS 0.01 par value per
share, of which 682,000 shares have been designated Series A Preferred Shares,
679,755 of which are issued and outstanding, 1,117,500 shares have been
designated Series B Preferred Shares, 890,781 of which are issued and
outstanding, 71,104 shares have been designated Series B-1 Preferred Shares,
15,469 of which are issued and outstanding, 226,563 shares have been designated
Series BB Preferred Shares, none of which are issued and outstanding, 14,221
shares have been designated Series BB-1 Preferred Shares, none of which are
issued and outstanding, 650,000 shares have been designated Series C Preferred
Shares, 648,149 of which are issued and outstanding, 500,000 shares have been
designated Series D Preferred Shares, 64,897 of which are issued and
outstanding, and 1,000,000 shares have been designated Series E Preferred
Shares, 113,207 of which are issued and outstanding. The Company has no class of
share capital authorized other than Ordinary Shares and Preferred Shares. Except
as set forth in SECTION 2.2(a) of the Disclosure Schedule, no Company Shares
were dormant shares and no shares were held in treasury by the Company or by
subsidiaries of the Company. As of the date hereof, the capitalization of the
Company is as set forth in SECTION 2.2(a) of the Disclosure Schedule. The
Company Shares are held by the persons with the domicile addresses and in the
amounts and of the type set forth in SECTION 2.2(a) of the Disclosure Schedule.
All outstanding Company Shares when issued were duly authorized, validly issued,
fully paid and non-assessable and not subject to preemptive rights created by
statute, the Charter Documents of the Company, or any agreement to which the
Company is or was a party or by which it is or was bound. All outstanding
Company Shares, Company Options, Company Warrants and all outstanding shares of
capital stock of each subsidiary of the Company have been issued or repurchased
(in the case of shares that were outstanding and repurchased by the Company or
any shareholder of the Company) (i) in compliance with all applicable securities
laws and other applicable Legal Requirements (as defined below) and (ii) in
material compliance with all applicable requirements set forth in Contracts (as
defined in SECTION 2.3). For the purposes of this Agreement, "LEGAL
REQUIREMENTS" means any Israeli or U.S. federal or state law, or material local
or municipal law, or foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or
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under the authority of any Governmental Entity (as defined in SECTION 2.5(b)).
The Company has not, and will not have, suffered or incurred any liability
(contingent or otherwise) or claim, loss, damage, deficiency, cost or expense
relating to or arising out of the issuance or repurchase of any Company Shares
or options or warrants to purchase Company Shares, or out of any agreements or
arrangements relating thereto (including any amendment of the terms of any such
agreement or arrangement). There are no declared or accrued but unpaid dividends
with respect to any Company Shares. There are no Company Shares that are
unvested and subject to forfeiture or the Company's right of repurchase.
(b) Except for the Plans, the Company has never adopted,
sponsored or maintained any stock option plan or any other plan or agreement
providing for equity compensation to any person. The Company has reserved
1,324,624 Ordinary Shares for issuance to employees and directors of, and
consultants to, the Company upon the issuance of stock or the exercise of
options granted under the Plans or any other plan, agreement or arrangement
(whether written or oral, formal or informal), of which (i) 928,747 Ordinary
Shares are issuable, as of the date hereof, upon the exercise of outstanding,
unexercised options, and (ii) 57,828 Ordinary Shares have been issued upon the
exercise of options previously granted and remain outstanding as of the date
hereof. Except for (x) the Company Options and Company Warrants set forth in
SECTION 2.2(b) of the Disclosure Schedule, all of which are to be cancelled or
exercised at or prior to the Effective Time, and (y) the Preferred Shares, there
are no options, warrants, calls, rights, convertible securities, commitments or
agreements of any character, written or oral, to which the Company is a party or
by which the Company is bound obligating the Company to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any Company Shares or obligating the Company to grant, extend,
accelerate the vesting of, change the price of, otherwise amend or enter into
any such option, warrant, call, right, commitment or agreement (other than the
Preferred Shares). SECTION 2.2(b) of the Disclosure Schedule sets forth the name
and domicile address of each holder of Company Options or Company Warrants, the
type of Company Shares underlying such Company Options and Company Warrants, and
the exercise price and vesting schedule of such Company Options and Company
Warrants. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or other similar rights with respect to the
Company. Except as contemplated hereby, there are no voting trusts, proxies, or
other agreements or understandings with respect to the voting shares of the
Company. There are no agreements to which the Company is a party relating to the
registration, sale or transfer (including agreements relating to rights of first
refusal, co-sale rights or "drag-along" rights) of any Company Shares. As a
result of the Merger, Parent will be the sole record and beneficial holder of
all issued and outstanding Company Shares and all rights to acquire or receive
any shares of Company Shares, whether or not such shares of Company Shares are
outstanding.
(c) The allocation of the consideration received in the Merger
set forth in SECTION 1.6(b) is consistent with (i) the Charter Documents of the
Company as amended as of immediately prior to the Effective Time, (ii) any
Contract (as defined in SECTION 2.3) and (iii) any Legal Requirement.
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(d) The Company's shares are not listed for trading on the Tel
Aviv Stock Exchange, or on any other foreign or domestic stock exchange or
market, nor has Company applied to list its shares on any such stock exchange or
market.
2.3 SUBSIDIARIES. SECTION 2.3 of the Disclosure Schedule lists each of
the Company's subsidiaries as of the date hereof, the jurisdiction of
incorporation of each such subsidiary, and the Company's equity interest
therein. Except as set forth in SECTION 2.3 of the Disclosure Schedule, neither
the Company nor any of its subsidiaries has agreed, is obligated to make, or is
bound by any written or oral agreement, contract, subcontract, lease, binding
understanding, instrument, note, bond, mortgage, indenture, option, warranty,
purchase order, license, sublicense, benefit plan, obligation, commitment or
undertaking of any nature (a "CONTRACT") under which it may become obligated to
make any future investment in, or capital contribution to, any other entity.
Except as set forth in SECTION 2.3 of the Disclosure Schedule, neither the
Company nor any of its subsidiaries directly or indirectly owns any equity or
similar interest in or any interest convertible, exchangeable or exercisable
for, any equity or similar interest in, any person.
2.4 AUTHORITY. The Company has all requisite power and authority to
enter into this Agreement and any Related Agreements to which it is a party and,
subject to obtaining the approval of the shareholders of the Company to this
Agreement, the Merger and the other transactions contemplated by this Agreement,
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and any Related Agreements to which the Company
is a party and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of the Company and no further action is required on the part of the Company to
authorize the Agreement and any Related Agreements to which it is a party and
the transactions contemplated hereby and thereby other than the approval of this
Agreement, the Merger and the other transactions contemplated by this Agreement
by the Required Company Shareholder Vote (as hereinafter defined)). Subject to
the provisions of Section 320(c) of the Israeli Companies Law, the affirmative
vote of a majority of each class of Company Shares present and voting at the
Company General Meeting (as defined in SECTION 6.2) at which a quorum is present
is a sufficient vote of the holders of any Company Shares necessary to approve
the Merger (the "REQUIRED COMPANY SHAREHOLDER VOTE"). The quorum required for
the Company General Meeting is two or more shareholders holding collectively at
least two-thirds of the issued share capital of the Company (present in person
or by proxy). No statutory vote of: (i) any creditor of the Company, (ii) any
holder of any Company Option or Company Warrant; or (iii) any shareholder of any
of the Company's subsidiaries is necessary in order to approve this Agreement,
or to approve or permit the consummation of the Merger and the other
transactions contemplated by this Agreement. This Agreement and the Merger have
been unanimously approved by the Board of Directors of the Company. This
Agreement and each of the Related Agreements to which the Company is a party has
been duly executed and delivered by the Company and assuming the due
authorization, execution and delivery by the other parties hereto and thereto,
constitute the valid and binding obligations of the Company enforceable against
it in accordance with their respective terms, except as such enforceability may
be subject to the laws of general application relating to bankruptcy,
insolvency, and the relief of debtors and rules of law governing specific
performance, injunctive relief, or other equitable remedies.
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2.5 NO CONFLICT; CONSENTS.
(a) The execution and delivery by the Company of this
Agreement and any Related Agreement to which the Company is a party, and the
consummation of the transactions contemplated hereby and thereby, will not
conflict with or result in any violation of or default under (with or without
notice or lapse of time, or both) or give rise to a right of termination,
cancellation, modification or acceleration of any obligation or loss of any
benefit under (any such event, a "CONFLICT") (i) any provision of the Charter
Documents of the Company or the equivalent organizational documents of any of
the Company's subsidiaries, (ii) subject to obtaining the Required Company
Shareholder Vote and compliance with the requirements set forth in SECTION
2.5(b), any law, rule, regulation, order, judgment or decree applicable to the
Company or any of its subsidiaries or by which its or any of their respective
properties is bound or affected, (iii) any Contract, or (iv) any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
Company or any of its properties (whether tangible or intangible) or assets. The
Company is in material compliance with and has not materially breached, violated
or defaulted under, or received notice that it has breached, violated or
defaulted under, any of the terms or conditions of any Contract, nor does the
Company have Knowledge of any event that would constitute such a breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect, and the Company is not subject to any
material default thereunder, nor to the Knowledge of the Company is any party
obligated to the Company pursuant to any such Contract subject to any default
thereunder. SECTION 2.5(a) of the Disclosure Schedule sets forth all necessary
consents, waivers and approvals of parties to any Contracts as are required
thereunder in connection with the Merger, or for any such Contract to remain in
full force and effect without limitation, modification or alteration after the
Effective Time so as to preserve all rights of, and benefits to, the Company
under such Contracts from and after the Effective Time. Following the Effective
Time, the Surviving Corporation will be permitted to exercise all of its rights
under the Contracts without the payment of any additional amounts or
consideration other than ongoing fees, royalties or payments which the Company
would otherwise be required to pay pursuant to the terms of such Contracts had
the transactions contemplated by this Agreement not occurred.
(b) Other than with respect to procedures under the Israeli
Companies Law, the execution and delivery by the Company of this Agreement and
any Related Agreement to which the Company is a party, and the consummation of
the transactions contemplated hereby and thereby, will not require any consent,
waiver, approval, order or authorization or permit of, declaration or filing
with or notification to, any court, administrative agency, commission,
governmental or regulatory authority, domestic or foreign (a "GOVERNMENTAL
ENTITY") with respect to the Company or its subsidiaries, except: (i) for: (A)
compliance with applicable requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), and state securities laws ("BLUE SKY LAWS"); (B)
compliance with the pre-merger notification requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT")
and under the comparable competition foreign laws that the parties reasonably
determine to apply; (C) consent of the Office of the Chief Scientist of the
Israeli Ministry of Trade & Industry ("OCS") to the change in ownership of the
Company to be effected by the Merger (the "OCS APPROVAL"); and (D) filings with,
and approval by, the Investment Center of the Israeli
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Ministry of Trade & Industry (the "INVESTMENT CENTER") of the change in
ownership of the Company to be effected by the Merger (the "INVESTMENT CENTER
APPROVAL"); and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications: (A) would
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect or, after the Effective Time, Parent, or (B) would not
prevent or materially delay consummation of the Merger or otherwise prevent the
parties hereto from performing their obligations under this Agreement.
2.6 COMPANY FINANCIAL STATEMENTS. SECTION 2.6 of the Disclosure
Schedule sets forth the Company's (i) audited balance sheet as of December 31,
2003, 2002, 2001 and 2000, and the related consolidated statements of income,
cash flow and Shareholders' equity for each of the twelve (12) month periods
then ended (the "YEAR-END FINANCIALS"), and (ii) unaudited balance sheet as of
September 30, 2004 (the "BALANCE SHEET DATE"), and the related unaudited
statement of income, cash flow and Shareholders' equity for the nine months then
ended and the nine months ended September 30, 2003 (the "INTERIM FINANCIALS").
The Year-End Financials and the Interim Financials (collectively referred to as
the "FINANCIALS") are true and correct in all material respects and have been
prepared in accordance with GAAP consistently applied on a consistent basis
throughout the periods indicated and consistent with each other (except that the
Interim Financials do not contain notes and other presentation items that may be
required by GAAP). The Financials present fairly the Company's financial
condition, operating results and cash flows as of the dates and during the
periods indicated therein, subject in the case of the Interim Financials to
normal year-end adjustments, which are not material in amount or significance in
any individual case or in the aggregate. The Company's unaudited consolidated
balance sheet as of the Balance Sheet Date is referred to hereinafter as the
"CURRENT BALANCE SHEET." As of November 10, 2004, the aggregate cash and cash
equivalents of the Company and its subsidiaries was $1,867,332.
2.7 NO UNDISCLOSED LIABILITIES. The Company has no liability,
indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of
any type, whether accrued, absolute, contingent, matured, unmatured or other
(whether or not required to be reflected in financial statements in accordance
with GAAP), which individually or in the aggregate (i) has not been reflected in
the Current Balance Sheet, or (ii) has not arisen in the ordinary course of
business consistent with past practices since the Balance Sheet Date.
2.8 NO CHANGES. Other than as set forth in SECTION 2.8 of the
Disclosure Schedule, since the Balance Sheet Date, there has not been, occurred
or arisen any:
(a) material transaction by the Company except in the ordinary
course of business as conducted on that date and consistent with past practices
(it being agreed and understood that for purposes of this subsection a material
transaction shall be defined as any transaction involving greater than $5,000 or
adversely affecting any Company Intellectual Property);
(b) amendments or changes to the Memorandum of Association or
Articles of Association of the Company;
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(c) capital expenditure or commitment by the Company exceeding
$30,000 individually or $150,000 in the aggregate;
(d) employment dispute, including but not limited to, claims
or matters raised by any individuals or any workers' representative
organization, bargaining unit or union regarding labor trouble or claim of
wrongful discharge or other unlawful employment or labor practice or action with
respect to the Company;
(e) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by the Company other
than as required by GAAP;
(f) change in any material election in respect of Taxes (as
defined below), adoption or change in any accounting method in respect of Taxes,
agreement or settlement of any claim or assessment in respect of Taxes, or
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(g) revaluation by the Company of any of its assets (whether
tangible or intangible), including without limitation, writing down the value of
inventory or writing off notes or accounts receivable;
(h) declaration, setting aside or payment of a dividend or
other distribution (whether in cash, stock or property) in respect of any
Company Shares, or any split, combination or reclassification in respect of any
shares of Company Shares, or any issuance or authorization of any issuance of
any other securities in respect of, in lieu of or in substitution for shares of
Company Shares, or any direct or indirect repurchase, redemption, or other
acquisition by the Company of any Company Shares (or options, warrants or other
rights convertible into, exercisable or exchangeable therefor), except in
accordance with the agreements evidencing Company Options or Company Warrants;
(i) increase in the salary or other compensation payable or to
become payable by the Company to any of its respective officers, directors,
employees or advisors, or the declaration, payment or commitment or obligation
of any kind for the payment (whether in cash or equity) by the Company of a
severance payment, termination payment, bonus or other additional salary or
compensation to any such person, except as required by law or by contracts in
existence as of the Balance Sheet Date;
(j) sale, lease or other disposition of any of the assets
(whether tangible or intangible) or properties of the Company, including, but
not limited to, the sale of any accounts receivable of the Company, or any
creation of any security interest in such assets or properties, other than
standard end-user agreements;
(k) loan by the Company to any person or entity, or purchase
by the Company or of any debt securities of any person or entity;
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(l) incurring by the Company of any indebtedness, amendment of
the terms of any outstanding loan agreement, guaranteeing by the Company of any
indebtedness, issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others, except for advances to employees
for travel and business expenses in the ordinary course of business consistent
with past practices;
(m) waiver or release of any right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company, in an amount in excess of $30,000;
(n) commencement or settlement of any lawsuit by the Company,
the commencement, settlement, notice or, to the Knowledge of the Company, threat
of any lawsuit or proceeding or other investigation against the Company or its
affairs, or any reasonable basis for any of the foregoing;
(o) notice of any claim or potential claim of ownership,
interest or right by any person other than the Company of the Company
Intellectual Property (as defined in SECTION 2.11(d) hereof) owned by or
developed or created by the Company or of infringement by the Company of any
other person's Intellectual Property (as defined in SECTION 2.11(d) hereof);
(p) issuance or sale, or contract or agreement to issue or
sell, by the Company of any Company Shares or securities convertible into, or
exercisable or exchangeable for, Company Shares, or any securities, warrants,
options or rights to purchase any of the foregoing, except for issuances of
Company Shares upon the exercise of options issued under the Plans;
(q) other than standard end-user agreements, (i) sale or
license of any Company Intellectual Property or execution, modification or
amendment of any agreement with respect to the Company Intellectual Property
with any person or entity or with respect to the Intellectual Property of any
person or entity, or (ii) purchase or license of any Intellectual Property or
execution, modification or amendment of any agreement with respect to the
Intellectual Property of any person or entity, (iii) agreement or modification
or amendment of an existing agreement with respect to the development of any
Intellectual Property with a third party, or (iv) change in pricing or royalties
set or charged by the Company to its customers or licensees or in pricing or
royalties set or charged by persons who have licensed Intellectual Property to
the Company;
(r) event or condition of any character that has had or is
reasonably likely to have a Company Material Adverse Effect;
(s) lease, license, sublease or other occupancy of any Leased
Real Property by the Company, other than in the ordinary course of business; or
(t) agreement by the Company, or any officer or employees on
behalf of the Company, to do any of the things described in the preceding
clauses (a) through (s) of this SECTION 2.8 (other than negotiations with Parent
and its representatives regarding the transactions contemplated by this
Agreement and the Related Agreements).
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2.9 TAX MATTERS.
(a) DEFINITION OF TAXES. For the purposes of this Agreement,
the term "Tax" or, collectively, "Taxes" shall mean (i) any and all domestic and
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes as well as public imposts, fees and social security charges
(including but not limited to health, unemployment and pension insurance),
together with all interest, penalties and additions imposed with respect to such
amounts, (ii) any liability for the payment of any amounts of the type described
in clause (i) of this SECTION 2.9(a) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any period (including,
without limitation, any liability under United States Treas. Reg. Section
1.1502-6 or any comparable provision of domestic or foreign law or any
arrangement for group Tax relief within a jurisdiction or similar arrangement),
and (iii) any liability for the payment of any amounts of the type described in
clauses (i) or (ii) of this SECTION 2.9(a) as a result of any express or implied
obligation to indemnify any other person or as a result of any obligation under
any agreement or arrangement with any other person with respect to such amounts
and including any liability for taxes of a predecessor entity.
(b) TAX RETURNS AND AUDITS.
(i) The Company has (a) prepared and timely filed all
required domestic and foreign returns, estimates, information statements and
reports ("RETURNS") relating to any and all Taxes concerning or attributable to
the Company or its operations, or has lawfully obtained extensions for such
filings, and such Returns are or will be true and correct and have been or will
be completed in accordance with applicable law and (b) timely paid all Taxes it
is required to pay.
(ii) The Company has paid or withheld with respect to
its Employees and other third parties, all domestic and foreign income taxes and
social security charges and similar fees, and other Taxes required to be paid or
withheld, and has timely paid such Taxes withheld over to the appropriate
authorities (including for all purposes under this Agreement the Investment
Center with respect to the Company's status as an "Approved Enterprise" under
Israel's Law for the Encouragement of Capital Investment, 1959).
(iii) The Company has not been delinquent in the
payment of any Tax, nor is there any Tax deficiency outstanding, assessed or
proposed against the Company, nor has the Company executed any waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
(iv) No audit or other examination of any Return of
the Company is presently in progress, nor has the Company been notified of any
request for such an audit or other examination. No adjustment relating to any
Return filed by the Company has been proposed formally or, to the Knowledge of
the Company, informally by any Tax authority to the Company or any
representative thereof.
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(v) As of the date of the Current Balance Sheet, the
Company had no liabilities for unpaid Taxes which have not been accrued or
reserved on the Current Balance Sheet, whether asserted or unasserted,
contingent or otherwise, and the Company has not incurred any liability for
Taxes since the date of the Current Balance Sheet other than in the ordinary
course of business.
(vi) The Company has made available to Parent or its
legal counsel, copies of all Returns for the Company filed for all periods since
its inception.
(vii) There are (and as a result of the Merger there
will be) no Liens on the assets of the Company relating to or attributable to
Taxes, other than Liens for Taxes not yet due and payable. The Company has no
Knowledge of any basis for the assertion of any claim relating or attributable
to Taxes which, if adversely determined, would result in any Lien on the assets
of the Company.
(viii) The Company has (a) never been a member of an
affiliated group (within the meaning of Code Section 1504(a)) filing a
consolidated federal income Tax Return (other than a group the common parent of
which was Company), (b) never been a party to any Tax sharing, indemnification,
allocation or similar agreement, (c) no liability for the Taxes of any person
(other than Company) under Treasury Regulation Section 1.1502-6 (or any similar
provision of domestic or foreign law or any arrangement for group Tax relief
within a jurisdiction or similar arrangement), as a transferee or successor, by
contract or agreement, or otherwise and (d) never been a party to any joint
venture, partnership or other arrangement that could be treated as a partnership
for Tax purposes.
(ix) The Company has not been, at any time, a "United
States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code.
(x) The Company has not constituted either a
"distributing corporation" or a "controlled corporation" in a distribution of
stock intended to qualify for tax-free treatment under Section 355 of the Code.
(xi) The Company has not engaged in a transaction
that is the same as or substantially similar to one of the types of transactions
that the Internal Revenue Service has determined to be a tax avoidance
transaction and identified by notice, regulation, or other form of published
guidance as a listed transaction, as set forth in Treas. Reg. Section
1.6011-4(b)(2).
(xii) The Company qualifies as an Industrial Company
according to the meaning of that term in the Law for the Encouragement of
Industry (Taxes), 1969. The consummation of the Merger will not have any adverse
effect on such qualification as an Industrial Company.
(xiii) The Company and each of its subsidiaries are
in compliance in all material respects with all terms and conditions of any Tax
exemptions, Tax holiday or other Tax reduction agreement, approval or order of
any government and, subject to receipt of the Investment
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Center Approvals and the other Approvals required herein, the consummation of
the Merger will not have any adverse effect on the validity and effectiveness of
any such Tax exemptions, Tax holiday or other Tax reduction agreement or order.
(xiv) The Disclosure Schedule lists each material tax
incentive granted to or enjoyed by the Company and its subsidiaries under the
laws of the State of Israel, the period for which such tax incentive applies,
and the nature of such tax incentive. The Company and its subsidiaries have
complied with all material requirements of Israeli law to be entitled to claim
all such incentives. Subject to receipt of the Investment Center Approval,
consummation of the Merger will not adversely affect the continued qualification
for the incentives or the terms or duration thereof or require any recapture of
any previously claimed incentive, and no consent or approval of any Governmental
Entity is required, other than as set forth on SECTION 2.9(b)(xiv) of the
Disclosure Schedule, prior to the consummation of the Merger in order to
preserve the entitlement of the Surviving Corporation or its subsidiaries to any
such incentive.
(xv) The Company will not be required to include any
income or gain or exclude any deduction or loss from Taxable income as a result
of (a) any change in method of accounting under Section 481(c) of the Code, (b)
closing agreement under Section 7121 of the Code, (3) deferred intercompany gain
or excess loss account under Treasury Regulations under Section 1502 of the Code
(or in the case of each of (a), (b), and (c), under any similar provision of
applicable law), (d) installment sale or open transaction disposition or (e)
prepaid amount.
(xvi) The Company is and has at all times been
resident for Tax purposes in its place of incorporation or formation and is not
and has not at any time been treated as resident in any other jurisdiction for
any Tax purpose (including any Tax treaty or other arrangement for the avoidance
of double taxation). The Company is not subject to Tax in any jurisdiction other
than its place of incorporation or formation by virtue of having a permanent
establishment or other place of business or by virtue of having a source of
income in that jurisdiction, except for income earned from services for which
any income tax is satisfied through withholding. The Company is not liable for
any Tax as the agent of any other person or business and does not constitute a
permanent establishment or other place of business of any other person, business
or enterprise for any Tax purpose.
(xvii) SECTION 2.9(xvii) of the Disclosure Schedule
sets forth the following information with respect to the Company: (a) the basis
of the Company in its assets; (b) the amount of any net operating loss, net
capital loss, unused investment Tax credit or other Tax credit and the amount of
any limitation upon any of the foregoing; and (c) the amount of any deferred
gain or loss allocable to the Company arising out of any deferred intercompany
transaction as defined in Treas. Reg. Section 1.1502-13 or any similar provision
of applicable law.
(xviii) There has been no indication from any Tax
authority that the consummation of the Merger would adversely affect the
Surviving Corporation's ability to set off for tax purposes in the future any
and all losses accumulated by Company as of the Closing Date.
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(c) EXECUTIVE COMPENSATION TAX. There is no contract,
agreement, plan or arrangement to which the Company is a party, including,
without limitation, the provisions of this Agreement, covering any Employee of
the Company, which, individually or collectively, could give rise to the payment
of any amount that would not be deductible pursuant to Sections 280G, 404 or
162(m) of the Code.
2.10 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement
(non-competition or otherwise), commitment, judgment, injunction, order or
decree to which the Company is a party or otherwise binding upon the Company
which has or may reasonably be expected to have the effect of prohibiting or
impairing any business practice of the Company, any acquisition of property
(tangible or intangible) by the Company, the conduct of business by the Company,
or otherwise limiting the freedom of the Company to engage in any line of
business or to compete with any person. Without limiting the generality of the
foregoing, except as set forth in SECTION 2.10 of the Disclosure Schedule, the
Company has not entered into any agreement under which the Company is restricted
from selling, licensing, manufacturing or otherwise distributing any of its
technology or products or from providing services to customers or potential
customers or any class of customers, in any geographic area, during any period
of time, or in any segment of the market.
2.11 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION
OF EQUIPMENT.
(a) The Company does not own any real property, nor has the
Company ever owned any real property. SECTION 2.11 of the Disclosure Schedule
sets forth a list of all real property currently leased, subleased or licensed
by or from the Company or otherwise used or occupied by the Company for the
operation of its business (the "Leased Real Property"), the name of the lessor,
licensor, sublessor, master lessor and/or lessee, the date and term of the
lease, license, sublease or other occupancy right and each amendment thereto
(the "Lease Agreements") and, with respect to any current lease, license,
sublease or other occupancy right the aggregate annual rental payable
thereunder. All such Lease Agreements are valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
default, no rentals are past due, or event of default (or event which with
notice or lapse of time, or both, would constitute a default). The Company has
not received any notice of a default, alleged failure to perform, or any offset
or counterclaim with respect to any such Lease Agreement, which has not been
fully remedied and withdrawn. The Closing will not affect the enforceability
against any person of any such Lease Agreement or the rights of the Company to
the continued use and possession of the Leased Real Property for the conduct of
business as presently conducted.
(b) The Leased Real Property is in good operating condition
and repair, free from structural, physical and mechanical defects and is
structurally sufficient and otherwise suitable for the conduct of the business
as presently conducted. The operation of the Company on the Leased Real Property
does not violate in any material respect any applicable building code, zoning
requirement or statute relating to such property or operations thereon, and any
such non-violation is not dependent on so-called non-conforming use exceptions.
(c) The Company has good and valid title to, or, in the case
of leased properties and assets, valid leasehold interests in, all of its
tangible properties and assets, real, personal and
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mixed, used or held for use in its business, free and clear of any Liens, except
(i) as reflected in the Current Balance Sheet, (ii) Liens for Taxes not yet due
and payable, and (iii) such immaterial imperfections of title and encumbrances,
if any, which do not detract from the value or interfere with the present use of
the property subject thereto or affected thereby.
(d) SECTION 2.11(d) of the Disclosure Schedule lists all
material items of equipment (the "EQUIPMENT") owned or leased by the Company,
and such Equipment is (i) adequate for the conduct of the business of the
Company as currently conducted and as currently contemplated to be conducted,
and (ii) in good operating condition, regularly and properly maintained, subject
to normal wear and tear.
2.12 INTELLECTUAL PROPERTY.
(a) DEFINITIONS. For all purposes of this Agreement, the
following terms shall have the following respective meanings:
"INTELLECTUAL PROPERTY" shall mean any or all of the
following (i) works of authorship including, without limitation, computer
programs, source code, and executable code, whether embodied in software,
firmware or otherwise, architecture, documentation, designs, files, records,
databases, and data, (ii) inventions (whether or not patentable), discoveries,
improvements, and technology, (iii) proprietary and confidential information,
trade secrets and know how, (iv) databases, data compilations and collections
and technical data, (v) logos, trade names, trade dress, trademarks and service
marks, (vi) domain names, web addresses and sites, (vii) tools, methods and
processes, and (viii) any and all instantiations of the foregoing in any form
and embodied in any media.
"INTELLECTUAL PROPERTY RIGHTS" shall mean worldwide
common law and statutory rights in (i) all patents and patent applications, (ii)
copyrights, copyright registrations and copyright applications, "moral" rights
and mask work rights, (iii) the protection of trade and industrial secrets and
confidential information, (iv) other proprietary rights relating to intangible
intellectual property, (v) trademarks, trade names and service marks, (vi)
analogous rights to those set forth above, and (vii) divisions, continuations,
renewals, reissuances and extensions of the foregoing (as applicable).
"IP AGREEMENTS" means all contracts, licenses, and
agreements to which the Company is a party with respect to any Intellectual
Property or Intellectual Property Rights.
"COMPANY INTELLECTUAL PROPERTY" shall mean any and
all Intellectual Property and Intellectual Property Rights that are owned by or
exclusively licensed to the Company. All material Company Intellectual Property
is identified in SECTION 2.12 of the Disclosure Schedule.
"REGISTERED INTELLECTUAL PROPERTY" shall mean
Intellectual Property and Intellectual Property Rights that have been
registered, applied for, filed, certified or otherwise perfected, issued, or
recorded with or by any state, government or other public or quasi-public legal
authority.
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(b) SECTION 2.12(b) of the Disclosure Schedule (i) lists all
Registered Intellectual Property owned by, or filed in the name of, the Company
(the "COMPANY REGISTERED INTELLECTUAL PROPERTY") and (ii) lists any proceedings
or actions before any court, tribunal (including the United States Patent and
Trademark Office (the "PTO") or equivalent authority anywhere in the world)
related to any of the Company Registered Intellectual Property or Company
Intellectual Property.
(c) Each item of Company Registered Intellectual Property is
valid and subsisting (except for items subject to applications for Company
Registered Intellectual Property), and all necessary registration, maintenance
and renewal fees in connection with such Company Registered Intellectual
Property have been paid and all necessary documents and certificates in
connection with such Company Registered Intellectual Property have been filed
with the relevant patent, copyright, trademark or other authorities in the
United States or foreign jurisdictions, as the case may be, for the purposes of
maintaining such Registered Intellectual Property.
(d) Except as set forth in SECTION 2.12(d) of the Disclosure
Schedule, all Company Intellectual Property will be fully transferable and
licensable by Surviving Corporation and/or Parent without restriction and
without payment of any kind to any third party.
(e) To the extent that any Intellectual Property has been
developed or created independently or jointly by any person other than the
Company for which the Company has, directly or indirectly, provided
consideration for such development or creation, the Company has a written
agreement with such person with respect thereto, and the Company thereby has
obtained ownership of, and is the exclusive owner of, all such Intellectual
Property therein and associated Intellectual Property Rights by operation of law
or by the terms of such written agreements.
(f) The Company has not (i) transferred ownership of, or
granted any exclusive license of or exclusive right to use, or authorized the
retention of any exclusive rights to use or joint ownership of, any Intellectual
Property or Intellectual Property Rights that is or was Company Intellectual
Property, to any other person or (ii) permitted the Company's rights in such
Company Intellectual Property to enter into the public domain.
(g) Except as set forth on SECTION 2.12(g) of the Disclosure
Schedule, the Company Intellectual Property constitutes all of the Intellectual
Property and Intellectual Property Rights used in, necessary to or otherwise
would be infringed by the conduct of the business of the Company as it currently
is conducted or planned to be conducted, including, without limitation, the
design, development, marketing, manufacture, use, import and sale of any
product, technology or service (including products, technology or services
currently under development).
(h) SECTION 2.12(h) of the Disclosure Schedule lists all IP
Agreements which are in effect as of the Closing Date.
(i) No third party that has licensed Intellectual Property or
Intellectual Property Rights to the Company has ownership rights or license
rights to improvements or derivative works made by the Company in such licensed
Intellectual Property.
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(j) There are no contracts, licenses or agreements between the
Company and any other person with respect to Company Intellectual Property or
other Intellectual Property used in and/or necessary to the conduct of the
business as it is currently conducted or planned to be conducted under which
there is any dispute regarding the scope of such agreement, or performance under
such agreement including with respect to any payments to be made or received by
the Company thereunder.
(k) SECTION 2.12(k) of the Disclosure Schedule lists all items
of the Company Intellectual Property as of the date hereof which were developed
with (x) funding, facilities or resources provided by or are subject to
restriction, constraint, control, supervision, or limitation imposed by the OCS
or any other Governmental Entity or quasi-Governmental Entity, or (y) funding,
facilities or resources provided by or are subject to restriction, constraint,
control, supervision, or limitation imposed a university, college, educational
institution, research center, foundation or similar institution (collectively,
an "INSTITUTION"). Except as set forth in SECTION 2.12(k) of the Disclosure
Schedule, (i) all Company Intellectual Property is freely transferable,
conveyable, and/or assignable by the Company and/or Parent or the Surviving
Corporation to any entity located in any jurisdiction in the world without any
restriction, constraint, control, supervision, or limitation whatsoever that
could be imposed by the OCS or any other Governmental Entity or
quasi-Governmental Entity or any Institution in accordance with currently
applicable laws and restrictions, (ii) no restriction, constraint, control,
supervision, or limitation whatsoever has been or may be (under currently
applicable laws and restrictions), imposed by the OCS or any other Governmental
Entity or quasi-Governmental Entity or Institution on the place, method and
scope of exploitation of any Company Intellectual Property (including the
operation of the business of the Company as it is currently conducted,
including, without limitation, the design, development, use, import, branding,
advertising, promotion, marketing, manufacture and sale of any products,
technologies or services of the Company or any of its subsidiaries and any
products, technology or services currently under development by the Company or
any of its subsidiaries), (iii) no Governmental Entity or quasi-Governmental
Entity or Institution has any claim or right in or to any Company Intellectual
Property, and (iv) no current or former employee, consultant or independent
contractor of the Company who was involved in, or who contributed to, the
creation or development of any Company Intellectual Property, has performed
services for any Governmental Entity or quasi-Governmental Entity or
Institution, during a period of time during which such employee, consultant or
independent contractor was also performing services for the Company.
(l) The operation of the business of the Company as it is
currently conducted, or is contemplated to be conducted, by the Company,
including but not limited to the design, development, use, import, branding,
advertising, promotion, marketing, distribution, manufacture and sale of any
product, technology or service (including products, technology or services
currently under development) of the Company has not infringed or
misappropriated, does not infringe or misappropriate, and will not infringe or
misappropriate when conducted by Parent and/or Surviving Corporation following
the Closing in the same manner currently planned to be conducted by the Company,
any Intellectual Property Rights of any person, violate any right of any person
(including any right to privacy or publicity), or constitute obscenity,
defamation, or unfair competition or trade practices under the laws of any
jurisdiction. It is agreed and understood that for purposes of
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determining whether the foregoing representation in this SECTION 2.12(l) shall
have been breached, with respect to any claims brought by an Indemnified Party
after the twelfth (12th) month anniversary of the Closing Date, the foregoing
representation and warranty set forth in this SECTION 2.12(l) shall only be made
to the Knowledge of the Company.
(m) Except as set forth in SECTION 2.12(m) of the Disclosure
Schedule, the Company has not received notice from any person claiming that such
operation or any act, any product, technology or service (including products,
technology or services currently under development) or Intellectual Property of
the Company infringes or misappropriates any Intellectual Property Rights of any
person or constitutes unfair competition or trade practices under the laws of
any jurisdiction (nor does the Company have Knowledge of any basis therefor).
(n) Neither this Agreement nor the transactions contemplated
by this Agreement, including the assignment to Parent by operation of law or
otherwise of any contracts or agreements to which the Company is a party, will
result in: (i) Parent or the Surviving Corporation granting to any third party
any right to or with respect to any Intellectual Property Rights owned by, or
licensed to, any of them, (ii) Parent or the Surviving Corporation, being bound
by, or subject to, any non-compete or other material restriction on the
operation or scope of their respective businesses, or (iii) Parent or the
Surviving Corporation being obligated to pay any royalties or other material
amounts to any third party in excess of those payable by the Company in the
absence of this Agreement or the transactions contemplated hereby.
(o) To the Knowledge of the Company, no person or entity has
infringed or misappropriated or is infringing or misappropriating any Company
Intellectual Property.
(p) The Company has taken all reasonable steps in accordance
with normal industry practices to protect the Company's rights in confidential
information and trade secrets of the Company or provided by any other person to
the Company. Without limiting the foregoing, the Company has, and enforces, a
policy requiring each employee, consultant, and contractor to execute
proprietary information, confidentiality and assignment agreements substantially
in the Company's standard forms (in the forms set forth in EXHIBIT B), except as
set forth on SECTION 2.12(p) of the Disclosure Schedule, and all current and
former employees, consultants and contractors of the Company have executed such
an agreement in substantially the Company's standard form.
(q) No Company Intellectual Property (including all Registered
Intellectual Property Rights), product, technology, or service offered or owned
by the Company is subject to any (i) proceeding or outstanding decree, order,
judgment or settlement agreement or stipulation that restricts in any manner the
use, transfer or licensing thereof by the Company or may affect the validity,
use or enforceability of such Company Intellectual Property, Intellectual
Property Rights, product, technology or service, or (ii) Lien.
(r) The Company has complied with all applicable laws and its
internal privacy policies relating to (a) the privacy of users of its products,
services, and Web sites and (b) the collection, storage, and transfer of any
personally identifiable information collected by or on behalf of the Company.
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(s) Except as set forth on SECTION 2.12(s) of the Disclosure
Schedule, neither the Company nor (to the Knowledge of the Company) any person
or entity acting on the Company's behalf has disclosed, delivered or licensed to
any person or entity, agreed to disclose, deliver or license to any person or
entity, or permitted the disclosure or delivery to any escrow agent or other
person or entity of any Company Source Code. No event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of time
or both) will, or would reasonably be expected to, result in the disclosure or
delivery by or on behalf of the Company of any Company Source Code. "COMPANY
SOURCE CODE" means any software source code or related proprietary or
confidential information or algorithms of any Company Intellectual Property.
(t) SECTION 2.12(t) of the Disclosure Schedule lists all
software or other material that is distributed as "freeware," "free software,"
"open source software" or under a similar licensing or distribution model
(including but not limited to the GNU General Public License) that the Company
uses or licenses, and identifies that which is incorporated into, combined with,
or distributed in conjunction with any Company products or services
("INCORPORATED OPEN SOURCE SOFTWARE"). The Company's use and/or distribution of
each component of Incorporated Open Source Software complies with all material
provisions of the applicable license agreement, and in no case does such use or
distribution give rise under such license agreement to any rights in any third
parties under any Company Intellectual Property or obligations for the Company
with respect to any Company Intellectual Property, including without limitation
any obligation to disclose or distribute any such Intellectual Property in
source code form, to license any such Intellectual Property for the purpose of
making derivative works, or to distribute any such Intellectual Property without
charge.
2.13 AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set forth in
SECTION 2.13 of the Disclosure Schedule (specifying the appropriate paragraph),
the Company is not a party to, nor is it bound by any of the following (each, a
"MATERIAL CONTRACT"):
(a) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson, or
consulting or sales agreement, contract, or commitment with a firm or other
organization;
(b) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement;
(c) any fidelity or surety bond or completion bond;
(d) any lease of personal property having a value in excess of
$30,000 individually or $150,000 in the aggregate;
(e) any agreement of indemnification or guaranty;
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(f) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $30,000 individually or
$150,000 in the aggregate;
(g) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business;
(h) any mortgages, indentures, guarantees, loans or credit
agreements, security agreements or other agreements or instruments relating to
the borrowing of money or extension of credit;
(i) any purchase order or contract for the purchase of
materials involving in excess of $30,000 individually or $150,000 in the
aggregate;
(j) any agreement containing covenants or other obligations
granting any person exclusive rights, "most favored nations" or similar terms;
(k) any dealer, distribution, joint marketing or development
agreement;
(l) any sales representative, original equipment manufacturer,
manufacturing, value added, remarketer, reseller, or independent software
vendor, or other agreement for use or distribution of the products, technology
or services of the Company;
(m) any IP Agreements; or
(n) any other agreement, contract or commitment that involves
payment to or by the Company of $30,000 individually or $150,000 in the
aggregate or more and is not cancelable without penalty within thirty (30) days.
2.14 INTERESTED PARTY TRANSACTIONS. Except as set forth in SECTION 2.14
of the Disclosure Schedule, no officer, director or shareholder of the Company
(nor any ancestor, sibling, descendant or spouse of any of such persons, or any
trust, partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) an interest in any entity
which furnished or sold, or furnishes or sells, services, products, technology
or Intellectual Property that the Company furnishes or sells, or proposes to
furnish or sell, or (ii) any interest in any entity that purchases from or sells
or furnishes to the Company, any goods or services, or (iii) a beneficial
interest in any Material Contract to which the Company is a party; provided,
however, that ownership of no more than one percent (1%) of the outstanding
voting stock of a publicly traded corporation shall not be deemed to be an
"interest in any entity" for purposes of this SECTION 2.14. No shareholder has
any loans outstanding from the Company.
2.15 GOVERNMENTAL AUTHORIZATION. Each consent, license, permit, grant
or other authorization (i) pursuant to which the Company currently operates or
holds any interest in any of its properties, or (ii) which is required for the
operation of the Company's business as currently conducted or currently
contemplated to be conducted or the holding of any such interest
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(collectively, "COMPANY AUTHORIZATIONS") has been issued or granted to the
Company, as the case may be. The Company Authorizations are in full force and
effect and constitute all Company Authorizations required to permit the Company
to operate or conduct its business or hold any interest in its properties or
assets.
2.16 LITIGATION. Except as set forth in SECTION 2.16 of the Disclosure
Schedule, there is no action, suit, claim or proceeding of any nature pending,
or to the Knowledge of the Company, threatened, against the Company, its
properties (tangible or intangible) or any of its officers or directors, nor to
the Knowledge of the Company is there any reasonable basis therefor. There is no
investigation or other proceeding pending or, to the Knowledge of the Company,
threatened, against the Company, any of its properties (tangible or intangible)
or any of its officers or directors in their capacity as such, by or before any
Governmental Entity, nor to the Knowledge of the Company is there any reasonable
basis therefor. No Governmental Entity has at any time challenged or questioned
the legal right of the Company to conduct its operations as presently or
previously conducted or as presently contemplated to be conducted.
2.17 MINUTE BOOKS. The minutes of the Company and each of its
subsidiaries made available to counsel for Parent contain materially complete
and accurate records of all material actions taken, and summaries of all
meetings held, by the shareholders, the Board of Directors of the Company and
each of its subsidiaries (and any committees thereof) since the time of
incorporation of the Company and each of its subsidiaries, as the case may be.
2.18 ENVIRONMENTAL MATTERS. To the Knowledge of the Company, the
Company has complied with all applicable laws, statutes, ordinances, rules,
regulations, codes, orders, decrees or injunctions enacted for the protection of
the environment (including, without limitation, air, water vapor, surface water,
groundwater and soils) against contamination with hazardous substances or wastes
("ENVIRONMENTAL LAWS") except, in any such case, as is not reasonably likely to
result in a Company Material Adverse Effect. There is no environmental suit,
action, claim or proceeding pending, or to the Knowledge of the Company,
threatened, naming the Company as party thereto, except as is not reasonably
likely to result in a Company Material Adverse Effect. Notwithstanding any other
representations and warranties in this ARTICLE II, the representations and
warranties contained in this SECTION 2.18 constitute the sole representations
and warranties of the Company with respect to any Environmental Law or
environmental liabilities, costs or obligations of any nature.
2.19 BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES. Except as set
forth in SECTION 2.19 of the Disclosure Schedule, the Company has not incurred,
nor will it incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions, fees related to investment banking or
similar advisory services or any similar charges in connection with the
Agreement or any transaction contemplated hereby. SECTION 2.19 of the Disclosure
Schedule sets forth the principal terms and conditions of any agreement, written
or oral, with respect to such fees.
2.20 EMPLOYEE BENEFIT PLANS AND COMPENSATION.
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(a) DEFINITIONS. For all purposes of this Agreement, the
following terms shall have the following respective meanings:
"COMPANY EMPLOYEE PLAN" shall mean any plan, program,
policy, practice, contract, agreement (other than Employee Agreements) or other
arrangement providing for compensation, severance, termination pay, deferred
compensation, retirement benefits, performance awards, stock or stock-related
awards, fringe benefits or other employee benefits or remuneration of any kind,
whether written, unwritten or otherwise, funded or unfunded, including without
limitation, each "employee benefit plan," within the meaning of Section 3(3) of
ERISA which is or has been maintained, contributed to, or required to be
contributed to, by the Company or any ERISA Affiliate for the benefit of any
Employee, or with respect to which the Company or any ERISA Affiliate has or may
have any liability or obligation, including any International Employee Plan.
"COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended.
"DOL" shall mean the United States Department of
Labor.
"EMPLOYEE" shall mean any current or former employee,
consultant or director of the Company or any ERISA Affiliate.
"EMPLOYEE AGREEMENT" shall mean each management,
employment, severance, consulting, relocation, repatriation, expatriation,
visas, work permit or other agreement, or contract (including, without
limitation, any offer letter or any agreement providing for acceleration of
Company Options, or any other agreement providing for compensation or benefits)
between the Company or any ERISA Affiliate and any Employee.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
"ERISA AFFILIATE" shall mean any other person or
entity under common control with the Company within the meaning of Section
414(b), (c), (m) or (o) of the Code, and the regulations issued thereunder.
"FMLA" shall mean the Family Medical Leave Act of
1993, as amended.
"HIPAA" shall mean the Health Insurance Portability
and Accountability Act of 1996, as amended.
"INTERNATIONAL EMPLOYEE PLAN" shall mean each Company
Employee Plan or Employee Agreement that has been adopted or maintained by the
Company or any ERISA Affiliate, whether formally or informally or with respect
to which the Company or any ERISA Affiliate will or may have any liability, for
the benefit of Employees who perform services outside the United States. For the
avoidance of doubt, this shall include, in Israel, manager's insurance or other
provident or pension funds which are not government-mandated but were set up to
provide for Company's legal
-35-
obligation to pay statutory severance pay (Pitzuay Piturim) under the Severance
Pay Law 5723-1963.
"IRS" shall mean the United States Internal Revenue
Service.
"MULTIEMPLOYER PLAN" shall mean any Pension Plan (as
defined below) which is a "multiemployer plan" as defined in Section 3(37) of
ERISA.
"PENSION PLAN" shall mean each Company Employee Plan
that is an "employee pension benefit plan," within the meaning of Section 3(2)
of ERISA.
(b) SCHEDULE. SECTION 2.20(b)(1) of the Disclosure Schedule
contains an accurate and complete list of each Company Employee Plan and each
Employee Agreement. The Company has not made any plan or commitment to establish
any new Company Employee Plan or Employee Agreement, to modify any Company
Employee Plan or Employee Agreement (except to the extent required by law or to
conform any such Company Employee Plan or Employee Agreement to the requirements
of any applicable law, in each case as previously disclosed to Parent in
writing, or as required by this Agreement), or to enter into any Company
Employee Plan or Employee Agreement. SECTION 2.20(b)(2) of the Disclosure
Schedule sets forth a table setting forth the name and current salary of each
employee of the Company.
(c) DOCUMENTS. The Company has provided to Parent (i) correct
and complete copies of all documents embodying each Company Employee Plan and
each Employee Agreement including, without limitation, all amendments thereto
and all related trust documents, (ii) the three (3) most recent annual reports
(Form Series 5500 and all schedules and financial statements attached thereto),
if any, required under ERISA or the Code in connection with each Company
Employee Plan, (iii) if the Company Employee Plan is funded, the most recent
annual and periodic accounting of Company Employee Plan assets, (iv) the most
recent summary plan description together with the summary(ies) of material
modifications thereto, if any, required under ERISA with respect to each Company
Employee Plan, (v) all material written agreements and contracts relating to
each Company Employee Plan, including, without limitation, administrative
service agreements and group insurance contracts, (vi) all communications
material to any Employee or Employees relating to any Company Employee Plan and
any proposed Company Employee Plans, in each case, relating to any amendments,
terminations, establishments, increases or decreases in benefits, acceleration
of payments or vesting schedules or other events which have not been adopted and
likely would result in any material liability to the Company, (vii) all
correspondence to or from any governmental agency relating to any Company
Employee Plan, (viii) all COBRA forms and related notices (or such forms and
notices as required under comparable law), (ix) all discrimination tests for
each Company Employee Plan for the three (3) most recent plan years, (x) the
most recent IRS determination or opinion letter issued with respect to each
Company Employee Plan, (xi) any licenses or permits held by Company which enable
it to employ foreign employees or employees from "territories" currently
administered by Israel, and (xii) the most recent actuarial valuations, if any,
prepared for each Company Employee Plan.
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(d) EMPLOYEE PLAN COMPLIANCE. The Company has performed, in
all material respects, all obligations required to be performed by them under
each Company Employee Plan, and each Company Employee Plan has been established
and maintained in all material respects in compliance with its terms and in
material compliance with all applicable laws, statutes, orders, rules and
regulations, including but not limited to ERISA or the Code. Any Company
Employee Plan intended to be qualified under Section 401(a) of the Code has
obtained a favorable determination letter (or opinion letter, if applicable)
since January 1, 2000 as to its qualified status under the Code and there has
been no event, condition or circumstance that has adversely affected or is
likely to adversely affect such qualified status. No "prohibited transaction,"
within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA,
and not otherwise exempt under Section 408 of ERISA, has occurred with respect
to any Company Employee Plan. There are no actions, suits or claims pending or,
to the Knowledge of the Company, threatened or reasonably anticipated (other
than routine claims for benefits) against any Company Employee Plan or against
the assets of any Company Employee Plan. Each Company Employee Plan can be
amended, terminated or otherwise discontinued after the Effective Time in
accordance with its terms, without liability to Parent, the Company or any ERISA
Affiliate (other than ordinary administration expenses). There are no audits,
inquiries or proceedings pending or to the Knowledge of the Company or any ERISA
Affiliates, threatened by the IRS, DOL, or any other Governmental Entity with
respect to any Company Employee Plan. Neither the Company nor any ERISA
Affiliate is subject to any penalty or tax with respect to any Company Employee
Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the Code.
The Company has timely made all contributions and other payments required by and
due under the terms of each Company Employee Plan.
(e) NO PENSION PLANS. Neither the Company nor any ERISA
Affiliate has ever maintained, established, sponsored, participated in, or
contributed to, any (i) Pension Plans subject to Title IV of ERISA. At no time
has the Company or any ERISA Affiliate contributed to or been obligated to
contribute to any Multiemployer Plan. Neither the Company nor any ERISA
Affiliate has at any time ever maintained, established, sponsored, participated
in or contributed to any multiple employer plan or to any plan described in
Section 413 of the Code.
(f) NO SELF-INSURED PLANS. Neither the Company nor any ERISA
Affiliate has ever maintained, established sponsored, participated in or
contributed to any self-insured plan that provides benefits to employees
(including, without limitation, any such plan pursuant to which a stop-loss
policy or contract applies).
(g) NO POST-EMPLOYMENT OBLIGATIONS. No Company Employee Plan
or Employee Agreement provides, or reflects or represents any liability to
provide, retiree life insurance, retiree health or other retiree employee
welfare benefits to any person for any reason, except as may be required by
COBRA or other applicable statute, and the Company has never represented,
promised or contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) or any other person that such
Employee(s) or other person would be provided with retiree life insurance,
retiree health or other retiree employee welfare benefits, except to the extent
required by statute.
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(h) COBRA; FMLA; HIPAA. The Company and each ERISA Affiliate
has complied in all material respects with COBRA, FMLA, HIPAA, and any similar
provisions of state law applicable to their Employees. To the Knowledge of the
Company, neither the Company nor any ERISA Affiliate has unsatisfied obligations
to any Employees of qualified beneficiaries pursuant to COBRA, HIPAA or any
state law governing health care coverage or extension.
(i) EFFECT OF TRANSACTION. Except as set forth in SECTION
2.20(i) of the Disclosure Schedule, the execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) SECTION 280G. No payment or benefit which has been, will
be or may be made by the Company or any ERISA Affiliates with respect to any
Employee will, or could reasonably be expected to, be characterized as a
"parachute payment," within the meaning of Section 280G(b)(2) of the Code.
(k) EMPLOYMENT MATTERS. The Company is in compliance with all
applicable foreign, federal, state and local laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment,
employee safety and wages and hours, and in each case, with respect to
Employees: (i) has withheld and reported by law or by agreement to be withheld
and reported with respect to wages, salaries and other payments to Employees,
(ii) is not liable in any material respect for any arrears of wages, severance
pay or any taxes or any penalty for failure to comply with any of the foregoing,
and (iii) except as set forth in SECTION 2.20(k) of the Disclosure Schedule, is
not liable for any payment to any trust or other fund governed by or maintained
by or on behalf of any governmental authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice). There are no pending or, to the
Company's Knowledge, threatened or reasonably anticipated claims or actions
against Company or any Company trustee under any worker's compensation policy.
Except as set forth in SECTION 2.20(k) of the Disclosure Schedule, the services
provided by each of the Company's and its ERISA Affiliates' Employees is
terminable at the will of the Company and its ERISA Affiliates and any such
termination would result in no liability to the Company or any ERISA Affiliate.
Neither the Company nor any ERISA Affiliate has direct or indirect material
liability with respect to any misclassification of any person as an independent
contractor rather than as an employee, or with respect to any employee leased
from another employer.
(l) LABOR. No work stoppage or labor strike against the
Company is pending, or to the Knowledge of the Company, threatened, or
reasonably anticipated. The Company does not know of any activities or
proceedings of any labor union to organize any Employees. There are no actions,
suits, claims, labor disputes or formal grievances pending or threatened or
reasonably anticipated relating to any labor matters involving any Employee,
including, without limitation,
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charges of unfair labor practices or discrimination complaints. The Company has
not engaged in any unfair labor practices within the meaning of the National
Labor Relations Act. The Company is not presently, nor has it been in the past,
a party to, or bound by, any collective bargaining agreement or union contract
with respect to Employees and no collective bargaining agreement is being
negotiated by the Company.
(m) NO INTERFERENCE OR CONFLICT. To the Knowledge of the
Company, no Shareholder, director, officer, Employee or consultant of the
Company is obligated under any contract or agreement, subject to any judgment,
decree, or order of any court or administrative agency that would interfere with
such person's efforts to promote the interests of the Company or that would
interfere with the Company's business. Neither the execution nor delivery of
this Agreement, nor the carrying on of the Company's business as presently
conducted or proposed to be conducted nor any activity of such officers,
directors, Employees or consultants in connection with the carrying on of the
Company's business as presently conducted or currently proposed to be conducted
will, to the Knowledge of the Company, conflict with or result in a breach of
the terms, conditions, or provisions of, or constitute a default under, any
contract or agreement under which any of such officers, directors, Employees, or
consultants is now bound.
(n) INTERNATIONAL EMPLOYEE PLAN. No International Employee
Plan has unfunded liabilities that are not offset by insurance or fully accrued.
Except as required by law, no condition exists that would prevent the Company or
Parent from terminating or amending any International Employee Plan at any time
for any reason without liability to the Company or its ERISA Affiliates (other
than ordinary administration expenses or routine claims for benefits).
(o) ISRAELI EMPLOYEES. Solely with respect to Employees who
reside or work in Israel ("ISRAELI EMPLOYEES"), except as set forth in SECTION
2.20(o) of the Disclosure Schedule: (i) the Company is not a party to any
collective bargaining contract, collective labor agreement or other contract or
arrangement with a labor union, trade union or other organization or body
involving any of its Israeli Employees, or is otherwise required (under any
legal requirement, under any contract or otherwise) to provide benefits or
working conditions beyond the minimum benefits and working conditions required
by law to be provided pursuant to rules and regulation of the Histadrut (General
Federation of Labor), the Coordinating Bureau of Economic Organization and the
Industrialists' Association. The Company has not recognized or received a demand
for recognition from any collective bargaining representative with respect to
any of its Israeli Employees. The Company does not have and is not subject to,
and no Israeli Employee of the Company benefits from, any extension order
(tzavei harchava) or any contract or arrangement with respect to employment or
termination thereof; (ii) all of the Israeli Employees are "at will" employees
subject to the termination notice provisions included in employment agreements
or applicable law; (iii) there is no Contract between the Company and any of its
Israeli Employees or directors that cannot be terminated by the Company upon
less than three months notice without giving rise to a claim for damages or
compensation (except for statutory severance pay); (iv) the Company's
obligations to provide statutory severance pay to its Israeli Employees pursuant
to the Severance Pay Law (5723-1963) are fully funded or accrued on the
Financials and the Company does not use the provisions of Section 14 of the
Severance Pay Law with respect to such statutory severance pay; (v) except as
set
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forth in SECTION 2.20(o) of the Disclosure Schedule, the Company has no
Knowledge of any circumstance that could give rise to any valid claim by a
current or former Israeli Employee for compensation on termination of employment
(beyond the statutory or contractual severance pay to which employees are
entitled, which contractual severance pay is listed elsewhere on the Disclosure
Schedules); (vi) all amounts that the Company is legally or contractually
required either (x) to deduct from its Israeli Employees' salaries or to
transfer to such Israeli Employees' pension or provident, life insurance,
incapacity insurance, continuing education fund or other similar funds or (y) to
withhold from their Israeli Employees' salaries and benefits and to pay to any
Governmental Entity as required by the Ordinance and National Insurance Law or
otherwise have, in each case, been duly deducted, transferred, withheld and
paid, and the Company does not have any outstanding obligation to make any such
deduction, transfer, withholding or payment; and (vii) the Company is in
compliance in all material respects with all applicable legal requirements and
contracts relating to employment, employment practices, wages, bonuses and other
compensation matters and terms and conditions of employment related to its
Israeli Employees, including but not limited to The Prior Notice to the Employee
Law 2002, The Notice to Employee (Terms of Employment) Law 2002, the Prevention
of Sexual Harassment Law (5758-1998), and The Employment by Human Resource
Contractors Law 1996. All obligations of the Company with respect to statutorily
required severance payments to Israeli Employees have been fully satisfied or
have been fully funded by contributions to appropriate insurance funds pursuant
to the Severance Pay Law (5723-1963). Other than as set forth in SECTION 2.20(o)
of the Disclosure Schedule: (i) as of the date hereof, the Company has not
engaged any Israeli employees whose employment would require special licenses or
permits, and (ii) there are no unwritten Company policies or customs which, by
extension, could entitle Israeli Employees to benefits in addition to what they
are entitled by law (including, by way of example but without limitation,
unwritten customs concerning the payment of statutory severance pay when it is
not legally required). The Company has not engaged any consultants,
sub-contractors or freelancers who, according to Israeli law, would be entitled
to the rights of an employee vis a vis the Company, including rights to
severance pay, vacation, recuperation pay (dmei havaraa) and other employee
related statutory benefits. For purposes of this Agreement, the term "Israeli
Employee" shall be construed to include, without limitation, consultants, sales
agents and other independent contractors who spend (or spent) a majority of
their working time in Israel on the business of the Company or a subsidiary
(each of whom shall be so identified in Section 2.20(o) of the Disclosure
Schedule. In addition, the Company has provided to Parent: (i) a correct and
complete summary of the calculations concerning the components of the Israeli
Employees' salaries, including any components which are not included in the
basis for calculation of amounts set aside for purposes of statutory severance
pay and pension; (ii) any and all agreements with human resource contractors, or
with consultants, sub-contractors or freelancers; (iii) a summary of its
policies, procedures and customs regarding termination of Israeli Employees; and
(iv) a summary of any dues it pays to the Histadrut Labor Organization and
whether the Company participates in the expenses of any worker's committee
(Va'ad Ovdim).
2.21 INSURANCE. SECTION 2.21 of the Disclosure Schedule lists all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company,
including the type of coverage, the carrier, the amount of coverage, the term
and the annual premiums of such policies. There is no claim by the Company
pending
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under any of such policies or bonds as to which coverage has been questioned,
denied or disputed or that the Company has a reason to believe will be denied or
disputed by the underwriters of such policies or bonds. In addition, there is no
pending claim of which its total value (inclusive of defense expenses) will
exceed the policy limits. All premiums due and payable under all such policies
and bonds have been paid, (or if installment payments are due, will be paid if
incurred prior to the Closing Date) and the Company is otherwise in material
compliance with the terms of such policies and bonds (or other policies and
bonds providing substantially similar insurance coverage). Such policies and
bonds (or other policies and bonds providing substantially similar coverage)
have been in effect since the Company's incorporation and remain in full force
and effect. The Company does not have Knowledge or reasonable belief of
threatened termination of, or premium increase with respect to, any of such
policies. The Company has never maintained, established, sponsored, participated
in or contributed to any self-insurance plan.
2.22 COMPLIANCE WITH LAWS. The Company has complied in all material
respects with, is not in violation in any material respects of, and has not
received any notices of violation with respect to, any foreign, federal, state
or local statute, law or regulation.
2.23 WARRANTIES; INDEMNITIES. Except for the warranties and indemnities
contained in those contracts and agreements set forth in SECTION 2.23 of the
Disclosure Schedule and warranties implied by law, the Company has not given any
warranties or indemnities relating to products or technology sold or services
rendered by the Company.
2.24 COMPLETE COPIES OF MATERIALS. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.25 INAPPLICABILITY OF CERTAIN STATUTES. Other than the Israeli
Companies Law and other than competition statutes, the Company is not subject to
any business combination, control share acquisition, fair price or similar
statute that applies to the Merger or any other transaction contemplated by this
Agreement.
2.26 GRANTS, INCENTIVES AND SUBSIDIES. SECTION 2.26 of the Disclosure
Schedule provides a complete list, as of the date hereof, of all pending and
outstanding grants, incentives, exemptions and subsidies (collectively,
"GRANTS") from the Government of the State of Israel or any agency thereof, or
from any foreign governmental or administrative agency, granted to the Company,
including, without limitation, grant of Approved Enterprise Status from the
Investment Center and grants from OCS. The Company has made available to the
Parent, prior to the date hereof, correct copies of all documents evidencing
Grants submitted by the Company and of all letters of approval, certificates of
completion, and supplements and amendments thereto, granted to the Company, and
all material correspondence related thereto. SECTION 2.26 of the Disclosure
Schedule lists, as of the date hereof: (a) all material undertakings of the
Company given in connection with the Grants; (b) the aggregate amount of each
Grant; (c) the aggregate monetary outstanding obligations of the Company under
each Grant with respect to royalties; (d) the outstanding amounts to be paid by
OCS to the Company and (e) the composition of such obligations or amount by the
product or product family to which it relates. The Company is in compliance, in
all material respects, with the terms
-41-
and conditions of all Grants and, except as disclosed in SECTION 2.26 of the
Disclosure Schedule, has duly fulfilled, in all material respects, all the
undertakings required thereby. The Company is not aware of any event or other
set of circumstances which would reasonably be expected to lead to the
revocation or material modification of any of the Grants.
2.27 ENCRYPTION AND OTHER RESTRICTED TECHNOLOGY. The Company's business
as currently conducted does not involve the use or development of, or engagement
in, encryption technology, or other technology whose development,
commercialization or export is restricted under Israeli law, and the Company's
business as currently conducted does not require the Company to obtain a license
from the Israeli Ministry of Defense or an authorized body thereof pursuant to
Section 2(a) of the Control of Products and Services Declaration (Engagement in
Encryption), 1974, as amended, or other legislation regulating the development,
commercialization or export of technology.
2.28 INFORMATION STATEMENTS. The information furnished on or in any
document mailed, delivered or otherwise furnished to shareholders of the Company
by the Company in connection with the solicitation of their consent to this
Agreement and the Merger, will not contain, at or prior to the Effective Time,
any untrue statement of a material fact and will not omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which made not misleading.
2.29 REPRESENTATIONS COMPLETE. The representations or warranties made
by the Company (as modified by the Disclosure Schedule) in this Agreement, and
the statements made in any exhibit, schedule or certificate furnished by the
Company pursuant to this Agreement, when taken as a whole, do not contain, or
will not contain at the Effective Time, any untrue statement of a material fact,
or omit or will omit at the Effective Time to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
ARTICLE III
INTENTIONALLY OMITTED
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Each of Parent and Sub hereby represents and warrants to the Company
that on the date hereof and as of the Effective Time, as though made at the
Effective Time, as follows:
4.1 ORGANIZATION, STANDING AND POWER. Each of Parent and Sub is a
corporation duly organized, validly existing and, where applicable, in good
standing under the laws of its jurisdiction of incorporation and has the
corporate power and authority to own its properties and to carry on its business
as now being conducted. Each of Parent and Sub is duly qualified or licensed to
do
-42-
business and, where applicable, is in good standing as a foreign corporation in
each jurisdiction in which the failure to be so qualified or licensed would have
a material adverse effect on the business, assets (whether tangible or
intangible), financial condition, operations or capitalization of Parent, taken
as a whole (a "PARENT MATERIAL ADVERSE EFFECT"); provided, however, that any
change, event or effect (a) relating to the industry in which Parent operates as
a whole and which does not affect Parent disproportionately in any material
respect, (b) resulting from a change generally affecting the United States or
world economy or capital markets and which does not affect Parent
disproportionately in any material respect, (c) shareholder class action
litigation brought by a stockholder or stockholders of Parent arising from
allegations of a breach of fiduciary duty by Parent's Board of Directors
relating to this Agreement, or (d) a change in the price per share of Parent
Common Stock or a change in the trading volume of Parent Common Stock, shall not
be deemed to constitute a Parent Material Adverse Effect.
4.2 AUTHORITY. Each of Parent and Sub has all requisite corporate power
and authority to enter into this Agreement and any Related Agreements to which
it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and any Related Agreements
to which it is a party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Parent and Sub. This Agreement and any Related Agreements to
which Parent and Sub are parties have been duly executed and delivered by Parent
and Sub and, assuming the due authorization, execution and delivery by the other
parties hereto and thereto, constitute the valid and binding obligations of
Parent and Sub, enforceable against each of Parent and Sub in accordance with
their terms, except as such enforceability may be limited by principles of
public policy and subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies.
4.3 CONSENTS. Other than with respect to procedures under the Israeli
Companies Law, the execution and delivery by Parent or Sub of this Agreement and
any Related Agreements to which Parent or Sub is a party and the consummation of
the transactions contemplated hereby and thereby, will not require any consent,
waiver, approval, order or authorization or permit of, or registration,
declaration or filing with, or notification to any Governmental Entity, except
(i) for (A) such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
securities laws, (B) compliance with the pre-merger notification requirements of
the HSR Act and under the comparable competition foreign laws that the parties
reasonably determine to apply; (C) the OCS Approval; and (D) obtaining the
Investment Center Approval; and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications:
(A) would not, individually or in the aggregate, reasonably be expected to have
a Parent Material Adverse Effect, or (B) would not prevent or materially delay
consummation of the Merger or otherwise prevent the parties hereto from
performing their respective obligations under this Agreement.
4.4 CAPITAL RESOURCES. Parent has sufficient capital resources to pay
the Component One Consideration at Closing, and has no current reason to believe
it will not have sufficient capital resources to pay additional consideration
hereunder when due and payable.
-43-
4.5 BROKER'S AND FINDERS' FEES. Except as set forth on SCHEDULE 4.5,
neither Parent nor Sub has incurred, nor will it incur, directly or indirectly,
any liability for brokerage or finders' fees or agents' commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
4.6 NO CONFLICTS. The execution and delivery of this Agreement and any
Related Agreement to which Parent or Sub is a party do not, and the consummation
of the transactions contemplated hereby will not, Conflict with, or result in
any Conflict with (i) any provision of the certificate of incorporation or
bylaws, or equivalent organizational document, of Parent or Sub, as amended,
respectively, (ii) any mortgage, indenture, lease, contract or other agreement
or instrument, permit, concession, franchise or license to which Parent or any
of its respective properties or assets are subject and which has been listed as
an exhibit to Parent's Annual Report on Form 10-K for the year ended December
31, 2003 ("PARENT 10-K") and such other filings under the Securities Act and
Exchange Act which are made subsequent to the Parent 10-K and prior to the date
hereof, or (iii) any material judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Parent or Sub or their respective properties or
assets.
4.7 SEC REPORTS; FINANCIAL STATEMENTS.
(a) Parent has made available to the Company a correct and
complete copy of each report, schedule, registration statement and definitive
proxy statement filed or submitted by Parent with the Securities and Exchange
Commission (the "SEC") since December 31, 2002 (the "PARENT SEC REPORTS") and
prior to the date of this Agreement, which are all the forms, reports and
documents required to be filed by Parent with the SEC since such time. The
Parent SEC Reports: (i) were prepared in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder; and (ii) did not at the time of
filing thereof (or if any Parent SEC Report filed prior to the date of this
Agreement was amended or superseded by a filing prior to the date of this
Agreement then on the date of filing of such amendment or superseded filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of Parent's subsidiaries is required to file or submit any
reports or other documents with the SEC. Since the date of filing of the last
Parent SEC Report, there has been no event, condition or circumstance that has
caused or that is reasonably likely to cause, a Parent Material Adverse Effect.
(b) Each set of consolidated financial statements (including,
in each case, any related notes thereto) contained in the Parent SEC Reports are
true and correct in all material respects and have been prepared in accordance
with GAAP consistently applied on a consistent basis throughout the periods
indicated and consistent with each other (except that any interim period
financial statements do not contain notes and other presentation items that may
be required by GAAP). Such financial statements present fairly Parent's
financial condition, operating results and cash flows as of the dates and during
the periods indicated therein, subject in the case of any interim financial
statements to normal year-end adjustments, which are not material in amount or
significance in any individual case or in the aggregate; provided, however, that
to the extent a Parent
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SEC Report shall have been amended or superseded, the foregoing representation
shall only apply to such amended or superseding Parent SEC Report.
4.8 INTERIM OPERATIONS OF SUB. Sub was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement and has engaged in
no business activities other than as contemplated by this Agreement.
4.9 SUB BOARD APPROVAL. The Board of Directors of Sub has: (a)
determined that the Merger is fair to, and in the best interests of, Sub and its
shareholders, and that, considering the financial position of the merging
companies, no reasonable concern exists that the Surviving Corporation will be
unable to fulfill the obligations of Sub to its creditors; (b) approved this
Agreement, the Merger and the other transactions contemplated by this Agreement;
and (c) determined to recommend that the shareholder of Sub approve this
Agreement, the Merger and the other transactions contemplated by this Agreement.
4.10 LITIGATION. Other than as set forth in the Parent SEC Reports,
there is no material action, suit, claim or proceeding of any nature pending, or
to the Knowledge of the Parent, threatened, against the Parent, its properties
(tangible or intangible) or any of its officers or directors, nor to the
Knowledge of the Parent is there any reasonable basis therefor. There is no
investigation or other proceeding pending or, to the Knowledge of the Parent,
threatened, against the Parent, any of its properties (tangible or intangible)
or any of its officers or directors by or before any Governmental Entity, nor to
the Knowledge of the Parent is there any reasonable basis therefor other than in
connection with Parent's restatement of certain financial statements pursuant to
a Form 8-K/A filed with the SEC on August 27, 2004. No Governmental Entity has
at any time challenged or questioned the legal right of the Parent to conduct
its operations as presently or previously conducted or as presently contemplated
to be conducted.
ARTICLE V
CONDUCT PRIOR TO THE EFFECTIVE TIME
5.1 CONDUCT OF BUSINESS OF THE COMPANY. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees, and agrees to cause each of
its subsidiaries, to conduct its business, except to the extent that Parent
shall otherwise consent in writing, in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay its debts and
Taxes when due, to pay or perform other obligations when due (including accounts
payable), and, to the extent consistent with such business, to preserve intact
its present business organizations, use reasonable efforts to keep available the
services of its present officers and key employees and preserve the
relationships with its customers, suppliers, distributors, licensors, licensees,
and others having business dealings with them, all with the goal of preserving
unimpaired the goodwill and ongoing businesses of the Company and its
subsidiaries at the Effective Time. The Company shall promptly notify Parent of
any event or occurrence or emergency not in the ordinary course of business of
the Company or its subsidiaries and any material event involving the Company or
its subsidiaries that arises during the period from the date of this Agreement
and continuing until the earlier of the
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termination date of this Agreement or the Effective Time. In addition to the
foregoing, except as expressly contemplated by this Agreement and except as
expressly set forth in SECTION 5.1 of the Disclosure Schedule, neither the
Company nor any of its subsidiaries shall, without the prior written consent of
Parent, from and after the date of this Agreement:
(a) cause or permit any amendments to its organizational
documents without the consent of Parent, which may not be unreasonably withheld
or delayed;
(b) make any expenditures or enter into any commitment or
transaction exceeding $50,000 individually or $150,000 in the aggregate or any
commitment or transaction of the type described in SECTION 2.8 hereof;
(c) pay, discharge, waive or satisfy, in an amount in excess
of $50,000 in any one case, or $150,000 in the aggregate, any claim, liability,
right or obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business or of liabilities reflected or reserved against in the
Current Balance Sheet;
(d) adopt or change accounting methods or practices (including
any change in depreciation or amortization policies) other than as required by
GAAP;
(e) make or change any material election in respect of Taxes,
adopt or change any accounting method in respect of Taxes, enter into any
closing agreement, settle any claim or assessment in respect of Taxes, consent
to any extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes or file any Tax Return unless a copy of such Tax
Return has been delivered to Parent for review a reasonable time prior to filing
and Parent has approved such Tax Return;
(f) revalue any of its assets (whether tangible or
intangible), including without limitation writing down the value of inventory or
writing off notes or accounts receivable other than in the ordinary course of
business consistent with past practice;
(g) declare, set aside, or pay any dividends on or make any
other distributions (whether in cash, stock or property) in respect of any
Company Shares, or split, combine or reclassify any Company Shares or issue or
authorize the issuance of any other securities in respect of, in lieu of or in
substitution for Company Shares, or repurchase, redeem or otherwise acquire,
directly or indirectly, any Company Shares (or options, warrants or other rights
exercisable therefor);
(h) increase the salary or other compensation payable or to
become payable to any officer, director, employee or advisor, or make any
declaration, payment or commitment or obligation of any kind for the payment
(whether in cash or equity) of a severance payment, termination payment, bonus
or other additional salary or compensation to any such person, in each case
other than in the ordinary course of business and except payments made pursuant
to written agreements outstanding on the date hereof and disclosed in the
Disclosure Schedule or as required by law;
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(i) other than pursuant to standard end-user agreements, sell,
lease, pledge, assign, license or otherwise dispose of or grant any security
interest in any of its properties or assets, including without limitation the
sale of any accounts receivable, except properties or assets (whether tangible
or intangible) which are not Company Intellectual Property and only in the
ordinary course of business and consistent with past practices;
(j) make any loan to any person or entity (other than the
Company's subsidiaries) or purchase debt securities of any person or entity or
amend the terms of any outstanding loan agreement, other than travel advances in
the ordinary course of business;
(k) incur any indebtedness, guarantee any indebtedness of any
person or entity, issue or sell any debt securities, or guarantee any debt
securities of any person or entity;
(l) waive or release any right or claim, including any
write-off or other compromise of any account receivable;
(m) commence or settle any lawsuit, threat of any lawsuit or
proceeding or other investigation against the Company;
(n) except as set forth in SECTION 5.1(n) of the Disclosure
Schedule, issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any Company
Shares or any securities convertible into, exercisable or exchangeable for, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue or purchase any such shares
or other convertible securities, except for the issuance of Company Shares
pursuant to the exercise of outstanding Company Options and Company Warrants;
(o) other than pursuant to standard end-user agreements, sell,
lease, license or transfer to any person or entity any rights to any Company
Intellectual Property or enter into any agreement or modify any existing
agreement with respect to any Company Intellectual Property with any person or
entity or with respect to any Intellectual Property of any person or entity,
(ii) purchase or license any Intellectual Property or enter into any agreement
or modify any existing agreement with respect to the Intellectual Property of
any person or entity, (iii) enter into any agreement or modify any existing
agreement with respect to the development of any Intellectual Property with a
third party, or (iv) change pricing or royalties set or charged to its customers
or licensees, or the pricing or royalties set or charged by persons who have
licensed Intellectual Property to the Company or any of its subsidiaries;
(p) enter into or amend any Contract pursuant to which any
other party is granted marketing, distribution, development, manufacturing or
similar rights of any type or scope with respect to any products or technology
of the Company or any of its subsidiaries, in each case other than in the
ordinary course of business;
(q) enter into any agreement to purchase or sell any interest
in real property, grant any security interest in any real property, enter into
any lease, sublease, license or other occupancy
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agreement with respect to any real property or alter, amend, modify or terminate
any of the terms of any Lease Agreements; or
(r) amend or otherwise modify (or agree to do so), except in
an immaterial respect and in the ordinary course of business, or violate the
terms of, any of the Material Contracts set forth or described in the Disclosure
Schedule;
(s) acquire or agree to acquire by merging or consolidating
with, or by purchasing any assets or equity securities of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to the
business of the Company or its subsidiaries, taken as a whole;
(t) in each case other than in the ordinary course of
business, adopt or amend any Company Employee Plan, enter into any employment
contract, pay or agree to pay any bonus or special remuneration to any director
or Employee, or increase or modify the salaries, wage rates, or other
compensation (including, without limitation, any equity-based compensation) of
its Employees except payments made pursuant to written agreements outstanding on
the date hereof and disclosed in SECTION 5.1(t) of the Disclosure Schedule;
(u) enter into any strategic alliance, affiliate agreement or
joint marketing arrangement or agreement;
(v) [Intentionally Omitted];
(w) except as set forth on SECTION 5.1(w) of the Disclosure
Schedule, hire, promote, demote or terminate any Employees other than in the
ordinary course of business, or encourage any Employees to resign;
(x) alter, or enter into any commitment to alter, its interest
in any corporation, association, joint venture, partnership or business entity
in which the Company or any of its subsidiaries directly or indirectly holds any
interest;
(y) cancel, amend or renew any insurance policy; or
(z) take, or agree in writing or otherwise to take, any of the
actions described in SECTIONS 5.1(a) through 5.1(y) hereof, or any other action
that would (i) prevent the Company from performing, or cause the Company not to
perform its covenants hereunder or (ii) cause or result in any of its
representations and warranties contained herein being untrue or incorrect.
5.2 PROCEDURES FOR REQUESTING PARENT CONSENT. If the Company desires to
take an action which would be prohibited pursuant to SECTION 5.1 of this
Agreement without the written consent of Parent, prior to taking such action the
Company may request such written consent by sending an e-mail or facsimile to
both of the following individuals:
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(a) General Counsel
Telephone: (408)395-6529
Facsimile: (408) 354-2470
E-mail address: jo-anne.sinclair@scansoft.com
(b) Senior Vice President Corporate Development
Telephone: (978) 977-2041
Facsimile: (978) 977-2436
E-mail address: richard.palmer@scansoft.com
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 MERGER PROPOSAL. Within one (1) Business Day after the execution
and delivery of this Agreement:
(a) the Company and Sub shall cause a merger proposal (in the
Hebrew language) in the form of EXHIBIT C (the "MERGER PROPOSAL") to be executed
in accordance with Section 316 of the Israeli Companies Law;
(b) the Company and Sub shall call the Company General Meeting
(as defined in SECTION 6.2) and a general meeting of Sub's shareholders,
respectively, and
(c) each of the Company and Sub shall deliver the Merger
Proposal to the Companies Registrar. The Company and Merger Sub shall cause a
copy of the Merger Proposal to be delivered to each of their respective secured
creditors, if any, no later than three (3) days after the date on which the
Merger Proposal is delivered to the Companies Registrar and shall promptly
inform their respective non-secured creditors of the Merger Proposal and its
contents in accordance with Section 318 of the Israeli Companies Law and the
regulations promulgated thereunder. Promptly after the Company and Sub shall
have complied with the preceding sentence and with subsections (i) and (ii)
below, but in any event no more than three (3) Business Days following the date
on which such notice was sent to the creditors, the Company and Sub shall inform
the Companies Registrar, in accordance with Section 317(b) of the Israeli
Companies Law, that notice was given to their respective creditors under Section
318 of the Israeli Companies Law and the regulations promulgated thereunder. In
addition to the above, each of the Company and, if applicable, Sub, shall:
(i) Publish a notice to its creditors, stating that a
Merger Proposal was submitted to the Companies Registrar and that the creditors
may review the Merger Proposal at the office of the Companies Registrar, the
Company's registered offices or Sub's registered offices, as applicable, and at
such other locations as the Company or Sub, as applicable, may determine, in (A)
two (2) daily Hebrew newspapers, on the day that the Merger Proposal is
submitted to the Companies Registrar, (B) a popular newspaper in the United
States, no later than three (3) days
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following the day on which the Merger Proposal was submitted to the Companies
Registrar, and (C) if required, in such other manner as may be required by
applicable law and regulations;
(ii) Within four (4) days from the date of submitting
the Merger Proposal to the Companies Registrar, send a notice by registered mail
to all of the "Substantial Creditors" (as such term is defined in the
regulations promulgated under the Israeli Companies Law) that the Company or
Sub, as applicable, is aware of, in which it shall state that a Merger Proposal
was submitted to the Companies Registrar and that the creditors may review the
Merger Proposal at such additional locations, if such locations were determined
in the notice referred to in subsection (i) above; and
(iii) If it employs 50 or more persons, send to the
"workers committee" or display in a prominent place at the Company's premises, a
copy of the notice published in a daily Hebrew newspaper (as referred to in
subsection (i)(A) above), no later than three (3) days following the day on
which the Merger Proposal was submitted to the Companies Registrar.
6.2 COMPANY GENERAL MEETING.
(a) The Company shall take all action necessary under all
applicable Legal Requirements to send a notice of the shareholders' meeting,
together with a summary of this Agreement, the Merger and the other transactions
contemplated by this Agreement (the "SUMMARY") to the Company's shareholders and
hold a shareholders' meeting and a meeting of shareholders of each class of
Company Shares (each such meeting to take place on the same date) to vote on the
proposal to approve this Agreement, the Merger and the other transactions
contemplated by this Agreement (the "COMPANY GENERAL MEETING"). Subject to the
notice requirements of the Israeli Companies Law and the rules and regulations
promulgated thereunder and the Articles of Association of Company, the Company
General Meeting shall be held (on a date selected by the Company and consented
to by Parent, which consent shall not be unreasonably withheld) as promptly as
practicable after the date hereof but no later than 45 days after the filing of
the Merger Proposal. The Company shall solicit from its shareholders proxies in
favor of the approval of this Agreement, the Merger and the other transactions
contemplated by this Agreement. The Company shall call, notice, convene, hold,
conduct and solicit all proxies in connection with the Company General Meeting
in compliance with all applicable legal requirements, including the Israeli
Companies Law and the Articles of Association of Company. The Company may
adjourn or postpone the Company General Meeting: (i) if and to the extent
necessary to provide any necessary supplement or amendment to the Notice of the
Company General Meeting and the Summary to the Company's shareholders in advance
of a vote on this Agreement, the Merger and the other transactions contemplated
by this Agreement; or (ii) if, as of the time for which the Company General
Meeting is originally scheduled (as set forth in the Notice of the Company
General Meeting and the Summary), there are insufficient Company Shares
represented (either in person or by proxy) to constitute a quorum necessary to
conduct the business of the Company General Meeting.
(b) (i) the Board of Directors of the Company shall
unanimously recommend that the Company's shareholders vote in favor of and
approve this Agreement, the Merger and the other transactions contemplated by
this Agreement at the Company General Meeting; (ii) the Notice of the
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Company General Meeting and the Summary shall include a statement to the effect
that the Board of Directors of the Company has unanimously recommended that the
Company's shareholders vote in favor of and approve this Agreement, the Merger
and the other transactions contemplated by this Agreement at the Company General
Meeting; and (iii) neither the Board of Directors of Company nor any committee
thereof shall withhold, withdraw, amend, modify, change or propose or resolve to
withhold, withdraw, amend, modify or change, in each case in a manner adverse to
Parent, the unanimous recommendation of the Board of Directors of the Company
that the Company's shareholders vote in favor of and approve this Agreement, the
Merger and the other transactions contemplated by this Agreement.
(c) No later than three days after the approval of the Merger
by the Company's shareholders at Company General Meeting, Company shall (in
accordance with Section 317(b) of the Companies Law) inform the Companies
Registrar of the decision of the Company General Meeting with respect to the
Merger.
6.3 MERGER SUB GENERAL MEETING. Promptly after the occurrence or waiver
of the conditions for Closing set forth in SECTIONS 7.1 and 7.2 and no later
than the Closing Date, Sub shall hold its general meeting, and Parent (as the
sole shareholder of Sub) shall approve this Agreement, the Merger and the other
transactions contemplated by this Agreement at such general meeting. No later
than the earlier of (i) three days after the approval of this Agreement and (ii)
the Closing Date, the Merger and the other transactions contemplated by this
Agreement by Parent, as the sole shareholder of Sub at the Sub general meeting,
Sub shall (in accordance with Section 317(b) of the Companies Law and the
regulations thereunder) inform the Companies Registrar of the decision of Sub's
general meeting with respect to the Merger.
6.4 ISRAELI APPROVALS.
(a) Government Filings. Each party to this Agreement shall use
all reasonable efforts to deliver and file, as promptly as practicable after the
date of this Agreement, each notice, report or other document required to be
delivered by such party to, or filed by such party with, any Israeli
Governmental Entity with respect to the Merger. Without limiting the generality
of the foregoing, the Company and Parent shall use all reasonable efforts to
obtain, as promptly as practicable after the date of this Agreement, the
following consents and approvals, and any other consents and approvals that may
be required pursuant to Israeli Legal Requirements in connection with the
Merger: (i) the OCS Approval set forth in SECTION 7.1(c); and (ii) the
Investment Center Approval.
(b) TAX RULINGS.
(i) As soon as reasonably practicable after the
execution of this Agreement, the Company shall instruct its Israeli counsel,
advisors and accountants to prepare and file with the Israeli Income Tax
Commissioner an application for a ruling confirming that (A) any tax event of
the Company shareholders with respect to cash payments deliverable after the
Closing Date shall be deferred until the receipt of such payments by the
shareholders of the Company, and (B) any tax event of the Company shareholders
with respect to the Earnout Warrants issued
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hereunder shall be deferred until the sale of the shares underlying the Earnout
Warrants ((A) and (B) together, the "ISRAELI INCOME TAX RULING"). Each of
Company and Parent shall cause their respective Israeli counsel, advisors and
accountants to coordinate all activities, and to cooperate with each other and
keep each other informed with respect to the preparation and filing of such
application and in the preparation of any written or oral submissions that may
be necessary, proper or advisable to obtain the Israeli Income Tax Ruling.
(ii) As soon as reasonably practicable after the
execution of this Agreement, the Company shall instruct its Israeli counsel,
advisors and accountants to prepare and file with the Israeli Income Tax
Commissioner an application for a ruling either exempting Parent, Exchange Agent
and Surviving Corporation from any obligation to withhold Israeli Tax at source
from any consideration payable or otherwise deliverable pursuant to this
Agreement, or clarifying that no such obligation exists (the "ISRAELI
WITHHOLDING TAX RULING"). Each of Company and Parent shall cause their
respective Israeli counsel, advisors and accountants to coordinate all
activities, and to cooperate with each other and keep each other informed with
respect to the preparation and filing of such application and in the preparation
of any written or oral submissions that may be necessary, proper or advisable to
obtain the Israeli Withholding Tax Ruling.
(c) LEGAL PROCEEDINGS. Each party to this Agreement shall: (i)
give the other parties prompt notice of the commencement of any legal proceeding
by or before any Israeli Governmental Entity with respect to the Merger; (ii)
keep the other parties informed as to the status of any such legal proceeding;
and (iii) promptly inform the other parties of any communication to the
Commissioner of Israeli Restrictive Trade Practices, the OCS, the Investment
Center, the Israeli Securities Authority, the Israeli Income Tax Commission, the
Companies Registrar or any other Israeli Governmental Entity regarding the
Merger. The parties to this Agreement will consult and cooperate with one
another, and will consider in good faith the views of one another, in connection
with any analysis, appearance, presentation, memorandum, brief, argument,
opinion or proposal made or submitted in connection with any Israeli legal
proceeding relating to the Merger pursuant to a joint defense agreement
separately agreed to. In addition, except as may be prohibited by any Israeli
Governmental Entity or by any Israeli Legal Requirement, in connection with any
such legal proceeding under or relating to the Israeli Restrictive Trade
Practices Law or any other Israeli antitrust or fair trade law, each party
hereto will permit authorized representatives of the other party to be present
at each meeting or conference relating to any such legal proceeding and to have
access to and be consulted in connection with any document, opinion or proposal
made or submitted to any Israeli Governmental Entity in connection with any such
legal proceeding.
(d) REGULATORY FILINGS. Each of the Company and Parent shall
cause all documents that it is responsible for filing with any Governmental
Entity under this Section to comply as to form and substance in all material
respects with the applicable Israeli Legal Requirements. Whenever any event
occurs which is required to be set forth in an amendment or supplement to any
such document or filing, the Company or Parent, as the case may be, shall
promptly inform the other of such occurrence and cooperate in filing with the
applicable Governmental Entity, such amendment or supplement.
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6.5 ACCESS TO INFORMATION. Subject to the confidentiality undertakings
set forth below, the Company shall afford Parent and its accountants, counsel
and other representatives, reasonable access during the period from the date
hereof and prior to the Effective Time to (i) all of the properties, books,
contracts, commitments and records of the Company, including the Company's
source code, (ii) all other information concerning the business, properties and
personnel (subject to restrictions imposed by applicable law) of the Company as
Parent may reasonably request, and (iii) all employees of the Company as
identified by Parent. The Company agrees to provide to Parent and its
accountants, counsel and other representatives copies of internal financial
statements (including Tax Returns and supporting documentation) promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section or otherwise shall affect or be deemed to modify any representation
or warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger in accordance with the terms and provisions hereof.
6.6 CONFIDENTIALITY. Each of the parties hereto hereby agrees that the
information obtained in any investigation pursuant to SECTION 6.5 hereof, or
pursuant to the negotiation and execution of this Agreement or the effectuation
of the transactions contemplated hereby, shall be governed by the terms of the
Confidential Disclosure Agreement effective as of July 7, 2004 (the
"CONFIDENTIAL DISCLOSURE AGREEMENT"), between the Company and Parent. In this
regard, the Company acknowledges that the Parent Common Stock is publicly traded
and that any information obtained by the Company regarding Parent could be
considered to be material non-public information within the meaning of federal
and state securities laws. Accordingly, the Company acknowledges and agrees not
to engage in any transactions in the Parent Common Stock in violation of
applicable insider trading laws.
6.7 EXPENSES. Whether or not the Merger is consummated, except as set
forth herein, all fees and expenses incurred in connection with the Merger
including, without limitation, all legal, financial advisory, consulting and all
other fees and expenses of third parties (including any Taxes incurred in
connection therewith) incurred by a party in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby ("THIRD PARTY EXPENSES"), shall be the obligation of the
respective party incurring such fees and expenses; provided, that,
notwithstanding the foregoing, Parent shall be responsible for up to $1,000,000
of Third Party Expenses incurred by the Company if the Merger is consummated
(the "REIMBURSED EXPENSES"). The Company shall provide Parent with a bona fide
statement of estimated Third Party Expenses incurred by the Company at least
five (5) business days prior to the Closing Date in form reasonably satisfactory
to Parent (the "STATEMENT OF EXPENSES"). Any Third Party Expenses incurred by
the Company in excess of the Reimbursed Expenses shall be deemed "EXCESS THIRD
PARTY EXPENSES".
6.8 PUBLIC DISCLOSURE. No party shall issue any statement or
communication to any third party (other than their respective agents that are
bound by confidentiality restrictions) regarding the subject matter of this
Agreement or the transactions contemplated hereby, including, if applicable, the
termination of this Agreement and the reasons therefor, without the consent of
the other party,
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except that this restriction shall be subject to Parent's obligation to comply
with applicable securities laws and the rules of the Nasdaq National Market.
6.9 CONSENTS. The Company shall make commercially reasonable efforts to
obtain all necessary consents, waivers and approvals ("CONSENTS") of any parties
to any Contract as are required thereunder in connection with the Merger or for
any such Contracts to remain in full force and effect, all of which Consents are
listed in SECTION 2.5 of the Disclosure Schedule, so as to preserve all rights
of, and benefits to, the Company under such Contract from and after the
Effective Time. Such Consents shall be in a form reasonably acceptable to
Parent. In the event that the other parties to any such Contract, including
lessor or licensor of any real property, conditions its grant of a consent,
waiver or approval (including by threatening to exercise a "recapture" or other
termination right) upon the payment of a consent fee, "profit sharing" payment
or other consideration, including increased rent payments or other payments
under the Contract, the Company shall be responsible for making all payments
required to obtain such consent, waiver or approval and shall indemnify, defend,
protect and hold harmless Parent from all losses, costs, claims, liabilities and
damages arising from the same.
6.10 REASONABLE EFFORTS; REGULATORY FILINGS.
(a) Subject to the terms and conditions provided in this
Agreement, each of the parties hereto shall use commercially reasonable efforts
to take promptly, or cause to be taken, all actions, and to do promptly, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to satisfy the conditions to the obligations to consummate
the Merger, to obtain all necessary waivers, consents and approvals and to
effect all necessary registrations and filings and to remove any injunctions or
other impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided, however, that Parent shall not be required to agree to any divestiture
by Parent or the Company or any of Parent's subsidiaries or affiliates, of
shares of capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates, or of the Company, its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
(b) If required, as soon as may be reasonably practicable, the
Company and Parent each shall file with the United States Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any applicable jurisdiction, as reasonably
agreed by the parties to be required. The Company and Parent each shall
promptly: (i) supply the other with any information which may be required in
order to effectuate such filings; and (ii) supply any additional information
which reasonably may be required by the FTC, the DOJ or the competition or
merger control authorities of any other jurisdiction and which the parties may
reasonably deem appropriate; provided, however,
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that neither Parent nor the Company shall be required to agree to any
divestiture by itself or any of its subsidiaries or affiliates of shares of
capital stock or of any business, assets or property, or the imposition of any
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
6.11 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to Parent of: (i) the occurrence or non-occurrence of any event, the
occurrence or non-occurrence of which is likely to cause any representation or
warranty of the Company contained in this Agreement to be untrue or inaccurate
at or prior to the Effective Time, and (ii) any failure of the Company to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section shall not (a) limit or otherwise affect any remedies
available to the party receiving such notice or (b) constitute an acknowledgment
or admission of a breach of this Agreement. No disclosure by the Company
pursuant to this Section shall be deemed to amend or supplement the Disclosure
Schedule or prevent or cure any misrepresentations, breach of warranty or breach
of covenant. Parent shall give prompt notice to the Company of: (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of Parent or the Sub
contained in this Agreement to be untrue or inaccurate at or prior to the
Effective Time, and (ii) any failure of Parent or the Sub to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section shall not (a) limit or otherwise affect any remedies available to
the party receiving such notice or (b) constitute an acknowledgment or admission
of a breach of this Agreement. No disclosure by the Parent pursuant to this
Section shall be deemed to prevent or cure any misrepresentations, breach of
warranty or breach of covenant.
6.12 ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. Each party hereto, at
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of the Merger and the
transactions contemplated hereby.
6.13 NO SOLICITATION.
(a) From and after the date of this Agreement until the
Effective Time or termination of this Agreement pursuant to ARTICLE XI, the
Company and its subsidiaries will not, nor will they authorize or permit any of
their respective officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by any of them to,
directly or indirectly (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Acquisition Proposal (as defined below), (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any non-public information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to, any Acquisition Proposal, (iii) respond to or
engage in discussions with any person with respect to any Acquisition Proposal,
except as to the existence of these provisions, (iv) approve, endorse or
recommend any Acquisition Proposal or (v) enter into any letter of intent or
similar document or any contract, agreement or commitment contemplating or
otherwise
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relating to any Acquisition Transaction (as defined below). Without limiting the
foregoing, it is understood that any violation of the restrictions set forth in
this Section by any officer or director of the Company or any of its
subsidiaries or any investment banker, attorney or other advisor or
representative of Company or any of its subsidiaries shall be deemed to be a
breach of this Section by the Company. For purposes of this Agreement,
"ACQUISITION PROPOSAL" shall mean any offer or proposal (other than an offer or
proposal by Parent) relating to any Acquisition Transaction. For the purposes of
this Agreement, "ACQUISITION TRANSACTION" shall mean any transaction or series
of related transactions other than the transactions contemplated by this
Agreement involving: (A) any acquisition or purchase from the Company by any
person or "group" (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder), or transaction pursuant to which any person
or group seeks to acquire or purchase, in excess of 25% of the voting securities
of the Company or any tender offer or exchange offer for in excess of 25% of the
voting securities of the Company or any merger, consolidation, business
combination or similar transaction involving the Company pursuant to which the
shareholders of the Company immediately preceding such transaction hold less
than 75% of the equity interests in the surviving or resulting entity of such
transaction; (B) any sale, lease (other than in the ordinary course of
business), exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of all or substantially all of the assets
of the Company; or (C) any liquidation or dissolution of the Company.
(b) In addition to the obligations of the Company set forth in
paragraph (a) of this Section, the Company as promptly as practicable shall
advise Parent orally and in writing of any request received by Company for
non-public information which Company reasonably concludes would lead to an
Acquisition Proposal or the receipt of any Acquisition Proposal, or any inquiry
received by Company with respect to or which Company reasonably concludes would
lead to any Acquisition Proposal, the material terms and conditions of such
request, Acquisition Proposal or inquiry, and the identity of the person or
group making any such request, Acquisition Proposal or inquiry. The Company will
keep Parent informed in all material respects of the status and details
(including material amendments or proposed amendments) of any such request,
Acquisition Proposal or inquiry.
6.14 NEW EMPLOYMENT ARRANGEMENTS. Promptly after execution of this
Agreement, Parent will notify the Company of the number and terms of options to
purchase Parent Common Stock it intends to grant to the Company's employees at
the Closing that are offered, and accept, employment with Parent.
6.15 TERMINATION OF BENEFIT PLANS. Unless requested otherwise in
writing by Parent no later than three (3) business days prior to the Closing
Date, the Company shall take (or cause to be taken) all actions necessary or
appropriate to terminate, effective no later than the date immediately preceding
the Closing Date, any and all Company Employee Plans that provide for group
severance, separation or salary continuation or that contain a cash or deferred
arrangement intended to qualify under Section 401(k) of the Code (the "COMPANY
DEFERRAL PLANS"). Unless Company receives notice otherwise from Parent, Parent
shall receive from the Company, prior to the Effective Time, evidence that the
Company's Board of Directors has adopted resolutions to terminate the Company
Deferral Plans (the form and substance of which resolutions shall be subject to
review and approval
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of Parent, which approval shall not be unreasonably withheld), effective no
later than the date immediately preceding the Closing Date.
6.16 SHAREHOLDER QUESTIONNAIRE; INFORMATION STATEMENT. Shareholder
Representative shall, as soon as practicable after the date hereof, deliver to
each Shareholder a questionnaire (the "SHAREHOLDER QUESTIONNAIRE"), in a form
provided by Parent, containing certain representations necessary to determine
whether such Shareholder (i) is an "accredited investor" as defined in Rule 501
of Regulation D, promulgated under the Securities Act or (ii) is not a "US
person" as defined in Rule 902 of Regulation S, promulgated under the Securities
Act. Shareholder shall use its best efforts to obtain executed copies of the
Shareholder Questionnaire from each of the Shareholders prior to the General
Company Meeting. By virtue of the approval of the Merger and this Agreement by
the requisite vote of Shareholders, each of the Shareholders, and each person
who on or prior to the Effective Date may become a Shareholder upon the exercise
of Company Options or Company Warrants (each, an "OPTIONHOLDER"), shall be
deemed to have agreed to appoint the Shareholder Representative (or, if the
"purchaser representative" is required to be a natural person, any qualified
designee of the Shareholder Representative) as its "purchaser representative" as
defined in Rule 501 of Regulation D, promulgated under the Securities Act, to
evaluate the merits and risks of a prospective investment in Parent by such
Shareholder or Optionholder, as the case may be; and Shareholder Representative,
by its execution of this Agreement, hereby agrees to act as "purchaser
representative" for each of the Shareholders and the Optionholders. Prior to the
Closing Date, Parent shall deliver to each Shareholder and Optionholder an
information statement containing the information required by Rule 502(b)(2)(ii)
of Regulation D, promulgated under the Securities Act. Parent and the Company
shall cooperate with each other in connection with, and shall take such
reasonable actions and provide any information that may be reasonably necessary
in order to prepare, such information statement. Prior to the distribution to
Shareholders and/or Optionholders of any Earnout Warrants by the Shareholder
Representative, Parent and the Shareholder Representative shall take such
reasonable actions as may be necessary in order to ascertain whether the
recipients of the Earnout Warrants are Exempt Persons.
6.17 FINANCIALS. The Company shall cause its affiliates, officers,
employees, auditors and other representatives to cooperate with and assist
Parent, as Parent may reasonably request, to enable Parent to prepare and file
with the SEC, in connection with the Merger, the Current Report on Form 8-K and
any additional amendments or supplements thereto required by the Exchange Act
and the rules and regulations promulgated thereunder. The Company shall cause
its auditors to deliver any opinions or consents necessary for Parent to file
the Company's Financials, and shall take such actions, and shall cause its
auditors to take such actions, if the Closing has not occurred prior to January
1, 2005, to prepare and complete an audit for the fiscal year ended December 31,
2004, and the Company shall cause its auditors to deliver any opinions or
consents necessary for Parent to file such audited financial statements for the
fiscal year ended December 31, 2004. Any financial statements of the Company
prepared pursuant to this paragraph shall be prepared in accordance with GAAP
and otherwise in accordance with the requirements of the Exchange Act and the
rules and regulations promulgated thereunder. Any costs incurred by the Company
associated with the compliance with this paragraph shall be borne by the
Company, but shall not be considered Third Party Expenses for purposes of this
Agreement.
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6.18 OBSERVER RIGHTS. Subject to applicable laws, rules and
regulations, until December 31, 2007, either one of two persons selected by the
Company prior to the Closing (such two persons to be approved by Parent, such
approval not to be unreasonably withheld) (the person attending such meeting,
the "OBSERVER") shall be entitled to attend Parent's meetings of its Board of
Directors in an observational, non-voting capacity, and, in this respect, Parent
shall provide such individual with copies of all notices and other material that
it provides to its directors, at the time that it provides such materials to its
directors (including any resolutions approved or to be approved by the unanimous
consent of directors); provided that (a) the Observer shall be subject to the
same obligations regarding treatment of confidential information of Parent as
would an actual member of the Board of Directors, and to that end, shall execute
a confidentiality agreement in a form reasonably approved by Parent, and (b)
Parent shall, in its sole discretion, be entitled to exclude the Observer from
any discussion and from receipt of any information which a majority of the Board
of Directors reasonably determines in good faith would (i) involve a conflict of
interest regarding the Observer, or (ii) result in an inability to invoke the
attorney-client privilege between Parent and its counsel.
ARTICLE VII
CONDITIONS TO THE MERGER
7.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of the Company and Parent to effect the Merger shall be
subject to the satisfaction, at or prior to the Effective Time, of the following
conditions, any of which may be waived, in writing, by mutual instrument of
Parent and the Company:
(a) NO ORDER. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger. Any
notification, waiting period, or approval requirements of anti-competition laws
of applicable jurisdictions that apply to the Merger shall have been satisfied
or waived.
(b) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be threatened or pending.
(c) ISRAELI GOVERNMENTAL ENTITY APPROVALS. All Israeli
Governmental Entity approvals required pursuant to Israeli legal requirements
for the consummation of the merger and the other transactions contemplated by
this Agreement shall have been obtained, including, without limitation, the (i)
the OCS Approval, and (ii) the Investment Center Approval.
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(d) SHAREHOLDER APPROVAL. Shareholders constituting the
Required Company Shareholder Vote shall have approved this Agreement, and the
transactions contemplated hereby, including the Merger and the appointment of
the Shareholder Representative.
7.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUB. The obligations of
Parent and Sub to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, by Parent and Sub:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. (i) The
representations and warranties of the Company in this Agreement shall have been
true and correct on the date hereof, and (ii) the Company shall have performed
and complied in all material respects with all covenants and obligations under
this Agreement required to be performed and complied with by such parties as of
the Closing.
(b) GOVERNMENTAL APPROVAL. Approvals from any court,
administrative agency, commission, or other federal, state, county, local or
other foreign governmental authority, instrumentality, agency, or commission (if
any) deemed appropriate or necessary by Parent shall have been timely obtained.
(c) NO MATERIAL ADVERSE EFFECT. There shall not have occurred
any event or condition of any character that has had or is reasonably likely to
have a Company Material Adverse Effect since the date of this Agreement.
(d) RESIGNATION OF OFFICERS AND DIRECTORS. Parent shall have
received a written resignation from each of the officers and directors of the
Company and its subsidiaries effective as of the Effective Time.
(e) CORPORATE AUTHORITY. Each officer of the Company shall
have surrendered his authority over all the Company's finances, including
without limitation, all Company bank accounts, and evidence of the foregoing (in
form and substance satisfactory to Parent) shall have been delivered to Parent.
The Company also shall have delivered to Parent such documents as are necessary
or advisable (in form and substance satisfactory to Parent) to transfer
authority over the Company's finances, including without limitation, all Company
bank accounts, to Parent.
(f) LEGAL OPINION. Parent shall have received a legal opinion
from legal counsel to the Company in a form reasonably acceptable to counsel to
the Parent.
(g) UNANIMOUS BOARD APPROVAL. This Agreement, the Merger and
the transactions contemplated hereby shall have been unanimously approved by the
Board of Directors of the Company, which unanimous approval shall not have been
modified or revoked.
(h) CERTIFICATE OF THE COMPANY. Parent shall have received a
certificate, validly executed by the Chief Executive Officer of the Company for
and on the Company's behalf, to the effect that, as of the Closing:
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(i) all representations and warranties made by the
Company in this Agreement were true and correct on the date of this Agreement;
(ii) all covenants and obligations under this
Agreement to be performed or complied with by the Company on or before the
Closing have been so performed or complied with in all material respects; and
(iii) the conditions to the obligations of Parent and
Sub set forth in this SECTION 7.2 have been satisfied in full (unless otherwise
waived in accordance with the terms hereof).
(i) CERTIFICATE OF SECRETARY OF COMPANY. Parent shall have
received a certificate, validly executed by the Secretary of the Company,
certifying as to (i) the terms and effectiveness of the Charter Documents, and
(ii) the valid adoption of resolutions of the Board of Directors of the Company
(whereby the Merger and the transactions contemplated hereunder were unanimously
approved by the Board of Directors) and (iii) that the Shareholders constituting
the Required Company Shareholder Vote have approved this Agreement and the
consummation of the transactions contemplated hereby.
(j) EXERCISE OR TERMINATION OF COMPANY OPTIONS AND COMPANY
WARRANTS. Parent shall have received evidence reasonably satisfactory to it that
all outstanding Company Options and Company Warrants shall have been exercised
in full or terminated immediately prior to the Effective Time.
(k) FINANCIAL STATEMENTS. Parent shall have received any
financial statements and consents of auditors related thereto in connection with
its Form 8-K and reporting requirements and as provided in SECTION 6.17.
(l) ISRAELI TAX STATUS. Neither Parent nor the Company shall
have received any written or oral indication from the Investment Center or the
Israeli income tax authorities to the effect that the consummation of the Merger
will jeopardize or adversely affect the tax status and benefits of the Company,
including its Approved Enterprise tax status and its status as an industrial
company, and Parent shall have received a certificate to such effect (only with
respect to the Company) signed on behalf of the Company by the Chief Executive
Officer and the Chief Financial Officer of the Company.
7.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the
Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. (i) The
representations and warranties of Parent and Sub in this Agreement shall have
been true and correct on the date hereof, and (ii) each of Parent and Sub shall
have performed and complied in all material respects with all
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covenants and obligations under this Agreement required to be performed and
complied with by such parties as of the Closing.
(b) CERTIFICATE OF PARENT. Company shall have received a
certificate, validly executed on behalf of Parent by a Vice President for and on
its behalf to the effect that, as of the Closing:
(i) all representations and warranties made by Parent
and Sub in this Agreement were true and correct on the date of this Agreement;
(ii) all covenants and obligations under this
Agreement to be performed by Parent and Sub on or before the Closing have been
so performed in all material respects; and
(iii) the conditions to the obligations of the
Company set forth in this SECTION 7.3 have been satisfied in full (unless
otherwise waived in accordance with the terms hereof).
(c) NO MATERIAL ADVERSE EFFECT. There shall not have occurred
any event or condition of any character that has had or is reasonably likely to
have a Parent Material Adverse Effect since the date of this Agreement.
(d) TAX RULINGS. The Company shall have received (i) the
portion of the Israeli Income Tax Ruling set forth in SECTION 6.4(b)(i)(A), (ii)
the Israeli Withholding Tax Ruling.
(e) LEGAL OPINION. The Company shall have received a legal
opinion from legal counsel to Parent in a form reasonably acceptable to counsel
to the Company.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in this Agreement, or in any certificate or
other instruments delivered pursuant to this Agreement, shall survive for a
period of sixteen (16) months following the Closing Date (the expiration of such
sixteen (16) month period, the "Survival Date", provided, however, that the
representations and warranties of the Company contained in SECTION 2.2 and
SECTION 2.9 shall survive until the last component of Merger Consideration
payable under this Agreement shall have been paid or payable (the earlier of
which) to the Exchange Agent), and provided further, however, that if, at any
time prior to the date on which a representation or warranty would otherwise
expire, an Officer's Certificate (as defined in SECTION 8.3) is delivered in
accordance with this ARTICLE VIII alleging Losses and a claim for recovery under
SECTION 8.3, then the claim asserted in such notice shall survive the date on
which such representation or warranty would otherwise expire until such claim is
fully and finally resolved. The representations and warranties of Parent and Sub
contained
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in this Agreement, or in any certificate or other instrument delivered pursuant
to this Agreement, shall terminate at the Closing.
8.2 INDEMNIFICATION. The Shareholders of the Company ("SHAREHOLDERS")
agree, solely out of amounts otherwise payable, but not yet paid, to the
Shareholders pursuant to SECTION 1.6(b)(ii)(4), jointly but not severally, to
indemnify and hold Parent and its officers, directors, and affiliates, including
the Surviving Corporation (the "INDEMNIFIED PARTIES"), harmless against all
claims, losses, liabilities, damages, deficiencies, costs and expenses,
including reasonable attorneys' fees and expenses of investigation and defense
and diminution in value (hereinafter individually a "LOSS" and collectively
"LOSSES") incurred or sustained by the Indemnified Parties, or any of them
(including the Surviving Corporation), directly or indirectly, as a result of
(i) any breach or inaccuracy of a representation or warranty of the Company
contained in this Agreement or in any certificate or other instruments delivered
by or on behalf of the Company pursuant to this Agreement, or (ii) any failure
by the Company to perform or comply with any covenant applicable to it contained
in this Agreement. The Shareholders shall not have any right of contribution
from the Surviving Corporation or Parent with respect to any Loss claimed by an
Indemnified Party.
8.3 INDEMNIFICATION CLAIMS.
(a) SATISFACTION OF CLAIMS. Claims by an Indemnified Party for
Losses shall be satisfied against the Shareholders, jointly but not severally,
directly and pro rata based on and up to the Earnout Amounts that become payable
to each such Shareholder pursuant to ARTICLE IX hereof. The Parties explicitly
agree that under no circumstances may any Claims by an Indemnified Party for
Losses be set off against, or satisfied from, the Component One Consideration or
the Component Two Consideration. Any payment for Losses pursuant to this ARTICLE
VIII shall be treated for all Tax purposes as an adjustment to the purchase
price.
(b) CLAIMS FOR INDEMNIFICATION. In order to seek
indemnification under SECTION 8.2, Parent shall deliver an Officer's Certificate
to the Shareholder Representative. For the purposes hereof, "OFFICER'S
CERTIFICATE" shall mean a certificate signed by any officer of Parent: (1)
stating that an Indemnified Party has paid, sustained, incurred, or properly
accrued, or reasonably anticipates that it will have to pay, sustain, incur, or
accrue Losses, and (2) specifying in reasonable detail the individual items of
Losses included in the amount so stated, the manner in which such amounts were
calculated, the date each such item was paid, sustained, incurred, or properly
accrued, or the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which such item is related.
Upon delivery of an Officer's Certificate, any Earnout Amounts that become
payable pursuant to ARTICLE IX hereof shall not be paid to the Exchange Agent,
but shall be deposited with an escrow agent mutually agreeable to the parties
(the costs of which to be split between the parties), to the extent of the
Losses claimed in such Officer's Certificate, until such claims contained in
such Officer's Certificate shall be resolved in accordance with this SECTION
8.3.
(c) OBJECTIONS TO CLAIMS FOR INDEMNIFICATION. Upon receipt of
an Officer's Certificate, the Shareholder Representative shall review the claims
therein and shall be entitled to object in a written statement to the claims
made in the Officer's Certificate (an "OBJECTION NOTICE"),
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such Objection Notice to contain a description of the basis of such objection
and shall be delivered to Parent prior to the expiration of the thirtieth (30th)
day after its receipt of the Officer's Certificate. If the Shareholder
Representative does not object in writing within such 30-day period, such
failure to so object shall be an irrevocable acknowledgment by the Shareholder
Representative that the Indemnified Party is entitled to the full amount of the
claim for Losses set forth in such Officer's Certificate, provided that the
Officer's Certificate has been validly delivered in accordance with SECTION
12.1. If the Shareholder Representative does not so object, the amount of Losses
claimed in the Officer's Certificate shall be permanently reduced, and shall be
retained by Parent, from any Earnout Amounts that become payable pursuant to
ARTICLE IX.
(d) RESOLUTION OF CONFLICTS; ARBITRATION.
(i) In case the Shareholder Representative delivers
an Objection Notice in accordance with SECTION 8.3(c), the Shareholder
Representative and Parent shall attempt in good faith to agree upon the rights
of the respective parties with respect to each of such claims. If the
Shareholder Representative and Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties, and the
amount of Losses so agreed shall be permanently reduced, and shall be paid to
Parent by the escrow agent (to the extent funds are deposited therewith), from
any Earnout Amounts that become payable pursuant to ARTICLE IX, and any claims
for Losses contained in the Officer's Certificate previously deposited by Parent
with the escrow agent in excess of the amount of Losses so agreed as set forth
in the memorandum shall be deposited with the Exchange Agent if and to the
extent earned as Earnout Amounts pursuant to ARTICLE IX.
(ii) If no such agreement can be reached after good
faith negotiation and prior to thirty (30) days after delivery of an Objection
Notice, either Parent, on the one hand, or the Shareholder Representative on the
other hand, may demand arbitration of the matter unless the amount of the Loss
is at issue in pending litigation with a third party, in which event arbitration
shall not be commenced until such amount is ascertained or both parties agree to
arbitration, and in any event the matter shall be settled by arbitration
conducted by one arbitrator mutually agreeable to Parent and the Shareholder
Representative. In the event that, within thirty (30) days after submission of
any dispute to arbitration, Parent and the Shareholder Representative cannot
mutually agree on one arbitrator, then, within fifteen (15) days after the end
of such thirty (30) day period, Parent and the Shareholder Representative shall
each select one arbitrator. The two arbitrators so selected shall select a third
arbitrator. If one party fails to select an arbitrator during this fifteen (15)
day period, then the parties agree that the arbitration will be conducted by one
arbitrator selected by the other party.
(iii) Any such arbitration shall be held in New York,
New York, under the rules then in effect of the American Arbitration
Association. The arbitrator(s) shall determine how all expenses relating to the
arbitration shall be paid, including without limitation, the respective expenses
of each party, the fees of each arbitrator and the administrative fee of the
American Arbitration Association. The arbitrator or arbitrators, as the case may
be, shall set a limited time period and establish procedures designed to reduce
the cost and time for discovery while allowing
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the parties an opportunity, adequate in the sole judgment of the arbitrator or
majority of the three arbitrators, as the case may be, to discover relevant
information from the opposing parties about the subject matter of the dispute.
The arbitrator, or a majority of the three arbitrators, as the case may be,
shall rule upon motions to compel or limit discovery and shall have the
authority to impose sanctions, including attorneys' fees and costs, to the same
extent as a competent court of law or equity, should the arbitrators or a
majority of the three arbitrators, as the case may be, determine that discovery
was sought without substantial justification or that discovery was refused or
objected to without substantial justification. The decision of the arbitrator or
a majority of the three arbitrators, as the case may be, as to the validity and
amount of any claim in such Officer's Certificate shall be final, binding, and
conclusive upon the parties to this Agreement. Such decision shall be written
and shall be supported by written findings of fact and conclusions, which shall
set forth the award, judgment, decree or order awarded by the arbitrator(s). If
the arbitrator or a majority of the three arbitrators, as the case may be,
determine that Parent is entitled to recover Losses hereunder, the amount of
Losses so determined shall be permanently reduced, and shall be paid to Parent
by the escrow agent (to the extent funds are deposited therewith), from any
Earnout Amounts that become payable pursuant to ARTICLE IX, and any claims for
Losses contained in the Officer's Certificate previously deposited by Parent
with the escrow agent in excess of the amount of Losses so determined shall be
deposited with the Exchange Agent if and to the extent earned as Earnout Amounts
pursuant to ARTICLE IX.
(iv) Judgment upon any award rendered by the
arbitrator(s) may be entered in any court having jurisdiction. The forgoing
arbitration provision shall apply only to any dispute under this ARTICLE VIII or
where otherwise expressly specified.
(e) THIRD-PARTY CLAIMS. In the event Parent becomes aware of a
third party claim (a "THIRD PARTY CLAIM") which Parent reasonably believes may
result in a demand for indemnification pursuant to this ARTICLE VIII, Parent
shall notify the Shareholder Representative of such claim, and the Shareholder
Representative shall be entitled, at its expense, to participate in, but not to
determine or conduct, the defense of such Third Party Claim. Parent shall have
the right in its sole discretion to conduct the defense of, and to settle, any
such claim; provided, however, that except with the consent of the Shareholder
Representative, no settlement of any such Third Party Claim with third party
claimants shall be determinative of the amount of Losses relating to such
matter. In the event that the Shareholder Representative has consented to any
such settlement, the Shareholders shall have no power or authority to object to
the amount of any Third Party Claim by Parent.
8.4 SHAREHOLDER REPRESENTATIVE.
(a) By virtue of the approval of the Merger and this Agreement
by the requisite vote of the Shareholders, each of the Shareholders shall be
deemed to have agreed to appoint Magnum Communications Fund L.P. as its agent
and attorney-in-fact, as the Shareholder Representative for and on behalf of the
Shareholders (i) to give and receive notices and communications, to authorize
payment to any Indemnified Party directly against the Shareholders in
satisfaction of claims by any Indemnified Party, to object to such payments, to
agree to, negotiate,
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enter into settlements and compromises of, and demand arbitration and comply
with orders of courts and awards of arbitrators with respect to such claims, to
negotiate, investigate and resolve all matters relating to ARTICLE VIII and
ARTICLE IX hereof, to assert, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to, any other claim by any Indemnified Party against
any Shareholder or by any such Shareholder against any Indemnified Party or any
dispute between any Indemnified Party and any such Shareholder, in each case
relating to this Agreement or the transactions contemplated hereby, (ii) to
agree to, negotiate, execute and distribute the Earnout Warrants and deliver the
Earnout Warrants to the Shareholders as provided therein, to fulfill all of its
obligations thereunder and resolve all matters relating thereto, act on behalf
of the Shareholders in connection therewith, and (iii) to take all other actions
that are either (A) necessary or appropriate in the judgment of the Shareholder
Representative for the accomplishment of the foregoing or (B) specifically
mandated by the terms of this Agreement. Such agency may be changed by the
Shareholders from time to time upon not less than thirty (30) days prior written
notice to Parent; provided, however, that the Shareholder Representative may not
be removed unless Shareholders holding a majority of Company Shares agree to
such removal and to the identity of the substituted agent. No bond shall be
required of the Shareholder Representative, and the Shareholder Representative
shall not receive any compensation for its services. Notices or communications
to or from the Shareholder Representative shall constitute notice to or from the
Shareholders.
(b) The Shareholder Representative shall not be liable for any
act done or omitted hereunder as Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Shareholders shall
indemnify the Shareholder Representative and hold the Shareholder Representative
harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Shareholder Representative and
arising out of or in connection with the acceptance or administration of the
Shareholder Representative's duties hereunder, including the reasonable fees and
expenses of any legal counsel retained by the Shareholder Representative
("SHAREHOLDER REPRESENTATIVE EXPENSES"). A decision, act, consent or instruction
of the Shareholder Representative, including but not limited to an amendment,
extension or waiver of this Agreement, shall constitute a decision of the
Shareholders and shall be final, binding and conclusive upon the Shareholders;
and Parent may rely upon any such decision, act, consent or instruction of the
Shareholder Representative as being the decision, act, consent or instruction of
the Shareholders. Parent is hereby relieved from any liability to any person for
any acts done by it in accordance with such decision, act, consent or
instruction of the Shareholder Representative.
8.5 MAXIMUM PAYMENTS; REMEDY.
(a) Notwithstanding anything to the contrary in this ARTICLE
VIII, an Indemnified Party shall not be entitled to indemnification hereunder
for any breach or inaccuracy of a representation or warranty of the Company
contained in this Agreement or in any certificate or other instruments delivered
by or on behalf of the Company pursuant to this Agreement until such time as
Losses arising out of or attributable to any such breaches exceed $100,000 in
the aggregate,
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and in which case all Losses theretofore incurred by Parent shall be subject to
the indemnification set forth in this ARTICLE VIII from the first dollar.
(b) Except as set forth in SECTION 8.5(c) hereof, the maximum
amount an Indemnified Party may recover from a Shareholder individually pursuant
to the indemnity set forth, and only set forth, in SECTION 8.2 hereof for Losses
shall be limited to a dollar amount equal to the Earnout Amounts payable but not
yet paid to such Shareholder pursuant to ARTICLE IX of this Agreement. From and
after the date hereof, the provisions of this ARTICLE VIII shall represent the
sole remedy of the Indemnified Parties with respect to any breach or alleged
breach of this Agreement by the Company.
(c) Nothing herein shall limit the liability of the Company or
Parent for any intentional breach or inaccuracy of any representation, warranty
or covenant contained in this Agreement or any Related Agreement (or any
Shareholder that is a party to a Related Agreement for any intentional breach or
inaccuracy of any representation, warranty or covenant by such Shareholder
contained in such Related Agreement), or for any breach or inaccuracy of any
representation, warranty or covenant contained in this Agreement or any Related
Agreement relating to facts the Company or Parent, respectively, should have
known after diligent inquiry (or any Shareholder that is a party to a Related
Agreement for any breach or inaccuracy of any representation, warranty or
covenant contained in such Related Agreement relating to facts the Shareholder
should have known after diligent inquiry), if the Merger does not close.
ARTICLE IX
EARNOUT
9.1 EARNOUT ARRANGEMENTS.
(a) EARNOUT GENERALLY. The parties acknowledge and agree that
in addition to the Component One Consideration and the Component Two
Consideration, Parent shall deposit with the Exchange Agent for payment to the
Shareholders an amount equal to the Earnout Amounts set forth herein, in cash,
as earned, and shall treat such Earnout Amount in accordance with this ARTICLE
IX.
(b) DISTRIBUTION OF EARNOUT.
(i) In the event Parent delivers an Earnout Notice
stating that Earnout Amounts have been earned pursuant to this ARTICLE IX, and
Parent does not have any claims outstanding for Losses pursuant to an Officer's
Certificate, Parent shall deposit the Earnout Amount set forth in the Earnout
Notice with the Exchange Agent for distribution to the Shareholders as soon as
practicable but in any event within five (5) days of the delivery of the Earnout
Notice.
(ii) In the event Parent delivers an Earnout Notice
stating that Earnout Amounts have been earned pursuant to this ARTICLE IX, and
Parent has a claim or claims outstanding for Losses pursuant to an Officer's
Certificate, Parent shall deposit the Earnout Amount
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in excess of such claimed Losses with the Exchange Agent for distribution to the
Shareholders as soon as practicable but in any event within five (5) days of the
delivery of the Earnout Notice, and the Earnout Amount to the extent of such
claimed Losses shall be deposited with the escrow agent in accordance with
SECTION 8.3(b), and any such amounts in dispute and deposited with the escrow
agent shall be released from escrow upon resolution of such dispute in
accordance with SECTION 8.3(b).
(iii) With respect to disputes of amounts contained
in the Earnout Notice, upon the final determination of such Earnout Amounts in
dispute determined to be due and payable to the Shareholders in accordance with
SECTION 9.5, Parent shall deposit with the Exchange Agent the Earnout Amounts,
if any, as so finally determined to be payable to the Shareholders not
theretofore delivered to the Exchange Agent, for distribution to the
Shareholders as soon as practicable but in any event within five (5) days of
such resolution.
(c) FORFEITED AMOUNTS. All Earnout Amounts that are not earned
by the Shareholders pursuant to this ARTICLE IX will be forfeited and not paid
by Parent.
9.2 EARNOUT TARGETS; DEFINITIONS. For purposes of this ARTICLE IX:
(i) "2005 AUTOMATION MILESTONE" means a Weighted
Average Automation Rate of 25% of Completed Calls based on a performance test
for the entire fourth quarter of the calendar year ending December 31, 2005;
(ii) "2005 EARNOUTS" means, collectively, the 2005
Automation Earnout, 2005 Automation Earnout Bonus and 2005 Revenue Earnout;
(iii) "2005 REVENUE MILESTONE" means $26,700,000 in
Revenues for the calendar year ending December 31, 2005;
(iv) "2006 AUTOMATION MILESTONE" means a Weighted
Average Automation Rate of 26% of Completed Calls based on a performance test
for the entire fourth quarter of the calendar year ending December 31, 2006;
(v) "2006 EARNOUTS" means the 2006 Automation
Earnout, 2006 Automation Earnout Bonus and 2006 Revenue Earnout;
(vi) "2006 REVENUE MILESTONE" means $35,200,000 in
Revenues for the calendar year ending December 31, 2006;
(vii) "2007 AUTOMATION MILESTONE" means a Weighted
Average Automation Rate of 27% of Completed Calls based on a performance test
for the entire fourth quarter of the calendar year ending December 31, 2007;
(viii) "2007 EARNOUTS" means the 2007 Automation
Earnout, 2007 Automation Earnout Bonus and 2007 Revenue Earnout;
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(ix) "2007 REVENUE MILESTONE" means $38,700,000 in
Revenues for the calendar year ending December 31, 2007;
(x) "AUTOMATED CALLS" means a Completed Call
processed entirely by automated means, based on the definition of an "automated
call" in each applicable customer contract;
(xi) "COMPLETED CALLS" means calls completed
utilizing the Company's Directory Assistance platform, based on the definition
of "call completion" in each applicable customer contract;
(xii) "DETERMINATION DATE" means (i) the sixteenth
month anniversary of the Closing with respect to the 2005 Earnouts, (ii) the
twenty eighth month anniversary of the Closing with respect to the 2006 Earnouts
and applicable Earnout Catch-up, and (iii) the fortieth month anniversary of the
Closing with respect to the 2007 Earnouts and applicable Earnout Catch-up;
(xiii) "DIRECTORY ASSISTANCE PRODUCTS" means products
that recognize, activate and automate end user requests for a specific telephone
listing using speech recognition software, and products that use speech
recognition software to enable end user access to enhanced information services
offerings (utilizing voice or a combination of voice and data) from or through
directory assistance providers. For clarity, Revenues from mobile device
application software sold in combination with Directory Assistance Products will
not be included for calculating the 2005 Revenue Earnout, 2006 Revenue Earnout
or 2007 Revenue Earnout.
(xiv) "ENTERPRISE AUTO-ATTENDANT PRODUCTS" means
products that use speech recognition software (excluding embedded speech
recognition software) to recognize, activate and automate end user requests (i)
to be connected to a specific individual or department within a given
organization or enterprise (ii) to be connected to a individual, department or
organization included in a directory, including without limitation, a personal
directory, a network address book or a directory of customers or suppliers, or
(iii) to access business processes (such as business continuity/disaster
recovery) or applications (such as password reset or messaging) through
recognition and/or authentication of the caller against a directory. In the
event that Enterprise Auto-Attendant Products are deployed by a telecom carrier
or cellular carrier to provide a service exclusively to consumers, Revenues from
such deployment will not be included for calculating the 2005 Revenue Earnout,
2006 Revenue Earnout or 2007 Revenue Earnout.
(xv) "EXCLUDED TELELOGUE ACCOUNTS" means the accounts
with the customers set forth on SCHEDULE 9.2, provided that the relationships
with such customers are direct relationships and not through resellers.
(xvi) "HEBREW LANGUAGE ASR PRODUCTS" means products,
including multiple language products, that provide in the Hebrew language
(together with other languages for multiple language products, speech
recognition, natural language understanding and dialog software technology for
use in network-based services.
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(xvii) "PROJECT A" means products providing
automation of name and address capture or address change;
(xviii) "PROJECT B" means products using speech
recognition technology to automate customer identification and authentication at
the front end of externally-oriented contact centers;
(xix) "REVENUES" means revenues generated by Parent's
Directory Assistance Products, Enterprise Auto-Attendant Products and Hebrew
Language ASR Products, less revenues from (i) Project A, (ii) Project B and
(iii) Excluded Telelogue Accounts.
(xx) "WEIGHTED AVERAGE AUTOMATION RATE" means the
quotient of (a) the aggregate number of Automated Calls processed under all of
the Company's applicable customer contracts divided by (b) the aggregate number
of Completed Calls effected under all of the Company's applicable customer
contracts; provided, however, that only calls utilizing platforms accepted by
customers on or prior to April 1 of the applicable test year shall be factored
in the foregoing calculation.
9.3 ACHIEVEMENT OF MILESTONES.
(a) The Earnout Amounts shall be earned as follows:
(i) 2005 AUTOMATION EARNOUT. An amount equal to
$2,000,000 ($2,166,667 in the event the portion of the Israeli Income Tax Ruling
set forth in SECTION 6.4(b)(i)(B) shall not have been obtained prior to the
Closing and the Earnout Warrants shall have been terminated in accordance with
the terms thereof and SECTION 1.6(c)(ii)) if the 2005 Automation Milestone is
met;
(ii) 2005 AUTOMATION EARNOUT BONUS. If the 2005
Automation Milestone is met, an amount up to $2,000,000 ($2,166,667 in the event
the portion of the Israeli Income Tax Ruling set forth in SECTION 6.4(b)(i)(B)
shall not have been obtained prior to the Closing and the Earnout Warrants shall
have been terminated in accordance with the terms thereof and SECTION
1.6(c)(II)) calculated on a linear scale in proportion to the achievement during
the entire fourth quarter of the calendar year ending December 31, 2005 of
Weighted Average Automation Rates between 25% and 28.5% of Completed Calls;
(iii) 2006 AUTOMATION EARNOUT. An amount equal to
$2,000,000 ($2,166,667 in the event the portion of the Israeli Income Tax Ruling
set forth in SECTION 6.4(b)(i)(B) shall not have been obtained prior to the
Closing and the Earnout Warrants shall have been terminated in accordance with
the terms thereof and SECTION 1.6(c)(II)) if the 2006 Automation Milestone is
met;
(iv) 2006 AUTOMATION EARNOUT BONUS. If the 2006
Automation Milestone is met, an amount up to $2,000,000 ($2,166,667 in the event
the portion of the Israeli Income Tax Ruling set forth in SECTION 6.4(b)(i)(B)
shall not have been obtained prior to the Closing and the
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Earnout Warrants shall have been terminated in accordance with the terms thereof
and SECTION 1.6(c)(ii)) calculated on a linear scale in proportion to the
achievement during the entire fourth quarter of the calendar year ending
December 31, 2006 of Weighted Average Automation Rates between 26% and 29% of
Completed Calls;
(v) 2007 AUTOMATION EARNOUT. An amount equal to
$2,000,000 ($2,166,667 in the event the portion of the Israeli Income Tax Ruling
set forth in SECTION 6.4(b)(i)(B) shall not have been obtained prior to the
Closing and the Earnout Warrants shall have been terminated in accordance with
the terms thereof and SECTION 1.6(c)(ii)) if the 2007 Automation Milestone is
met;
(vi) 2007 AUTOMATION EARNOUT BONUS. If the 2007
Automation Milestone is met, an amount up to $2,000,000 ($2,166,667 in the event
the portion of the Israeli Income Tax Ruling set forth in SECTION 6.4(b)(i)(B)
shall not have been obtained prior to the Closing and the Earnout Warrants shall
have been terminated in accordance with the terms thereof and SECTION
1.6(c)(ii)) calculated on a linear scale in proportion to the achievement during
the entire fourth quarter of the calendar year ending December 31, 2007 of
Weighted Average Automation Rates between 27% and 29.5% of Completed Calls;
(vii) 2005 REVENUE EARNOUT. An amount up to
$8,000,000 of the Earnout Amount calculated on a linear scale in proportion to
the achievement of between 67.5% and 100% of the 2005 Revenue Milestone;
(viii) 2006 REVENUE EARNOUT. An amount up to
$8,000,000 of the Earnout Amount calculated on a linear scale in proportion to
the achievement of between 67.5% and 100% of the 2006 Revenue Milestone;
(ix) 2007 REVENUE EARNOUT. An amount up to $7,000,000
of the Earnout Amount calculated on a linear scale in proportion to the
achievement of between 67.5% and 100% of the 2007 Revenue Milestone;
(x) EARNOUT CATCH-UP.
(1) In the event that Revenues for the year
ending December 31, 2005 were less than the 2005 Revenue Milestones, and
Revenues for the year ending December 31, 2006 were greater than the 2006
Revenue Milestones (the amount of such excess, the "2006 EXCESS REVENUES"), if
the Shareholder Representative shall choose to apply all or part of the 2006
Excess Revenues to the 2005 Revenue Milestones rather than the 2007 Revenue
Milestones, the 2005 Revenue Earnout set forth in subparagraph (vii) shall be
recalculated by adding the 2006 Excess Revenues to the Revenues for the year
ending December 31, 2005, and the amount by which the recalculated 2005 Revenue
Earnout exceeds the initial calculation of the 2005 Revenue Earnout shall be
considered the "2005 EARNOUT CATCH-UP".
(2) In the event that Revenues for the year
ending December 31, 2006 were less than the 2006 Revenue Milestones, and
Revenues for the year ending December 31,
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2005 were greater than the 2005 Revenue Milestones (the amount of such excess,
the "2005 EXCESS REVENUES"), the 2006 Revenue Earnout set forth in subparagraph
(viii) shall be recalculated by adding the 2005 Excess Revenues to the Revenues
for the year ending December 31, 2006, and the amount by which the recalculated
2006 Revenue Earnout exceeds the initial calculation of the 2005 Revenue Earnout
shall be considered the "2006 EARNOUT CATCH-UP".
(3) In the event that Revenues for the year
ending December 31, 2006 were less than the 2006 Revenue Milestones, and
Revenues for the year ending December 31, 2007 were greater than the 2007
Revenue Milestones (the amount of such excess, the "2007 EXCESS REVENUES"), if
and to the extent 2006 Earnout Catch-up in (2) above does not result in the full
payment of the 2006 Revenue Earnout, the 2006 Revenue Earnout, as increased by
any 2006 Earnout Catch-up, shall be recalculated by adding the 2007 Excess
Revenues to the Revenues for the year ending December 31, 2006, as so increased
by the 2006 Earnout Catch-up, and the amount by which the recalculated 2006
Revenue Earnout exceeds the calculation of the 2006 Revenue Earnout, as so
increased by the initial 2006 Earnout Catch-up, shall be considered the
"SUBSEQUENT 2006 EARNOUT CATCH-UP".
(4) In the event that Revenues for the year
ending December 31, 2007 were less than the 2007 Revenue Milestones, if any 2006
Excess Revenues remain after calculating the 2005 Earnout Catch-up or if the
Shareholder Representative shall choose to apply all or part of the 2006 Excess
Revenues to the 2007 Revenue Milestones rather than the 2005 Revenue Milestones,
the 2007 Revenue Earnout set forth in subparagraph (ix) shall be recalculated by
adding such remaining 2006 Excess Revenues to the Revenues for the year ending
December 31, 2007, and the amount by which the recalculated 2007 Revenue Earnout
exceeds the initial calculation of the 2007 Revenue Earnout shall be considered
the "2007 EARNOUT CATCH-UP".
(5) If any 2006 Excess Revenue is used for
the 2005 Earnout Catch-up, such revenue so used may not also be used for the
2007 Earnout Catch-up, and if any 2006 Excess Revenue is used for the 2007
Earnout Catch-up, such revenue so used may not also be used for the 2005 Earnout
Catch-up.
(b) Notwithstanding anything to the contrary contained in
SECTION 9.3(a), in the event of a Change in Control that occurs prior to any
Determination Date, all of the milestones set forth as conditions precedent to
any unpaid portion of the Earnout Amount in subparagraphs (i) - (viii) shall be
deemed satisfied on the respective subsequent Determination Date.
9.4 FAILURE TO ACHIEVE MILESTONES. Subject to SECTION 9.3(a)(x) and
SECTION 9.3(b), failure to achieve the milestones specified in this ARTICLE IX
shall result in forfeiture of the applicable portion of the Earnout Amount as
set forth in this SECTION 9.4 by the former Shareholders.
9.5 CALCULATION OF EARNOUT DISTRIBUTIONS; SHAREHOLDER REPRESENTATIVE
OBJECTIONS.
(a) EARNOUT DISTRIBUTION. On the applicable Determination
Date, Parent shall deliver to the Shareholder Representative a memorandum (the
"EARNOUT NOTICE") specifying in reasonable detail the calculation of the portion
of the Earnout Amount earned for the applicable
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period (including any Earnout Catch-up) and the calculation of the distribution
of the Earnout Amount to each of the Shareholders pursuant to this ARTICLE IX
and SECTION 1.6(b)(ii)(4), with the basis for such calculation, in accordance
with Parent's accounting principles and policies consistently applied and
derived from the audited results of Parent's accountants, and any supporting
documentation, as applicable, and, if applicable, any proposed set off for
Losses in accordance with SECTION 8.3. Parent agrees that it will promptly
supply any reasonably requested back up or supporting information to the
Shareholder Representative or its accountants on which the Earnout calculations
are based. Parent shall then deposit funds with the Exchange Agent or escrow
agent, as applicable, in accordance with SECTION 9.1(b).
(b) SHAREHOLDER REPRESENTATIVE OBJECTION. The Shareholder
Representative shall have thirty (30) days to make an objection (in writing) to
any item in the Earnout Notice, and such statement must be delivered to Parent
prior to the expiration of such thirty (30) day period.
(c) RESOLUTION OF CONFLICTS.
(i) In case the Shareholder Representative shall have
objected in writing to the Earnout Notice in a timely manner or in case of any
other dispute relating to the Earnout Amount, the Shareholder Representative and
Parent will attempt in good faith to resolve such objection or dispute. If the
Shareholder Representative and Parent should so agree, a memorandum setting
forth such agreement will be prepared and signed by both parties.
(ii) In the event the parties cannot come to an
agreement as set forth in SECTION 9.5(c)(i) within thirty (30) days after the
date on which the Shareholder Representative objected in writing to the Earnout
Notice or, in the event the dispute does not relate to an Earnout Notice, the
date on which the parties determine that they are unable to reach agreement
pursuant to SECTION 9.5(c)(i) , such dispute shall be resolved in the manner set
forth in SECTION 8.3(d).
(iii) If the Shareholder Representative (i) executes
a memorandum with Parent pursuant to SECTION 9.5(c)(i), or (ii) a determination
is made pursuant to SECTION 9.5(c)(ii), then such resolution with respect to the
Earnout Amount set forth in the Earnout Notice shall be final and any portion of
such Earnout Amount, as finally determined, not previously deposited with the
Exchange Agent shall be deposited with the Exchange Agent in accordance with
SECTION 9.1(b).
(d) EARNOUT RIGHTS NOT TRANSFERABLE. No Shareholder may sell,
exchange, transfer or otherwise dispose of his, her or its right to receive any
portion of the Earnout Amount, other than by the laws of descent and
distribution or succession, and any transfer in violation of this SECTION 9.5(d)
shall be null and void and shall not be recognized by Parent or the Surviving
Corporation.
9.6 RIGHT TO SET OFF. Notwithstanding anything to the contrary
contained herein, in the event claims for Losses have been asserted by Parent in
an Officer's Certificate pursuant to SECTION 8.3(b) hereof, Parent shall set-off
any amounts which may become payable in the aggregate under
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this ARTICLE IX in accordance with SECTION 8.3 hereof, and deposit such amounts
with the escrow agent as provided in this ARTICLE IX and SECTION 8.3.
ARTICLE X
INTENTIONALLY OMITTED
ARTICLE XI
TERMINATION, AMENDMENT AND WAIVER
11.1 TERMINATION. Except as provided in SECTION 11.2 hereof, this
Agreement may be terminated and the Merger abandoned at any time prior to the
Closing:
(a) by unanimous agreement of the Company and Parent;
(b) by Parent or the Company if the Closing Date shall not
have occurred by March 31, 2005; provided, however, that the right to terminate
this Agreement under this SECTION 11.1(b) shall not be available to any party
whose action or failure to act has been a principal cause of or resulted in the
failure of the Merger to occur on or before such date and such action or failure
to act constitutes breach of this Agreement;
(c) by Parent or the Company if: (i) there shall be a final
non-appealable order of any Governmental Entity in effect preventing
consummation of the Merger, or (ii) there shall be any statute, rule, regulation
or order enacted, promulgated or issued or deemed applicable to the Closing by
any Governmental Entity that would make consummation of the Closing illegal;
(d) by Parent if there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i) prohibit
Parent's ownership or operation of any portion of the business of the Company or
(ii) compel Parent or the Company to dispose of or hold separate all or any
portion of the business or assets of the Company or Parent as a result of the
Merger;
(e) by Parent if it is not in material breach of its
obligations under this Agreement and there has been a breach of any
representation, warranty, covenant or agreement of the Company contained in this
Agreement such that the conditions set forth in SECTION 7.2(a) hereof would not
be satisfied and such breach has not been cured within ten (10) calendar days
after written notice thereof to the Company; provided, however, that no cure
period shall be required for a breach which by its nature cannot be cured; or
(f) by the Company if the Company is not in material breach of
their respective obligations under this Agreement and there has been a breach of
any representation, warranty, covenant or agreement of Parent contained in this
Agreement such that the conditions set forth in
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SECTION 7.3(a) hereof would not be satisfied and such breach has not been cured
within ten (10) calendar days after written notice thereof to Parent; provided,
however, that no cure period shall be required for a breach which by its nature
cannot be cured.
11.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in SECTION 11.1 hereof, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of Parent
or the Company, or their respective officers, directors or Shareholders, if
applicable; provided, however, that each party hereto shall remain liable for
any breaches of this Agreement prior to its termination; and provided further,
however, that, the provisions of SECTIONS 6.6, 6.7 and 6.8 hereof, ARTICLE XII
hereof and this SECTION 11.2 shall remain in full force and effect and survive
any termination of this Agreement pursuant to the terms of this ARTICLE XI.
11.3 AMENDMENT. This Agreement may be amended by the parties hereto at
any time by execution of an instrument in writing signed on behalf of the party
against whom enforcement is sought. For purposes of this SECTION 11.3, the
Shareholders agree that any amendment of this Agreement signed by the
Shareholder Representative shall be binding upon and effective against the
Shareholders whether or not they have signed such amendment.
11.4 EXTENSION; WAIVER. At any time prior to the Closing, Parent, on
the one hand, and the Company and the Shareholder Representative, on the other
hand, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations of the other party hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (iii) waive compliance
with any of the covenants, agreements or conditions for the benefit of such
party contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. For purposes of this SECTION 11.4, the
Shareholders agree that any extension or waiver signed by the Shareholder
Representative shall be binding upon and effective against all Shareholders
whether or not they have signed such extension or waiver.
ARTICLE XII
GENERAL PROVISIONS
12.1 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice); provided, however,
that notices sent by mail will not be deemed given until received:
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(a) if to Parent or Sub, to:
ScanSoft, Inc.
9 Centennial Drive
Peabody, MA 01960
Attention: Senior Vice President Corporate Development
Facsimile No.: (978) 977-2436
and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
Two Fountain Square, Reston Town Center
11921 Freedom Drive, Suite 600
Reston, VA 20190
Attention: Robert Sanchez, Esq.
Facsimile No.: (703) 734-3199
(b) if to the Company or the Shareholder Representative, to:
Phonetic Systems Ltd.
9 HaOdem Street
P.O. Box 7075
Petah-Tikva 49170 Israel
Attention: Yahal Zilka
Facsimile No.: (972) 3-921-0966
with a copy to:
Meitar Liquornik Geva & Leshem Brandwein
16 Abba Hillel Silver Road
Ramat Gan
52506 Israel
Attention: Dan Geva
Facsimile No.: (972) 3-610-3111
12.2 INTERPRETATION. The words "include," "includes" and "including"
when used herein shall be deemed in each case to be followed by the words
"without limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
12.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more
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counterparts have been signed by each of the parties and delivered to the other
party, it being understood that all parties need not sign the same counterpart.
12.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the Exhibits hereto,
the Disclosure Schedule, the Confidential Disclosure Agreement, and the
documents and instruments and other agreements among the parties hereto
referenced herein: (i) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof, including, without limitation, that certain Term Sheet by
and between the Parent and the Company dated as of August 25, 2004, (ii) are not
intended to confer upon any other person any rights or remedies hereunder, and
(iii) shall not be assigned by operation of law or otherwise, except that Parent
may assign its rights and delegate its obligations hereunder to its affiliates
as long as Parent remains ultimately liable for all of Parent's obligations
hereunder.
12.5 SEVERABILITY. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
12.6 OTHER REMEDIES. Any and all remedies herein expressly conferred
upon a party will be deemed cumulative with and not exclusive of any other
remedy conferred hereby, or by law or equity upon such party, and the exercise
by a party of any one remedy will not preclude the exercise of any other remedy.
12.7 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof. Each of the parties hereto irrevocably consents to the exclusive
jurisdiction and venue of any court within New York County, State of New York,
in connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of New York for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
12.8 RULES OF CONSTRUCTION. The parties hereto agree that they have
been represented by counsel during the negotiation and execution of this
Agreement and, therefor, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
12.9 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AND ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT, OR
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OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY
PARTY HERETO IN NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.
[remainder of page intentionally left blank]
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IN WITNESS WHEREOF, Parent, Sub, the Company and the Shareholder
Representative have caused this Agreement to be signed, all as of the date first
written above.
SCANSOFT, INC.
By: /s/ Paul Ricci
------------------------------
Name:
Title:
PHONETIC SYSTEMS LTD.
By: /s/ Moshe Levin/ /s/ Yahal Zilka
--------------------------------
Name:
Title:
PHONETICS ACQUISITION LTD.
By: /s/ James Robert Arnold, Jr.
------------------------------
Name:
Title:
SHAREHOLDER REPRESENTATIVE
MAGNUM COMMUNICATIONS FUND L.P.
By: /s/ Yahal Zilka
------------------------------
Name:
Title:
SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER