EXHIBIT 2.01
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "AGREEMENT") is entered
into as of this 15th day of July, 1999, by and among Integrated Systems, Inc., a
California corporation ("ACQUIRER"), ISI Acquisition Corporation, an Illinois
corporation and a wholly owned subsidiary of Acquirer ("SUB"), Software
Development Systems, Inc., an Illinois corporation, and the individuals listed
on SCHEDULE A hereto (the "PRINCIPALS"). The term "Target" shall mean Software
Development Systems, Inc., an Illinois corporation, and each of the entities set
forth on SCHEDULE 2.4 hereto, taken as a whole.
RECITALS
A. The parties intend that, subject to the terms and conditions
hereinafter set forth, Target will merge with and into Sub in a forward
triangular merger (the "MERGER"), with Sub to be the surviving corporation of
the Merger, pursuant to the terms and conditions of this Agreement and the
Articles of Merger to be filed with the State of Illinois substantially in the
form of EXHIBIT B attached hereto (the "ARTICLES OF MERGER") and the applicable
provisions of the law of the State of Illinois. Upon the effectiveness of the
Merger, all of the outstanding Common Stock of Target will be converted into
Common Stock of Acquirer ("ACQUIRER COMMON STOCK"). In addition, all outstanding
options ("TARGET OPTIONS") will be converted into options to purchase Acquirer
Common Stock, all as provided in this Agreement and the Articles of Merger. All
debt instruments which by their terms are convertible into or exchangeable for
equity securities of Target ("TARGET CONVERTIBLE DEBT") will be treated as set
forth in Section 1.1.1(v).
B. The Merger is intended to be treated as a tax-free
reorganization pursuant to the provisions of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "CODE"), by virtue of the
provisions of Section 368(a)(2)(D) of the Code, and as a "purchase" for
accounting purposes.
C. The parties intend that the Total Acquirer Shares (as defined
below) will be the total amount of Acquirer Common Stock issued or issuable for
all of Target's outstanding Common Stock, options to purchase Common Stock and
any other equity interests or rights in Target of any type whatsoever.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. PLAN OF REORGANIZATION
1.1 THE MERGER. The Articles of Merger will be filed with the
office of the Secretary of State of Illinois, as soon as practicable after the
Closing Date (as defined in Section 6.1 hereof). The effective date and time of
the last such filing is referred to herein as the "EFFECTIVE TIME". At the
Effective Time, Target will be merged with and into Sub pursuant to
this Agreement and the Articles of Merger in accordance with applicable
provisions of the law of the State of Illinois as follows:
1.1.1 CONVERSION OF SHARES. Each share of Target Common
Stock (the "TARGET COMMON STOCK") issued and outstanding immediately prior to
the Effective Time, other than shares, if any, for which dissenters rights have
been or will be perfected in compliance with applicable law, will by virtue of
the Merger and at the Effective Time, and without further action on the part of
any holder thereof (the "TARGET SHAREHOLDER(S)"), be converted into the right to
receive (a) the "PER SHARE CASH PAYMENT" and (b) the "APPLICABLE FRACTION" of a
fully paid and nonassessable share of Acquirer Common Stock from Acquirer.
(i) PURCHASE PRICE. The "Purchase Price" shall
be Forty Million Six Hundred Thousand Dollars ($40,600,000) LESS the cash
payable to holders of Target Options pursuant to Section 1.1.2 below and LESS
any adjustment due to unconverted or repaid Target Convertible Debt pursuant to
Section 1.1.1(v) below.
(ii) THE PER SHARE CASH PAYMENT. The Per Share
Cash Payment shall be determined by dividing the Purchase Price by 2 (the "CASH
PURCHASE PRICE") and then dividing the Cash Purchase Price by the Target Common
Stock (as defined above). The Cash Purchase Price shall be subject to adjustment
pursuant to Sections 1.1.1(iii)(B) and (C) below.
(iii) THE TOTAL ACQUIRER SHARES. The total shares
of Acquirer Common Stock issuable hereunder (the "TOTAL ACQUIRER SHARES") shall
be determined by dividing the Purchase Price by 2 (the "STOCK PURCHASE PRICE")
and then dividing the Stock Purchase Price by the Nasdaq National Market closing
prices of Acquirer's Common Stock on the most recent ten (10) trading days
immediately prior to the date of this Agreement (the "PER SHARE MARKET VALUE")
subject to the following adjustments.
(A) If the Per Share Market Value
exceeds $15.60, the Total Acquirer Shares will be calculated by dividing the
Stock Purchase Price by $15.60.
(B) If the Per Share Market Value is
less than $10.40, the Total Acquirer Shares will be calculated as the sum of the
result of dividing the Acquirer Stock Purchase Price by $10.40 and (ii) such
number, if any, of additional shares that are necessary to have the Stock
Purchase Price equal one-half of the sum of (A) the number of shares prior to
such adjustment multiplied by the Per Share Market Value and (B) the Cash
Purchase Price prior to adjustment pursuant to Section 1.1.1(iii)(B) herein. In
the event an adjustment is necessary pursuant to clause (ii), then the Cash
Purchase Price shall be reduced to equal the product of (1) the Per Share Market
Value and (2) the number of Target Acquirer Shares, after the adjustments set
forth in clause (ii) above. Notwithstanding anything to the contrary herein, in
no event shall Acquirer be required to issue more shares than Nineteen and Nine
Tenths Percent (19.9%) of the total number of outstanding shares of its Common
Stock immediately prior to the Closing. In addition, the Cash Purchase Price
shall only exceed the Stock Purchase Price upon the approval of each of Acquirer
and Target, in which case the provisions, terms and conditions contained in this
Agreement, the Acquirer Ancillary Agreements and the Target Ancillary Agreements
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relating to the tax-free treatment of the Merger shall no longer be applicable
with respect to any party.
(C) If the Per Share Market Value is
greater than the last reported sale price of Acquirer's Common Stock on the
trading day immediately prior to the Effective Time (the "EFFECTIVE TIME
PRICE"), then the Cash Purchase Price shall then be reduced to equal the product
of (x) the number of Total Acquirer Shares as determined pursuant to this
Section 1.1.1(iii) multiplied by (y) the Effective Time Price.
(iv) APPLICABLE FRACTION. The Applicable Fraction
shall be determined by dividing (A) the Total Acquirer Shares (as defined above
in Subsection 1.1.1(iii)) by (B) the total number of shares of Target Common
Stock outstanding immediately prior to the Effective Time.
(v) ADJUSTMENT TO PURCHASE PRICE. To the extent
that any Target Convertible Debt remains unconverted at the Effective Time
because the holder declines to convert such debt as listed on SCHEDULE 1.1.1(iv)
hereto, Acquirer agrees to assume the obligation of paying such unconverted
Target Convertible Debt in accordance with the terms thereof. The Purchase Price
shall be reduced by the amount of the principal and interest of such obligation
that was repaid prior to the Effective Time or that is assumed by Acquirer. Any
attempt to make an election to convert the debt after the Effective Time to
Target Common Stock shall be invalid and will not be honored by Acquirer. Any
fractional shares shall be handled in accordance with Section 1.2 hereof.
1.1.2 TARGET OPTIONS TREATMENT. Each share of Target Common
Stock issuable upon the exercise of Target Options will, by virtue of the Merger
and at the Effective Time, and without any action on the part of the holder
thereof, be converted into the right of the holder thereof to receive a cash
payment from Acquirer an amount equal to the difference between:
(i) the result obtained from dividing (A) Forty
Million Six Hundred Thousand Dollars ($40,600,000) less any adjustment to the
Purchase Price due to unconverted or repaid Target Convertible Debt pursuant to
Section 1.1.1(v) above by (B) the sum of the total number of shares of Target
Common Stock and the total number of shares of Target Common Stock issuable upon
exercise of all Target Options outstanding immediately prior to the Effective
Time; and
(ii) the exercise price per share of such Target
Option.
Any fractional shares shall be handled in accordance with Section 1.2 hereof.
1.1.3 ADJUSTMENTS FOR CAPITAL CHANGES. If prior to the
Effective Time, Acquirer recapitalizes through a split-up of its outstanding
shares into a greater number, or a combination of its outstanding shares into a
lesser number, reorganizes, reclassifies or otherwise changes its outstanding
shares into the same or a different number of shares of other classes (other
than through a split-up or combination of shares provided for in the previous
clause), or declares a dividend on its outstanding shares payable in shares or
securities convertible into shares, the
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number of shares of Acquirer Common Stock into which the shares of Target Common
Stock, Target Options and Target Convertible Debt (that elects to convert into
Acquirer Common Stock at the Effective Time) are to be converted will be
adjusted appropriately so as to maintain the proportionate interests of the
holders of the Target Common Stock, Options and Target Convertible Debt (that
elects to convert into Target Common Stock at or prior to the Effective Time)
and the holders of Acquirer shares.
1.1.4 DISSENTING SHARES. Holders of shares of Target Common
Stock who have complied with all requirements for perfecting dissenter's rights,
as set forth in the general corporation law of the State of Illinois ("ILLINOIS
LAW"), shall be entitled to their rights under the Illinois Law with respect to
such shares ("DISSENTING SHARES").
1.2 FRACTIONAL SHARES. No fractional shares of Acquirer Common
Stock will be issued in connection with the Merger, but in lieu thereof, the
holder of any shares of Target Common Stock who would otherwise be entitled to
receive a fraction of a share of Acquirer Common Stock will receive from
Acquirer, promptly after the Effective Time, an amount of cash equal to (i) the
Per Share Market Value, as determined in Subsection 1.1.1(i) above, multiplied
by (ii) the fraction of a share to which such holder would otherwise be
entitled.
1.3 ESCROW AGREEMENT. At the Closing of the Merger (as defined in
Section 6.1 hereof), Acquirer will withhold (i) that number of shares of
Acquirer Common Stock which equals five percent (5%) of the sum of the Total
Acquirer Shares (as defined in Section 1.1.2 hereof) on a pro rata basis among
each Material Target Shareholder (as defined below), as determined pursuant to
this Section 1.3 (rounded down to the nearest whole number of shares to be
issued to each Material Target Shareholder) (the "ESCROW SHARES") and (ii) five
percent (5%) of the Cash Purchase Price (after any adjustments pursuant to
Section 1.1.1(iii)(B) hereof) (the "ESCROW CASH" and, together with the Escrow
Shares, the "ESCROW CASH AND SHARES") and deliver the Escrow Cash and Shares to
Chase Manhattan Bank and Trust Company, National Association (the "ESCROW
AGENT"), as escrow agent, to be held by the Escrow Agent as collateral for the
Material Target Shareholder's obligations under Section 10.2 and pursuant to the
provisions of an escrow agreement (the "ESCROW AGREEMENT") in substantially the
form of EXHIBIT 1.3. The Escrow Shares will be represented by a certificate or
certificates issued in the name of the Material Target Shareholders and
delivered to the Escrow Agent and, along with the Escrow Cash, will be held as
collateral for Damages suffered by an Indemnified Person (each as defined in
Section 10.2) for breaches of the representations, warranties and covenants of
Target contained in this Agreement. The Escrow Cash and Shares will be delivered
and will be held by the Escrow Agent from the Closing until the first
anniversary of the Effective Time (the "ESCROW PERIOD"). However, in all cases
as to matters which an Indemnified Person has given written notice of a claim
for Damages during the Escrow Period, Escrow Agent shall disburse to the
Material Target Shareholders such lesser amount as is sufficient to pay such
claims in accordance with the terms of this Agreement and the Escrow Agreement.
In the event that the Merger is approved by the Target
Shareholders, as provided herein, the Material Target Shareholders shall,
without any further act of any Material Target Shareholder, be deemed to have
consented to and approved (i) the use of the Escrow Cash and
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Shares as collateral for the Material Target Shareholder's indemnification
obligations under Section 10.2 in the manner set forth in the Escrow Agreement,
(ii) the appointment of James E. Challenger as the representative of the
Material Target Shareholders ( the "REPRESENTATIVE") under the Escrow Agreement
and as the attorney-in-fact and agent for and on behalf of each Material Target
Shareholder (other than holders of Dissenting Shares), and the taking by the
Representative of any and all actions and the making of any decisions required
or permitted to be taken by the Representative under the Escrow Agreement
(including, without limitation, the exercise of the power to: (a) authorize
delivery to Acquirer of Escrow Cash and Shares in satisfaction of claims by
Acquirer; (b) agree to, negotiate, enter into settlements and compromises of and
demand arbitration and comply with orders of courts and awards of arbitrators
with respect to such claims; (c) resolve any claim made by Indemnified Persons
pursuant to Section 10.2; and (d) take all actions necessary in the judgment of
the Representative for the accomplishment of the foregoing) and (iii) to all of
the other terms, conditions and limitations in the Escrow Agreement.
All actions, decisions and instructions of the Representative
including, without limitation, the defense or settlement of any claims for which
the Material Target Shareholders may be required to indemnify Acquirer or Sub
pursuant to Section 9.2 hereof, shall be conclusive and binding upon all of the
Material Target Shareholders and no shareholder shall have any right to object,
dissent, protest or otherwise contest the same or have any cause of action
against the Representative for any action taken, decision made or instruction
given by the Representative under this Agreement, except for fraud or willful
breach of this Agreement by the Representative. The provisions of this paragraph
are independent and severable, are irrevocable and coupled with an interest and
shall be enforceable notwithstanding any rights or remedies that any shareholder
may have in connection with the transactions contemplated by this Agreement. The
provisions of this paragraph shall be binding upon the executors, heirs, legal
representatives, successors and assigns of each such shareholder, and any
references in this Agreement to a Material Target Shareholder or the Material
Target Shareholders shall include the successors to the Material Target
Shareholders' rights hereunder, whether pursuant to assignment, testamentary
disposition, the laws of descent, and distribution or otherwise. In acting as
the representative of the Material Target Shareholders, the Representative may
rely upon, and shall not be liable to any shareholder for acting or refraining
from acting upon, an opinion of counsel, certificate of auditors or other
certificate, statement, instrument, opinion, report, notice, request, consent,
order, arbitrator's award, appraisal, bond or other paper or document reasonably
believed by him to be genuine and to have been signed or presented by the proper
party or parties. The Representative shall incur no liability to any Material
Target Shareholder with respect to any action taken or suffered by him in his
capacity as Representative in reliance upon any note, direction, instruction,
consent, statement or other documents believed by him to be genuinely and duly
authorized, nor for other action or inaction except his own willful misconduct
or gross negligence and the Representative shall be indemnified and saved
harmless by the shareholders from all losses, costs and expenses which the
Representative may incur as a result of involvement in any legal proceedings
arising from the performance of his or her duties hereunder. The Representative
may perform his duties as Representative either directly or by or through his
agents or attorneys and the Representative shall not be responsible to the other
Material Target Shareholders for any misconduct or negligence on the part of any
agent or
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attorney appointed with reasonable care by him hereunder. All fees and expenses
incurred by the Representative in connection with this Agreement shall be paid
by the Material Target Shareholders in proportion to their respective Pro Rata
Percentages. For purposes of this Agreement, "Material Target Shareholders"
shall mean all Target Shareholders, excluding Jeffrey Barth.
1.4 EFFECTS OF THE MERGER. At the Effective Time: (a) the separate
existence of Target will cease and Target will be merged with and into Sub, and
Sub will be the surviving corporation, pursuant to the terms of the Articles of
Merger, (b) each share of Target Common Stock outstanding immediately prior to
the Effective Time and the Target Convertible Debt that elects to convert into
Target Common Stock at or prior to the Effective Time will be converted into
Acquirer Common Stock, each as provided in Sections 1.1 and 1.2, (c) the Merger
will, from and after the Effective Time, have all of the effects provided by
applicable law (d) the Certificate of Incorporation and Bylaws of Target in
effect immediately prior to the Effective Time shall be the Certificate of
Incorporation and Bylaws, respectively, of the surviving corporation after the
Effective Time unless and until further amended as provided by law (e) the
directors and officers of the Surviving Corporation after the Effective Time
shall be as set forth on SCHEDULE 1.4 hereto. Such directors and officers shall
hold their position until the election and qualification of their respective
successors or until their tenure is otherwise terminated in accordance with the
Bylaws of the surviving corporation.
1.5 S-3 REGISTRATION RIGHTS. Effective upon the Effective Time,
each Target Shareholder who receives shares of Acquirer Common Stock, including
shares issued to holders of Target Convertible Debt that elect to convert into
Target Common Stock at or prior to the Effective Time, in the Merger pursuant to
Section 1.1 hereof shall be granted Form S-3 registration rights under the
Securities Act of 1933, as amended (the "1933 ACT") on the terms and subject to
the conditions and limitations of the Registration Rights Agreement attached
hereto as EXHIBIT 1.5 (the "REGISTRATION RIGHTS AGREEMENT"). Within ninety (90)
days of the Closing, Acquirer will cause to be filed a Registration Statement on
Form S-3 covering the resale of all securities issued in the Merger, including
shares to holders of Target Convertible Debt that converted into Target Common
Stock at or prior to the Effective Time. Acquirer will use its best efforts to
cause the Registration Statement to become effective promptly after filing and
shall keep such Registration Statement effective until such time as each
recipient of Acquirer Common Stock is eligible to sell all of the Acquirer
Common Stock held by each such recipient in a three (3) month period pursuant to
the resale restrictions provided for in Rule 144 under the 1933 Act. In order to
enforce the foregoing covenants, Acquirer shall have the right to place
restrictive legends on the certificates of the Acquirer Common Stock issued in
the Merger, indicating that the shares are subject to the provisions of the
Registration Rights Agreement until the sale of such shares.
1.6 QUALIFY AS A TAX-FREE REORGANIZATION. The parties intend to
adopt this Agreement as a plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(1)(A) of the Code. The parties
believe that the total value to be received in the Merger by the Target
Shareholders is equal, in each instance, to the total value of the Target Common
Stock to be surrendered in exchange therefor. The Total Acquirer Shares and the
Cash
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Purchase Price will be exchanged solely for Target Common Stock, Target Options
and Target Convertible Debt that elects to convert into Target Common Stock at
or prior to the Effective Time, respectively, and no other transaction other
than the Merger represents, provides for or is intended to be an adjustment to
the consideration paid for the Target Common Stock, Target Options and Target
Convertible Debt that elects to convert into Acquirer Common Stock at or prior
to the Effective Time. Except for the Cash Purchase Price and cash paid in lieu
of fractional shares or for Dissenting Shares, no consideration that could
constitute "other property" within the meaning of Section 356 of the Code is
being paid by Acquirer for the Target Common Stock in the Merger. The parties
shall not take a position on any tax returns inconsistent with this Section 1.6
unless required to do so by applicable tax laws pursuant to a determination as
defined in Section 1313(c) of the Code. In addition, Acquirer represents now,
and as of the Closing Date, that it presently intends to continue Target's
historic business or use a significant portion of Target's business assets in a
business. At the Closing, the Chief Financial Officers of Acquirer and Target
shall each execute and deliver tax certificates in the forms of EXHIBITS 1.6A-B,
together with an acknowledgment that such certificates will be relied upon by
Target and Acquirer in determining whether the Merger constitutes a
reorganization under Section 368(a) of the Code. The provisions and
representations contained or referred to in this Section 1.6 shall survive until
the expiration of the applicable statute of limitations.
2. REPRESENTATIONS AND WARRANTIES OF TARGET AND PRINCIPALS
Target and the Principals, severally and in accordance with their
respective pro rata shares (but not jointly and severally), hereby represent and
warrant as follows, except as set forth in the Target Disclosure Schedule
delivered to Acquirer by Target prior to the execution of this Agreement, as
SCHEDULE 2.0:
2.1 ORGANIZATION AND GOOD STANDING. Target is a corporation duly
organized, validly existing and in good standing under the law of the State of
Illinois, and is qualified to do business in each jurisdiction where the failure
to do so would have a Material Adverse Effect (as defined below) and has the
corporate power and authority to own, operate and lease its properties and to
carry on its business as now conducted and as proposed to be conducted, and is
qualified as a foreign corporation in each jurisdiction in which a failure to be
so qualified could reasonably be expected to have a material adverse effect on
its business, results of operations or financial condition ("Material Adverse
Change").
2.2 POWER, AUTHORIZATION AND VALIDITY.
2.2.1 Target has the right, power, legal capacity and
authority to enter into and, subject to Target Shareholder approval, perform its
obligations under this Agreement and all agreements to which Target is or will
be a party that are required to be executed pursuant to this Agreement (the
"TARGET ANCILLARY AGREEMENTS"). The execution, delivery and performance of this
Agreement and the Target Ancillary Agreements have been duly and validly
approved and authorized by Target's Board of Directors.
2.2.2 No filing, authorization or approval, governmental or
otherwise, is necessary to enable Target to enter into, and to perform its
obligations under, this Agreement and
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the Target Ancillary Agreements, except for (a) the filing of the Articles of
Merger with the Illinois Secretary of State, and the filing of appropriate
documents with the relevant authorities of other states in which Target is
qualified to do business, if any, (b) compliance with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR"), (c) such filings as may
be required to comply with federal and state securities laws, (d) consents
required under contracts disclosed in SCHEDULE 2.11 and (e) the approval of the
Target Shareholders of the transactions contemplated hereby, as provided under
applicable law and Target's Articles of Incorporation and Bylaws.
2.2.3 This Agreement and the Target Ancillary Agreements
are, or when executed by Target will be, valid and binding obligations of Target
enforceable in accordance with their respective terms, except as to the effect,
if any, of (a) applicable bankruptcy and other similar laws affecting the rights
of creditors generally, (b) rules of law governing specific performance,
injunctive relief and other equitable remedies and (c) the enforceability of
provisions requiring indemnification or contribution in connection with the
offering, issuance or sale of securities; provided, however, that the Articles
of Merger will not be effective until filed with the Illinois Secretary of
State.
2.3 CAPITALIZATION. The authorized capital stock of Target
consists of Thirty Million (30,000,000) shares of Common Stock, of which
7,503,288 shares are currently outstanding. An aggregate of One Million One
Hundred and Twenty Five Thousand Shares (1,125,000) shares of Target Common
Stock are reserved and authorized for issuance pursuant to the Target Option
Plan, of which options to purchase a total of Eight Hundred and Ninety Nine
Thousand Eight Hundred and Eighty (899,880) shares of Common Stock are
outstanding thereunder. All issued and outstanding shares of Target Common Stock
have been duly authorized and validly issued, are fully paid and non assessable,
are not subject to any right of rescission, and have been offered, issued, sold
and delivered by Target in compliance with all registration or qualification
requirements (or applicable exemptions therefrom) of applicable federal and
state securities laws. A list of all holders of Target Common Stock and Target
Options and the number of shares and options held by each, along with the
exercise price for each, has been delivered by Target to Acquirer herewith as
SCHEDULE 2.3. Except as set forth in this Section 2.3 and in SCHEDULE 2.3, there
are no options, warrants, calls, commitments, conversion privileges or
preemptive or other rights or agreements outstanding to purchase any of Target's
authorized but unissued capital stock or any securities convertible into or
exchangeable for shares of Target Common Stock or obligating Target to grant,
extend, or enter into any such option, warrant, call, right, commitment,
conversion privilege or other right or agreement, and there is no liability for
dividends accrued but unpaid. Except as indicated in the Target Disclosure
Schedule, there are no voting agreements, rights of first refusal or other
restrictions (other than normal restrictions on transfer under applicable
federal and state securities laws) applicable to any of Target's outstanding
securities. Except as indicated in the Target Disclosure Schedule, Target is not
under any obligation to register under the Securities Act any of its presently
outstanding securities or any securities that may be subsequently issued. Except
for the Target Options listed on SCHEDULE 2.3, no securities of Target are
subject to acceleration or automatic vesting as a result of the Merger.
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2.4 SUBSIDIARIES. Except for Subsidiaries set forth on SCHEDULE
2.4, Target does not have any subsidiaries or any ownership interest, direct or
indirect, in any corporation, partnership, joint venture or other business
entity.
2.5 NO VIOLATION OF EXISTING AGREEMENTS. Neither the execution and
delivery by Target of this Agreement nor of any Target Ancillary Agreement, nor
the consummation by Target of the transactions contemplated hereby or thereby,
will conflict with, or (with or without notice or lapse of time, or both) result
in a termination, breach, impairment or violation of (a) any provision of the
Articles of Incorporation or Bylaws of Target, as currently in effect, (b) in
any material respect, any Material Agreement (as defined in Section 2.11) to
which Target is a party or by which Target is bound, or (c) any federal, state,
local or foreign judgment, writ, decree, order, statute, rule or regulation
known to Target to be applicable to Target or its assets or properties, except,
in each case, where such conflict, termination, breach, impairment or violation
would not have a Material Adverse Effect. Except as set forth on Schedule 2.5,
the consummation of the Merger will not require the consent of or notice to any
third party.
2.6 LITIGATION. There is no action, proceeding, claim or
investigation pending against Target before any court or administrative agency
that if determined adversely to Target may reasonably be expected to have a
Material Adverse Effect or to prevent Target from fulfilling its obligations
under this Agreement; nor to Target's or any Principal's knowledge, has any such
action, proceeding, claim or investigation been threatened. There is, to
Target's and each Principals' knowledge, no reasonable basis for any shareholder
or former shareholder of Target, or any other person, firm, corporation, or
entity, to assert a claim against Target or Acquirer based upon: (a) ownership
or rights to ownership of any shares of Target Common Stock (except for
dissenter's rights with respect to shares of Acquirer Common Stock issuable by
virtue of the Merger), (b) any rights as an Target Shareholder, including any
option or preemptive rights or rights to notice or to vote, or (c) any rights
under any agreement among Target and the Target Shareholders.
2.7 TAXES. Target has timely filed all federal, state, local and
foreign tax returns, estimates, information statements and reports required to
be filed by or on behalf of Target and its operations (collectively, "RETURNS"),
has timely paid all taxes shown due on all Returns which have been filed, has
established an adequate accrual or reserve for the payment of all taxes, due and
payable, including reasonable accruals for taxes payable in respect of the
periods subsequent to the periods covered by the most recent applicable Returns,
has made all necessary estimated tax payments, and has no material liability for
taxes in excess of the amounts so paid or accruals or reserves so established.
Target has filed with all applicable taxing authorities or applied for
extensions with respect to tax returns for the most recently completed fiscal
year. Target is not delinquent in the payment of any tax nor delinquent in the
filing of any returns or other required documents (including but not limited to
the filing of financial statements with any foreign taxing authorities), and
there are no deficiencies for any tax and there are currently no taxes claimed,
assessed or, to Target's or any Principal's knowledge, threatened, by any taxing
authority. Target has not executed any waiver of any statute of limitations on
or extending the period for the assessment or collection of any tax. Target has
not received any notification that any material issues have been raised (and are
currently pending) by the Internal Revenue Service or any other
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taxing authority (including but not limited to any foreign state or sales tax
authority) regarding Target. No tax return of Target has ever been audited by
the Internal Revenue Service or any foreign or state taxing agency or authority.
Target has provided to Acquirer copies of all foreign, federal and state income
Returns for Target's 1996 and 1997 fiscal years. There are no liens, pledges,
charges, claims, security interests or other encumbrances of any sort on the
assets of Target relating to or attributable to taxes, other than liens for
taxes not yet due and payable. There is no contract, agreement, plan or
arrangement, including but not limited to the provisions of this Agreement,
covering any employee or former employee of Target that, individually or
collectively, could give rise to the payment of any amount that would be
disallowed pursuant to Section 280G or 162(m) of the Code. Target is not a party
to a tax sharing or allocation agreement nor does Target owe any amount under
any such agreement. Target is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code. Target has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the
Code) owned by Target. None of Target's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code. For the purposes of
this Agreement, the terms "TAX" and "TAXES" include all federal, state, local
and foreign income, gains, franchise, excise, property, sales, use, employment,
license, payroll, occupation, recording, value added or transfer taxes,
governmental charges, fees, levies or assessments (whether payable directly or
by withholding), and, with respect to such taxes, any estimated tax, interest
and penalties or additions to tax and interest on such penalties and additions
to tax. Without limiting any of the foregoing, Target's inter-company transfer
prices have been within five percent (5.0%) of those paid by any of Target's
distributors. Target has not been a distributing corporation within the prior
two (2) years in a transaction intending to qualify as a tax-free distribution
under Section 355 of the Code.
2.8 TARGET FINANCIAL STATEMENTS. Target has delivered to Acquirer
as SCHEDULE 2.8 Target's (a) audited balance sheet as of December 31, 1998 (the
"1998 BALANCE SHEET") and income statement and statement of cash flows for the
twelve (12) month period then ended (collectively, the "1998 FINANCIAL
STATEMENTS"), and (b) unaudited balance sheet as of May 31, 1999 (the "MAY 31
BALANCE SHEET") and income statement and statement of cash flows for the five
(5) month period then ended (collectively, the "MAY FINANCIAL STATEMENTS") (the
1998 Financial Statements and May Financial Statements are collectively referred
to herein as the "Financial Statements"). The Financial Statements have been
prepared based upon with the books and records of Target and fairly present the
financial condition of Target at the dates therein indicated and the results of
operations for the periods therein specified in all material respects. The
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except, with respect to the
May Financial Statements, for the absence of footnotes and as to the effect of
normal year end adjustments). To the knowledge of Target and each Principal,
Target has no material debt, liability or obligation of any nature, whether
accrued, absolute, contingent or otherwise, and whether due or to become due,
that is not reflected or reserved against in the Financial Statements which
would be required under generally accepted accounting principles to be reflected
or reserved, except for those that may have been incurred after the date of the
Financial Statements in the ordinary course of its business, consistent with
past practice and that are not material in amount either individually or
10
collectively. Without limiting the foregoing, Target represents that the
refundable tax assets described in the Financial Statements are accurate in all
material respects.
2.9 TITLE TO PROPERTIES. Except as set forth on Schedule 2.9,
Target has good and marketable title to or a leasehold or other rights to use
all of its assets as shown on the May 31 Balance Sheet, free and clear of all
liens, charges, restrictions or encumbrances (other than for taxes not yet due
and payable) in excess of twenty five thousand dollars ($25,000) in the
aggregate. All machinery and equipment included in such properties is in good
condition and repair, normal wear and tear excepted, and all leases of real or
personal property to which Target is a party are fully effective and afford
Target peaceful and undisturbed possession of the subject matter of the lease.
To Target's and each Principals' knowledge, Target is not in violation of any
zoning, building, safety or environmental ordinance, regulation or requirement
or other law or regulation applicable to the operation of owned or leased
properties (the violation of which would have a material adverse effect on its
business), and has not received any notice of such violation with which it has
not complied.
2.10 ABSENCE OF CERTAIN CHANGES. Since May 31, 1999, there has not
been with respect to Target:
(a) any change in the financial condition, properties,
assets, liabilities, business or operations thereof which change by itself or in
conjunction with all other such changes, whether or not arising in the ordinary
course of business, has had or will have a Material Adverse Effect;
(b) any material contingent liability incurred thereby as
guarantor or otherwise with respect to the obligations of others;
(c) any mortgage, encumbrance or lien placed on any of
the properties of Target other than in the ordinary course of business;
(d) any material obligation or liability incurred thereby
other than obligations and liabilities incurred in the ordinary course of
business or in connection with this Agreement;
(e) any purchase or sale or other disposition, or any
agreement or other arrangement for the purchase, sale or other disposition, of
any of the material properties or assets of Target other than in the ordinary
course of business;
(f) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the properties, assets
or business of Target;
(g) any declaration, setting aside or payment of any
dividend on, or the making of any other distribution in respect of, the capital
stock thereof, any split, combination or recapitalization of the capital stock
thereof or any direct or indirect redemption, purchase or other acquisition of
the capital stock thereof;
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(h) any labor dispute or claim of unfair labor practices,
any change in the compensation payable or to become payable to any of its
officers, employees or agents, or any bonus payment or arrangement made to or
with any of such officers, employees or agents outside of the ordinary course of
business;
(i) any change with respect to the management,
supervisory or other key personnel thereof outside of the ordinary course of
business;
(j) any payment or discharge of a material lien or
liability thereof which lien was not either shown on the 1998 Balance Sheet or
incurred in the ordinary course of business thereafter; or
(k) any material obligation or liability incurred thereby
to any of its officers, directors or shareholders or any loans or advances made
thereby to any of its officers, directors or shareholders except normal
compensation and expense allowances payable to officers, consultants and
directors.
2.11 MATERIAL AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set
forth on SCHEDULE 2.11 delivered to Acquirer herewith, Target is not a party or
subject to any oral or written contracts, obligations, commitments, plans,
leases, instruments, arrangements or licenses not entered into in the ordinary
course of business which is material to the business of Target (each a "MATERIAL
AGREEMENT"), including, but not limited to any:
(a) Contract providing for potential payments by or to
Target in excess of one hundred thousand dollars ($100,000.00) or more;
(b) Product distribution agreement, development
agreement, or license agreement as licensor or licensee (except for standard
non-exclusive software licenses granted to end-user customers in the ordinary
course of business, the form of which has been provided to Acquirer's counsel,
or standard licenses purchased by Target for off-the-shelf software);
(c) Material agreement for the lease of real or personal
property;
(d) Joint venture contract or arrangement or any other
agreement that involves a sharing of profits with other persons;
(e) Instrument evidencing or related in any way to
indebtedness for borrowed money by way of direct loan, sale of debt securities,
purchase money obligation, conditional sale, guarantee, or otherwise in any
amount individually in excess of twenty-five thousand dollars ($25,000) or in
the aggregate in excess of twenty-five thousand dollars ($25,000), except for
trade indebtedness incurred in the ordinary course of business, and except as
disclosed in the Financial Statements;
(f) Contract containing covenants purporting to limit
Target's freedom to compete in any line of business in any geographic area;
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(g) Stock redemption or purchase agreement yet to be
performed;
(h) Contract entered into with any OEM, VAR or other
direct or indirect distributor; or
(i) Contract involving any non-recurring engineering fees
that have or may be paid to Target.
All Material Agreements listed in SCHEDULE 2.11 constitute
valid and enforceable obligations of the parties thereto and are in full force
and effect. Target is not, nor, to the knowledge of Target and the Principals,
is any other party thereto, in breach or default in any material respect under
the terms of any such Material Agreement, which breach or default may reasonably
be expected to have a Material Adverse Effect on Target. A copy of each
agreement or document listed on SCHEDULE 2.11 has been delivered to Acquirer's
counsel. Target is not a party to any contract or arrangement which, to Target's
or any Principal's knowledge, has had or could reasonably be expected to have a
material adverse effect on its business or prospects.
2.12 INTELLECTUAL PROPERTY. Target owns, or has the rights to use,
sell or license all Intellectual Property Rights (as defined below) necessary or
required for the conduct of, or used in, its business as presently conducted and
as currently contemplated by Target to be conducted (such Intellectual Property
Rights being hereinafter collectively referred to as the "TARGET IP RIGHTS") and
such rights to use, sell or license are reasonably sufficient for the conduct of
its business and as currently contemplated by Target to be conducted. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not constitute a material breach of
any instrument or agreement governing any Target IP Right (the "TARGET IP RIGHTS
AGREEMENTS"), will not cause the forfeiture or termination or give rise to a
right of forfeiture or termination of any Target IP Right or materially impair
the right of Target to use, sell or license any Target IP Right or portion
thereof (except where such breach, forfeiture or termination would not have a
material adverse effect on Target, taken as a whole). There are no royalties,
honoraria, fees or other payments payable by Target to any person by reason of
the ownership, use, license, sale or disposition of the Target IP Rights (other
than as set forth in the Target IP Rights Agreements listed in SCHEDULE 2.12).
Neither the manufacture, marketing, license or sale of any product currently
licensed or sold by Target or currently under development by Target violates any
license or agreement between Target and any third party or infringes any
Intellectual Property Right of any other party; and there is no pending or, to
the knowledge of Target and the Principals, threatened claim or litigation
contesting the validity, ownership or right to use, sell, license or dispose of
any Target IP Right; nor, to the knowledge of Target and the Principals is there
any basis for any such claim; nor has Target received any notice asserting that
any Target IP Right or the proposed use, sale, license or disposition thereof
conflicts or will conflict with the rights of any other party, nor, to the
knowledge of Target and the Principals is there any reasonable basis for any
such assertion. Target has taken commercially reasonable and practicable steps
designed to safeguard and maintain the secrecy and confidentiality of, and its
proprietary rights in, all material Target IP Rights. SCHEDULE 2.12 contains a
list of all applications, registrations, filings and other formal actions made
or taken pursuant to federal, state and foreign laws by Target to perfect or
protect its interest in Target IP
13
Rights, including, without limitation, all issued patents, patent applications,
registered copyrights, copyright applications, registered trademarks, trademark
applications, registered tradenames, issued service marks, service mark
applications and all Target IP Rights Agreements (except for object code
end-user licenses granted to end-users in the ordinary course of business that
permit use of software products without a right to modify, distribute or
sublicense the same). Target has disclosed all information material to the
applications, registrations and filings listed in SCHEDULE 2.12 to the
appropriate government agencies, and has properly complied with all procedural
requirements pertaining to the preparation and filing of such applications,
registrations and filings. As used herein, the term "INTELLECTUAL PROPERTY
RIGHTS" shall mean all industrial and intellectual property rights in any
jurisdiction in the world, including, without limitation, patents, patent
applications, patent rights, trademarks, trademark applications, trade names,
service marks, service mark applications, copyright, copyright applications,
moral rights, franchises, licenses, inventories, know-how, trade secrets,
customer lists, proprietary processes and formulae, all source and object code,
algorithms, architecture, structure, display screens, layouts, inventions,
development tools and all documentation and media constituting, describing or
relating to the above, including, without limitation, manuals, memoranda and
records.
2.13 COMPLIANCE WITH LAWS. Target is or will be at the Closing Date
in full compliance, in all material respects with all applicable laws,
ordinances, regulations, and rules, and all orders, writs, injunctions, awards,
judgments, and decrees applicable to it or to the assets, properties, and
business thereof (the violation of which would have a Material Adverse Effect),
including, without limitation: (a) all applicable federal and state and foreign
securities laws and regulations, (b) all applicable federal, state, local and
foreign laws, ordinances, regulations, and all orders, writs, injunctions,
awards, judgments, and decrees pertaining to (i) the sale, licensing, leasing,
ownership, or management of its owned, leased or licensed real or personal
property, products and technical data, (ii) employment and employment practices,
terms and conditions of employment, and wages and hours and (iii) safety,
health, fire prevention, environmental protection, toxic waste disposal,
building standards, zoning and other similar matters (c) the Export
Administration Act and regulations promulgated thereunder and all other laws,
regulations, rules, orders, writs, injunctions, judgments and decrees applicable
to the export or re-export of controlled commodities or technical data and (d)
the Immigration Reform and Control Act. Target has received all permits and
approvals from, and has made all filings with, third parties, including
government agencies and authorities, that are necessary in connection with its
present business and which, if not received or filed, would have a Material
Adverse Effect.
2.14 CERTAIN TRANSACTIONS AND AGREEMENTS. To Target's or any
Principal's knowledge, none of its officers or directors or the Principals, nor
any member of their immediate families, has any direct or indirect ownership
interest in any firm or corporation that competes with Target (except with
respect to any interest in less than five percent (5%) of the stock of any
corporation whose stock is publicly traded). None of the officers, directors or
Principals, nor any member of their immediate families, is directly or
indirectly interested in any contract or informal arrangement with Target,
except for normal compensation for services as an officer, consultant, director
or employee thereof and contracts with respect to Target Common Stock, Target
Options or Target Convertible Debt. None of said officers, directors or
Principals, nor any member of
14
their immediate families, has any interest in any property, real or personal,
tangible or intangible, including inventions, patents, copyrights, trademarks or
trade names or trade secrets, used in or pertaining to the business of Target,
except for the normal rights of a shareholder.
2.15. EMPLOYEES, ERISA AND OTHER COMPLIANCE.
2.15.1 Except as set forth in SCHEDULE 2.15.1, Target has no
employment contracts or consulting agreements currently in effect that are not
terminable at will (other than agreements with the sole purpose of providing for
the confidentiality of proprietary information or assignment of inventions). All
current and former officers, employees and consultants of Target having access
to proprietary information or in any way involved with the creation of Target
Intellectual Property Rights have executed and delivered to Target an agreement
regarding the protection of such proprietary information or Target Intellectual
Property Rights and the assignment to Target of all Intellectual Property Rights
arising from the services performed for Target by such persons. Copies of the
form of all such agreements have been delivered to Acquirer's counsel.
2.15.2 Target (i) has not ever been nor, to Target's or any
Principal's knowledge, is subject to a union organizing effort, (ii) is not
subject to any collective bargaining agreement with respect to any of its
employees, (iii) is not subject to any other contract, written or oral, with any
trade or labor union, employees' association or similar organization, or (iv)
has no current labor disputes. Target nor any Principal has any knowledge of any
facts indicating that the consummation of the transactions contemplated hereby
will have a material adverse effect on such labor relations and has no knowledge
that any of the employees that Acquirer has indicated to Target that it desires
to retain intend to leave its employ.
2.15.3 SCHEDULE 2.15.3 identifies each "employee benefit
plan," as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), currently or previously maintained, contributed
to or entered into by Target under which Target or any ERISA Affiliate (as
defined below) thereof has any present or future obligation or liability
(collectively, the "TARGET EMPLOYEE PLANS"). For purposes of this Section
2.15.3, "ERISA AFFILIATE" shall mean any entity which is a member of (A) a
"controlled group of corporations," as defined in Section 414(b) of the Code,
(B) a group of entities under "common control," as defined in Section 414(c) of
the Code, or (C) an "affiliated service group," as defined in Section 414(m) of
the Code, any of which includes Target. Except as set forth in SCHEDULE 2.15.3,
copies of all Target Employee Plans (and, if applicable, related trust
agreements) and all amendments thereto and summary plan descriptions thereof
(including summaries of material modifications) have been delivered to Acquirer
or its counsel, together with the three most recent annual reports (Form 5500,
including, if applicable, Schedule B thereto), if such reports are required by
ERISA, prepared in connection with any such Target Employee Plan. All Target
Employee Plans which individually or collectively would constitute an "employee
pension benefit plan," as defined in Section 3(2) of ERISA (collectively, the
"TARGET PENSION PLANS"), are identified as such in SCHEDULE 2.15.3. All
contributions due from Target prior to the Closing Date with respect to any of
the Target Employee Plans have been or will be made prior to such Closing Date
or have otherwise been accrued on Target's financial statements as required by
generally accepted
15
accounting principles and all such contributions have or will be made in
accordance with ERISA. Each Target Employee Plan has been maintained
substantially in compliance with its terms and with the requirements prescribed
by any and all statutes, orders, rules and regulations, including, without
limitation, ERISA and the Code, which are applicable to such Target Employee
Plans.
2.15.4 No "prohibited transaction," as defined in Section
406 of ERISA or Section 4975 of the Code, has occurred with respect to any
Target Employee Plan which is covered by Title I of ERISA which would result
in a material liability to Target taken as a whole, excluding transactions
effected pursuant to (or covered by) a statutory, regulatory or
administrative exemption. Neither Target nor any of its officers or directors
have engaged in any transaction or acted or failed to act in any manner that
violates the fiduciary requirements of ERISA with respect to any Target
Employee Plan and that would subject Target or any of its officers or
directors to a material liability. No event or omission has occurred in
connection with any Target Employee Plan that would make Target or any of its
officers or directors liable for any material tax (as defined in Section 2.7)
or material penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code
or Section 502 of ERISA.
2.15.5 Except as set forth in SCHEDULE 2.15.5, any Target
Pension Plan which is intended to be qualified under Section 401(a) of the Code
has received a favorable determination from the Internal Revenue Service that
the Plan document for such Target Pension Plan satisfies the requirements for
qualification, and Target is not aware of any reason why such determination may
not be relied upon by such plan (other than changes in the law resulting from
the Small Business Job Protection Act of 1996 and the Taxpayers Relief Act of
1997).
2.15.6 SCHEDULE 2.15.6 lists each employment, severance or
other similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for insurance coverage (including any self-insured
arrangements), workers' benefits, vacation benefits, severance benefits,
disability benefits, death benefits, hospitalization benefits, retirement
benefits, deferred compensation, profit-sharing, bonuses, stock options, stock
purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits for
employees, consultants or directors which (A) is not a Target Employee Plan, (B)
is entered into, maintained or contributed to, as the case may be, by Target and
(C) covers any employee or former employee of Target. Such contracts, plans and
arrangements as are described in this Section 2.15.6 are herein referred to
collectively as the "TARGET BENEFIT ARRANGEMENTS." Each Target Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Target Benefit Arrangement. Target has
delivered to Acquirer or its counsel a complete and correct copy or description
of each Target Benefit Arrangement.
2.15.7 Except as set forth in SCHEDULE 2.15.7, there has
been no amendment to, or written interpretation or announcement (whether or not
written) by Target relating to, or material change in employee participation or
coverage under, any Target Employee Plan or Target Benefit Arrangement that
would increase materially the expense of maintaining such
16
Target Employee Plan or Target Benefit Arrangement above the level of the
expense incurred in respect thereof for the fiscal year ended December 31, 1998.
2.15.8 Target (or its designee) has complied in all material
respects with all required notices and coverage pursuant to Section 4980B of the
Code and the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), with respect to any "qualifying event" (as defined in Section
4980B(f)(3) of the Code) under any Target Employee Plan occurring prior to and
including the Closing Date, except where the failure to do so would not result
in a material liability to Target and no material Tax payable on account of
Section 4980B of the Code has been incurred with respect to any current or
former employees (or their beneficiaries) of Target.
2.15.9 No benefit payable or which may become payable by
Target due to the consummation of the transactions contemplated by this
Agreement or pursuant to any Target Employee Plan or any Target Benefit
Arrangement shall constitute an "excess parachute payment" (as defined in
Section 280G(b)(1) of the Code) which is subject to the imposition of a material
excise Tax under Section 4999 of the Code or which would not be deductible by
reason of Section 280G of the Code.
2.15.10 Target is in compliance in all material respects with
all applicable laws, agreements and contracts relating to employment, employment
practices, wages, hours, and terms and conditions of employment, including, but
not limited to, employee compensation matters, but not including ERISA.
2.15.11 To Target's and each Principal's knowledge, no
employee of Target is in violation of any term of any employment contract,
patent disclosure agreement, noncompetition agreement, or any other contract or
agreement, or any restrictive covenant relating to the right of any such
employee to be employed thereby, or to use trade secrets or proprietary
information of others, and the employment of such employees by Target does not
subject Target to any liability.
2.15.12 A list of all employees, officers and consultants of
Target and their current compensation has been delivered to Acquirer and
attached hereto as SCHEDULE 2.15.12.
2.15.13 Except for the agreements described in Section 1.1.2
hereof, Target is not a party to any (a) agreement with any executive officer or
other key employee thereof (i) the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving Target in the nature of any of the transactions contemplated by this
Agreement and the Articles of Merger, (ii) providing any term of employment or
compensation guarantee, or (iii) providing severance benefits or other benefits
after the termination of employment of such employee regardless of the reason
for such termination of employment, or (b) 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 materially increased, or the
vesting of benefits of which will be materially accelerated, by the occurrence
of any of the transactions contemplated by this Agreement and the Articles of
Merger 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 and the Articles
of Merger.
17
2.16 CORPORATE DOCUMENTS. Target has made available to Acquirer for
examination all documents and information listed in the Target Disclosure
Schedule or other Exhibits called for by this Agreement or which have been
requested by Acquirer's legal counsel, including, without limitation, the
following: (a) copies of Target's Articles of Incorporation and Bylaws as
currently in effect; (b) its Minute Book containing all records of all
proceedings, consents, actions, and meetings of the shareholders, the board of
directors and any committees thereof; (c) its stock ledger and journal
reflecting all stock issuances and transfers; and (d) all permits, orders, and
consents issued by any regulatory agency with respect to Target, or any
securities of Target, and all applications for such permits, orders, and
consents.
2.17 NO BROKERS. Neither Target nor the Principals are obligated
for the payment of fees or expenses of any investment banker, broker or finder
in connection with the origin, negotiation or execution of this Agreement or the
Target Ancillary Agreements or in connection with any transaction contemplated
hereby or thereby.
2.18 DISCLOSURE. Neither this Agreement, its exhibits and
schedules, nor any of the certificates or documents to be delivered by Target to
Acquirer under this Agreement, when taken together, contains any untrue
statement of a material fact or, to Target or any Principal's knowledge, omits
to state any material fact necessary in order to make the statements contained
herein and therein, in light of the circumstances under which such statements
were made, not materially misleading. To the knowledge of Target and the
Principals, there are no undisclosed liabilities that would have a Material
Adverse Effect or that would prevent Target from fulfilling its obligations
under this Agreement. Target and Principals acknowledge that they have read the
SEC Reports and have had the opportunity to interview Acquirer management
regarding such SEC Reports.
2.19 INSURANCE. Target maintains fire and casualty, general
liability, business interruption, product liability, and sprinkler and water
damage insurance which it believes to be reasonably prudent for similarly sized
and similarly situated businesses.
2.20 ENVIRONMENTAL MATTERS.
2.20.1 During the period that Target has leased or owned its
properties or owned or operated any facilities, there have been no disposals,
releases or threatened releases of Hazardous Materials (as defined below) by
Target, or to Target's or each Principals' knowledge, by others, on, from or
under such properties or facilities, the liability for which would have a
material adverse effect on Target's business, financial condition, results of
operations or prospects. Neither Target nor any Principal has any knowledge of
any presence, disposals, releases or threatened releases of Hazardous Materials
on, from or under any of such properties or facilities, which may have occurred
prior to Target having taken possession of any of such properties or facilities.
For the purposes of this Agreement, the terms "DISPOSAL," "RELEASE," and
"THREATENED RELEASE" shall have the definitions assigned thereto by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. Section 9601 et seq., as amended ("CERCLA"). For the purposes of this
Agreement "HAZARDOUS MATERIALS" shall mean any hazardous or toxic substance,
material or waste which is or becomes prior to the Closing
18
regulated under, or defined as a "hazardous substance," "pollutant,"
"contaminant," "toxic chemical," "hazardous materials," "toxic substance" or
"hazardous chemical" under (1) CERCLA; (2) any similar federal, state or local
law; or (3) regulations promulgated under any of the above laws or statutes.
2.20.2 To the knowledge of Target and the Principals, none
of the properties or facilities of Target is in material violation of any
federal, state or local law, ordinance, regulation or order relating to
industrial hygiene or to the environmental conditions on, under or about such
properties or facilities, including, but not limited to, soil and ground water
condition. During the time that Target has owned or leased its properties and
facilities, neither Target nor, to Target's and the Principals' knowledge, any
third party, has used, generated, manufactured or stored on, under or about such
properties or facilities or transported to or from such properties or facilities
any Hazardous Materials except in substantial accordance with applicable
environmental laws.
2.20.3 During the time that Target has owned or leased its
respective properties and facilities, there has been no litigation brought or
threatened against Target by, or any settlement reached by Target with, any
party or parties alleging the presence, disposal, release or threatened release
of any Hazardous Materials on, from or under any of such properties or
facilities.
2.21 INTERESTED PARTY TRANSACTIONS. No officer or director of
Target or any "affiliate" or "associate" (as those terms are defined in Rule 405
promulgated under the Securities Act) of any such person has had, either
directly or indirectly, a material interest in: (i) any person or entity which
purchases from or sells, licenses or furnishes to Target any goods, property,
technology or intellectual or other property rights or services; or (ii) any
contract or agreement to which Target is a party or by which it may be bound or
affected.
2.22 APPLICABILITY OF SECTION 368(a). To the knowledge of Target,
the Principals and Target's Affiliates, there are no facts or transactions that
would prevent the treatment of the Merger as a reorganization qualifying under
the provisions of Section 368(a) of the Code.
2.23 TREATMENT OF CERTAIN TARGET SECURITYHOLDERS.
2.23.1 Robert Zieserl has entered into an agreement with
Target pursuant to which Mr. Zieserl will receive 652,526 shares of Target
Common Stock in exchange for terminating all put, conversion, exchange or other
rights contained in that certain Subscription and Securities Restriction
Agreement dated January 1, 1998 between Mr. Zieserl and the Company.
2.23.2 Hewlett-Packard has elected in writing to receive
payment of all outstanding principal and accrued interest in full in cash
related to that certain Convertible Secured Subordinated U.S. $3,000,000
Promissory Note dated March 11, 1998 and that certain Convertible Secured
Subordinated U.S. $2,000,000 Promissory Note dated November 16, 1998 at the
Closing.
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2.24 MANAGEMENT LETTER. Target has received from its independent
auditors, a management letter for the audit of the most recently completed
fiscal year.
3. REPRESENTATIONS AND WARRANTIES OF ACQUIRER AND SUB
Acquirer and Sub hereby jointly and severally represent and warrant as
follows, that, except as set forth on the Acquirer Disclosure Schedule delivered
to Target by Acquirer prior to the execution of this Agreement, as SCHEDULE 3.0:
3.1 ORGANIZATION AND GOOD STANDING.
3.1.1 Acquirer is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and has
the corporate power and authority to own, operate and lease its properties and
to carry on its business as now conducted and as proposed to be conducted, and
is qualified to do business in each jurisdiction where the failure to do so
would have a Material Adverse Effect.
3.1.2 Sub is a corporation duly organized, validly existing
and in good standing under the laws of the State of Illinois, and has the
corporate power and authority to own, operate and lease its properties and to
carry on its business as now conducted and as proposed to be conducted, and is
qualified as a foreign corporation in each jurisdiction in which a failure to be
so qualified could reasonably be expected to have a material adverse effect on
its present operations or financial condition.
3.2 POWER, AUTHORIZATION AND VALIDITY.
3.2.1 Acquirer and Sub have the right, power, legal
capacity and authority to enter into and perform their obligations under this
Agreement, and all agreements to which Acquirer or Sub is or will be a party
that are required to be executed pursuant to this Agreement (the "ACQUIRER
ANCILLARY AGREEMENTS"). The execution, delivery and performance of this
Agreement and the Acquirer Ancillary Agreements have been duly and validly
approved and authorized by Acquirer's Board of Directors and Sub's Board of
Directors and sole shareholder. Acquirer is not required to obtain the approval
of its stockholders in connection with this Agreements or the transactions
contemplated hereby
3.2.2 No filing, authorization or approval, governmental or
otherwise, is necessary to enable Acquirer or Sub to enter into, and to perform
its obligations under, this Agreement and the Acquirer Ancillary Agreements,
except for (a) the filing of the Articles of Merger with the Illinois Secretary
of State, the filing of appropriate documents with the relevant authorities of
other states in which Acquirer and Sub are qualified to do business, if any; (b)
compliance with HSR and (c) such filings as may be required to comply with
federal and state securities laws.
3.2.3 This Agreement and the Acquirer Ancillary Agreements
are, or when executed by Acquirer and/or Sub (as applicable) will be, valid and
binding obligations of Acquirer and Sub enforceable in accordance with their
respective terms, except as to the effect, if
20
any, of (a) applicable bankruptcy and other similar laws affecting the rights of
creditors generally, (b) rules of law governing specific performance, injunctive
relief and other equitable remedies and (c) the enforceability of provisions
requiring indemnification or contribution in connection with the offering,
issuance or sale of securities; provided, however, that the Articles of Merger
will not be effective until filed with the Illinois Secretary of State.
3.2.4 The Acquirer Common Stock to be issued to Target
Shareholders in the Merger has been duly authorized and, when issued by Acquirer
will be validly issued, fully paid and non-assessable, will be issued in
compliance with applicable federal and state securities laws and will be free
and clear of all liens, encumbrances and adverse claims.
3.3 NO VIOLATION OF EXISTING AGREEMENTS. Neither the execution and
delivery of this Agreement nor any Acquirer Ancillary Agreement, nor the
consummation of the transactions contemplated hereby or thereby, will conflict
with, or (with or without notice or lapse of time, or both) result in a
termination, breach, impairment or violation of (a) any provision of the
Certificate of Incorporation or Articles of Incorporation of Acquirer or Sub,
respectively, or the Bylaws of Acquirer or Sub, all as currently in effect, (b)
in any material respect, any material instrument or contract to which Acquirer
or Sub is a party or by which Acquirer or Sub is bound, or (c) any federal,
state, local or foreign judgment, writ, decree, order, statute, rule or
regulation applicable to Acquirer or Sub or their assets or properties. Acquirer
is not currently in material violation of any agreement material to its
business.
3.4 ACQUIRER SEC REPORTS. Acquirer has filed and made available to
the Target and the Target Shareholders all forms, reports and documents required
to be filed by Acquirer with the Commission under the Exchange Act and the
Securities Act since February 28, 1998 (collectively, the "ACQUIRER SEC
REPORTS"). The Acquirer SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Exchange Act, and (ii)
did not at the time they were filed (or if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated in such Acquirer SEC Reports or necessary in order to make
the statements in such Acquirer SEC Reports, in the light of the circumstances
under which they were made, not misleading. As of their respective dates, the
financial statements of Acquirer included in the Acquirer SEC Reports (the
"ACQUIRER FINANCIAL STATEMENTS") complied when filed as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the Securities and Exchange Commission with respect thereto,
and were, when filed, in accordance with the books and records of Acquirer,
complete and accurate in all material respects, and presented fairly the
consolidated financial position and the consolidated results of operations,
changes in Target Shareholders' equity and cash flows of Acquirer and its
Subsidiaries as of the dates and for the periods indicated, in accordance with
GAAP, consistently applied, subject in the case of interim financial statements
to normal year-end adjustments and the absence of certain footnote information.
3.5 ABSENCE OF CERTAIN CHANGES. Since the most recent SEC Report,
there has not been any change in the financial condition, properties, assets,
liabilities, business or operations of
21
Acquirer which change by itself or in conjunction with all other such changes,
whether or not arising in the ordinary course of business, has had or will have
a material adverse effect thereon except as disclosed in the SEC Reports.
3.6 COMPLIANCE WITH LAWS. Acquirer and Sub have complied, or prior
to the Closing Date will have complied, and are or will be at the Closing Date
in full compliance, in all material respects with all applicable laws,
ordinances, regulations, and rules, and all orders, writs, injunctions, awards,
judgments, and decrees applicable to them, the violation of which would have a
material adverse effect upon their business. Acquirer and Sub have received all
permits and approvals from, and have made all filings with, third parties,
including government agencies and authorities, that are necessary in connection
with their present business. To Acquirer's and Sub's knowledge, there are no
legal or administrative proceedings or investigations pending or threatened,
that, if enacted or determined adversely to them, would result in any material
adverse change on their respective business, financial condition, results of
operations or prospects.
3.7 DISCLOSURE. Neither this Agreement, its exhibits and
schedules, nor any of the certificates or documents to be delivered by Acquirer
to Target under this Agreement, when taken together, contains any untrue
statement of a material fact or, to Acquirer's knowledge, omits to state any
material fact necessary in order to make the statements contained herein and
therein, in light of the circumstances under which such statements were made,
not materially misleading. To the knowledge of Acquirer, there are no
undisclosed liabilities that would have a Material Adverse Effect or that would
prevent Acquirer from fulfilling its obligations under this Agreement.
3.8 NO BROKERS. Acquirer and Sub are not obligated for the payment
of fees or expenses of any investment banker, broker or finder in connection
with the origin, negotiation or execution of this Agreement or the Acquirer
Ancillary Agreements or in connection with any transaction contemplated hereby
or thereby.
3.9 APPLICABILITY OF SECTION 368(a). To the knowledge of Acquirer,
Sub and their respective Affiliates, there are no situations that would prevent
the treatment of the Merger as a reorganization qualifying under the provisions
of Section 368(a) of the Code. Acquirer has no plan or intention directly or
indirectly (through one or more related parties) to reacquire any of its voting
common stock issued in the Merger. For these purposes "related parties" include
corporations which are members of the same affiliated group as defined in
Section 1504 of the Code (determined without regard to Section 1504(b) of the
Code), or two corporations if the first corporation purchases the stock of the
second corporation in a transaction which would be treated as a distribution in
redemption of the stock of the first corporation under Section 304(a)(2) of the
Code (determined without regard to Treas. Reg. Sec. 1.1502-80(b)). In addition,
a corporation will be treated as related to another corporation if such
relationship exists immediately before or immediately after the acquisition of
the stock involved. Moreover, a corporation, other than Target or a person
related to Target, will be treated as related to Acquirer if the relationship is
created in connection with the Merger. Acquirer may from time to time repurchase
some of its issued and outstanding common stock in open market repurchase
transactions unrelated to the Merger without breaching the terms of this Section
3.9.
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4. TARGET AND PRINCIPAL STOCKHOLDER COVENANTS
During the period from the date of this Agreement until the Effective
Time, Target and the Principals, covenant and agree as follows:
4.1 ADVICE OF CHANGES. Target will promptly advise Acquirer in
writing (a) of any event occurring subsequent to the date of this Agreement that
would render any representation or warranty of Target contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material and adverse respect and (b) of any material
adverse change in Target's business, results of operations, financial condition
or prospects.
4.2 SHAREHOLDERS APPROVAL. Target will obtain the approval of the
Target Shareholders at the earliest practicable date approving this Agreement,
the Target Ancillary Agreements, the Merger and related matters, which approval
will be unanimously recommended by Target's Board of Directors and management.
To the extent the Principals hold any Target Common Stock at the effective date
of the written consent, the Principals agree to approve this Agreement, Merger
and all related matters.
4.3 REGULATORY APPROVALS. Target will execute and file, or join in
the execution and filing, of any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign which may be reasonably
required, in connection with the consummation of the transactions contemplated
by this Agreement. Target will use its best efforts to obtain all such
authorizations, approvals and consents.
4.4 NECESSARY CONSENTS. Target and each Principal will use its
best efforts to obtain such approvals and take such other actions as may be
necessary or appropriate to allow the consummation of the transactions
contemplated hereby and to allow Acquirer to carry on Target's business after
the Closing. Until the forty-fifth (45th) day after the Closing, each Principal
also will use its best efforts to obtain such approvals and consent to the
assignment of those agreements that require assignment in the sole judgment of
Acquirer.
4.5 LITIGATION. Target will notify Acquirer in writing promptly
after learning of any actions, suits, proceedings or investigations by or before
any court, board or governmental agency, initiated by or against it, or known by
it to be threatened against it.
4.6 ACCESS TO INFORMATION. Until the Closing, Target will allow
Acquirer and its agents reasonable access to the files, books, records and
offices of Target, including, without limitation, any and all information
relating to Target's taxes, commitments, contracts, leases, licenses, and real,
personal and intangible property and financial condition. Target will cause its
accountants to cooperate with Acquirer and its agents in making available all
financial information reasonably requested, including without limitation the
right to examine all working papers pertaining to all financial statements
prepared or audited by such accountants. All such information shall be subject
to the terms of the non-disclosure provisions set forth in that certain
Confidentiality Agreement dated as of June 15, 1999 entered into by the parties
hereto (the "CONFIDENTIALITY AGREEMENT").
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4.7 SATISFACTION OF CONDITIONS PRECEDENT. Target will use its best
efforts to satisfy or cause to be satisfied all the conditions precedent which
are set forth in Section 8, and Target will use its best efforts to cause the
transactions contemplated by this Agreement to be consummated, and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby.
4.8 TARGET DISSENTING SHARES. As promptly as practicable after the
date of the Target Shareholders' and prior to the Closing Date, Target shall
furnish Acquirer with the name and address of each Target Shareholder who
requests appraisal rights pursuant to Section 5/11 of the Illinois Corporation
Act of 1983, as amended (the "TARGET DISSENTING SHAREHOLDER") and the number of
Target Common Stock (the "DISSENTING SHARES") owned by such Target Dissenting
Shareholder.
4.9 PURCHASE ACCOUNTING. Target shall use its best efforts to
cause its Affiliates not to take any action that would adversely affect the
ability of Acquirer to account for the business combination to be effected by
the Merger as a purchase.
4.10 BLUE SKY LAWS. Target shall use its best efforts to assist
Acquirer to the extent necessary to comply with the securities and Blue Sky laws
of all jurisdictions which are applicable in connection with the Merger.
4.11 NO SOLICITATION. Until the earlier of the Effective Time or
the date of termination of this Agreement pursuant to the provisions of Section
9 hereof, Target and the Principals will not (nor will Target permit any of
Target's officers, directors, agents, representatives or affiliates to) directly
or indirectly, take any of the following actions with any party other than
Acquirer and its designees: (a) solicit, conduct discussions with or engage in
negotiations with any person, relating to the possible acquisition of Target
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any portion of its capital stock or assets, (b) provide
information with respect to it to any person, other than Acquirer, relating to
the possible acquisition of Target (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any portion of its capital
stock or assets, (c) enter into an agreement with any person, other than
Acquirer, providing for the acquisition of Target (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any portion of
its capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of Target
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any portion of its capital stock or assets by any person, other
than by Acquirer. In addition to the foregoing, if Target or any Principal
receives prior to the Effective Time or the termination of this Agreement any
offer, proposal or request relating to any of the above, Target shall
immediately notify Acquirer thereof, including information as to the identity of
the offeror or the party making any such offer or proposal and the specific
terms of such offer or proposal and such other information related thereto as
Acquirer may reasonably request.
24
4.12 TERMINATION OF BENEFIT PLANS. The Target Board of Directors
shall approve the termination of any Target Pension Plan which is covered by
Sections 401(k) or 408 of the Code, effective as of the Effective Time, or take
such other actions concerning such Target Pension Plan, as reasonably requested
by Acquirer.
4.13 REDUCTION OF WORKFORCE. Prior to the Effective Time, Target
shall reduce its number of employees pursuant to a plan approved by Acquirer.
4.14 TREATMENT OF CERTAIN TARGET OPTION HOLDER. During the period
from the date of this Agreement until the Effective Time, Target shall comply in
all respects with the provisions of that certain Software Development Systems,
Inc. Incentive Stock Option Agreement dated January 1, 1998 between Target and
Jeffrey Barth (the "Barth Agreement"), including but not limited to Section 5
thereof.
4.15 FURTHER ASSURANCES. Target and each Principal agree that if,
at any time before or after the Effective Time, Acquirer considers or is advised
that any further deeds, assignments or assurances are reasonably necessary or
desirable to vest, perfect or confirm in Acquirer title to any property or
rights of Target, Acquirer and its proper officers and directors may execute and
deliver all such proper deeds, assignments and assurances and do all other
things necessary or desirable to vest, perfect or confirm title to such property
or rights in Acquirer and otherwise to carry out the purpose of this Agreement,
in the name of Target or otherwise.
5. ACQUIRER AND SUB COVENANTS
5.1 ADVICE OF CHANGES. During the period from the date of this
Agreement until the Effective Time, Acquirer and Sub will promptly advise Target
in writing (a) of any event occurring subsequent to the date of this Agreement
that would render any representation or warranty of Acquirer or Sub contained in
this Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material and adverse respect and (b) of any material
adverse change in Acquirer's or Sub's business, results of operations, financial
condition or prospects.
5.2 REGULATORY APPROVALS. During the period from the date of this
Agreement until the Effective Time, Acquirer and Sub will execute and file, or
join in the execution and filing, of any application or other document that may
be necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign, which may be reasonably
required, in connection with the consummation of the transactions contemplated
by this Agreement. Each of Acquirer and Sub will use its best efforts to obtain
all such authorizations, approvals and consents.
5.3 SATISFACTION OF CONDITIONS PRECEDENT. During the period from
the date of this Agreement until the Effective Time, each of Acquirer and Sub
will use its best efforts to satisfy or cause to be satisfied all the conditions
precedent which are set forth in Section 7, and each of Acquirer and Sub will
use its best efforts to cause the transactions contemplated by this Agreement to
be consummated and, without limiting the generality of the foregoing, to obtain
all consents and authorizations of third parties and to make all filings with,
and give all notices to,
25
third parties that may be necessary or reasonably required on its part in order
to effect the transactions contemplated hereby.
5.4 BLUE SKY LAWS. During the period from the date of this
Agreement until the Effective Time, Acquirer shall take such steps as may be
necessary to comply with the securities and Blue Sky laws of all jurisdictions
which are applicable in connection with the Merger.
5.5 PURCHASE ACCOUNTING. During the period from the date of this
Agreement until the Effective Time, Acquirer shall use its best efforts to cause
the business combination to be effected by the Merger to be accounted for as a
purchase. Acquirer shall use its best efforts to cause its Affiliates not to
take any action that would adversely affect the ability of Acquirer to account
for the business combination to be effected by the Merger as a purchase.
5.6 EMPLOYEE MATTERS.
5.6.1 EMPLOYEE STOCK PURCHASE PLAN. During the period from
the date of this Agreement until the Effective Time, subject to compliance with
purchase of interests accounting treatment and the requirements of any
applicable laws, employees of Target who become employees of Acquirer at or
after the Effective Time shall be permitted to participate in Acquirer's
Employee Stock Purchase Plan (the "ESPP") commencing with the first Offering
Period (as defined in the ESPP) following the Effective Time and such employees
will receive full credit for the period of their employment with Target by
Acquirer for such purposes, subject to compliance with the eligibility and other
provisions of such plan; provided, however, nothing contained herein shall
require Acquirer to continue the employment of any such employee.
5.6.2 OTHER BENEFIT PLANS. During the period from the date
of this Agreement until the Effective Time, the requirements of any applicable
laws, employees of Target who become employees of Acquirer at or after the
Effective Time will be permitted to participate in those employee benefit plans
sponsored by Acquirer in which similarly situated Acquirer employees participate
subject to the eligibility and other provisions of such Acquirer employee
benefit plans. Such employees will receive full credit for the period of their
employment with Target by Acquirer for such purposes; provided, however, nothing
contained herein shall require Acquirer to continue the employment of any such
employee.
5.7 UPDATE SEC REPORTS. During the period from the date of this
Agreement until the Effective Time, Acquirer shall update the SEC Reports and
any other disclosures related thereto for any material information which has
come into existence since the SEC Reports were previously provided to Target's
counsel for delivery to the Target Shareholders through the Shareholder mailing,
until and through Closing.
5.8 OUTSTANDING DEBT AND OTHER LIABILITIES. Effective as of the
Closing, Acquirer will assume all outstanding debt and other liabilities of
Target, including, without limitation, amounts owed to vendors and service
providers and the principal and interest of the Target Convertible Debt that is
not converted into Acquirer Common Stock pursuant to the terms of Section
1.1.1(iv) hereof. Acquirer shall pay such debt and liabilities in accordance
with the terms thereof.
26
5.9 NO SOLICITATION. Until the earlier of the Effective Time or
the date of termination of this Agreement pursuant to the provisions of Section
9 hereof, Acquirer will not (nor will Acquirer permit any of Acquirer's
officers, directors, agents, representatives or affiliates to) directly or
indirectly, take any of the following actions with Embedded Support Tools, Inc.
("EST"): (a) solicit, conduct discussions with or engage in negotiations with
any person, relating to the possible acquisition of EST (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) or any
portion of EST's capital stock or assets by Acquirer, (b) provide information to
EST, relating to the possible acquisition of EST (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any portion of
EST's capital stock or assets by Acquirer, (c) enter into an agreement with EST,
providing for the acquisition of EST (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any portion of EST's capital
stock or assets by Acquirer or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of EST
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any portion of EST's capital stock or assets.
5.10 ELECTION OF MR. CHALLENGER TO ACQUIRER BOARD OF DIRECTORS.
Acquirer agrees to appoint James E. Challenger to its Board of Directors upon
the creation of a vacancy on its Board of Directors, which vacancy shall be
created, subject to Acquirer stockholder approval, at its next Annual
Stockholders' Meeting.
5.11 NO TRADING OF ACQUIRER SECURITIES. During the period from the
date of this Agreement until the Effective Time, Target and each Principal agree
that they shall not, directly or indirectly, offer or contract to purchase any
shares of Acquirer's Common Stock or any securities convertible into or
exchangeable for or any other rights to purchase or sell such Common Stock.
6. CLOSING MATTERS
6.1 THE CLOSING. Subject to termination of this Agreement as
provided in Section 9 below, the Closing will take place at the offices of
Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California on or before
July 21, 1999 (the "CLOSING"), or, if all conditions to closing have not been
satisfied or waived by such date, such other place, time and date as Target and
Acquirer may mutually select (the "CLOSING DATE"). Concurrently with the
Closing, an Articles of Merger will be filed in the office of the Illinois
Secretary of State. The Articles of Merger provides that the Merger shall become
effective upon filing.
6.2 EXCHANGE OF CERTIFICATES.
6.2.1 As of the Effective Time, all shares of Target Common
Stock that are not Dissenting Shares that are outstanding immediately prior
thereto will, by virtue of the Merger and without further action, cease to exist
and will be converted into the right to receive from Acquirer the number of
shares of Acquirer Common Stock determined as set forth in Section 1.1.1,
subject to Sections 1.1.5, 1.1.6, 1.2 and 1.3.
27
6.2.2 Promptly after The Effective Time, each holder of
shares of Target Common Stock that are not Dissenting Shares will surrender the
certificate(s) for such shares (the "TARGET CERTIFICATES"), duly endorsed as
requested by Acquirer, to Acquirer's counsel for cancellation for Acquirer's
records. Prior to the Effective Time, each holder of Target Convertible Debt
that elected to convert to Acquirer Common Stock at the Effective Time will
surrender the original promissory note(s), security agreement(s) and other
related documentation (the "DEBT INSTRUMENTS") and Target shall forward the Debt
Instruments to Acquirer's counsel for cancellation and retention for Acquirer's
records. Prior to the Effective Time, Acquirer's counsel will forward a letter
of instruction to Chemical Mellon Shareholder Services, acting as the transfer
agent for Acquirer, (the "EXCHANGE AGENT") instructing the Exchange Agent to
issue to Acquirer's counsel a certificate for the number of shares of Acquirer
Common Stock to which such holder is entitled pursuant to Section 1.1.1 hereof,
less the shares of Acquirer Common Stock deposited into escrow pursuant to
Section 1.3 hereof. Acquirer's counsel will release such certificate at the
Effective Time, provided such holder has surrendered its, his or her Target
Certificate(s) to Acquirer's counsel, to each such tendering holder. Acquirer
will distribute any cash payable under Section 1.1.1 or Section 1.2.
6.2.3 No dividends or distributions payable to holders of
record of Acquirer Common Stock after the Effective Time, or cash payable in
lieu of fractional shares, will be paid to the holder of any unsurrendered
Target Certificate(s) until the holder of the Target Certificate(s) surrenders
such Target Certificate(s) or if such certificates are lost, stolen or
destroyed, provides an indemnity reasonably acceptable to Acquirer. Subject to
the effect, if any, of applicable escheat and other laws, following surrender of
any Target Certificate, there will be delivered to the person entitled thereto,
without interest, the amount of any dividends and distributions therefor paid
with respect to Acquirer Common Stock so withheld as of any date subsequent to
the Effective Time and prior to such date of delivery.
6.2.4 All Acquirer Common Stock and cash delivered upon the
surrender of Target Common Stock in accordance with the terms hereof and the
terms of the Escrow Agreement will be deemed to have been delivered in full
satisfaction of all rights pertaining to such Target Common Stock. There will be
no further registration of transfers on the stock transfer books of Target or
its transfer agent of the Target Common Stock. If, after the Effective Time,
Target Certificates are presented for any reason, they will be canceled and
exchanged as provided in this Section 6.2.
6.2.5 Until certificates representing Target Common Stock
outstanding prior to the Merger are surrendered pursuant to Section 6.2.2 above,
such certificates will be deemed, for all purposes, to evidence ownership of the
number of shares of Acquirer Common Stock and cash into which the Target Common
Stock will have been converted, subject to the Escrow Agreement with respect to
the number of shares withheld as Escrow Shares.
6.2.6 Certificates which are not presented to Acquirer's
counsel within one (1) year after the Closing shall be canceled and the holder
thereof will no longer be entitled to receive any Acquirer securities in
consideration thereof. Any Debt Instruments not delivered at
28
or prior to the Effective Time will not be deemed to be convertible into
Acquirer Common Stock and shall be assumed by Acquirer and payable only in cash
pursuant to the terms thereof.
6.3 ASSUMPTION OF OPTIONS. Promptly after Closing, Acquirer will
notify in writing each holder of a Target Option of the assumption of such
Target Option by Acquirer, and the number of shares of Acquirer Common Stock
that are then subject to such option and the exercise price of such option, as
determined pursuant to Section 1.1 hereof.
7. CONDITIONS TO OBLIGATIONS OF TARGET
Target's obligations hereunder are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Target, but only in a writing signed by
Target):
7.1 COMPLIANCE WITH LAW. There shall be no order, decree, or
ruling by any court or governmental agency or threat thereof, or any other fact
or circumstance, which would prohibit or render illegal the transactions
contemplated by this Agreement.
7.2 GOVERNMENT CONSENTS. Acquirer has obtained at or prior to the
Closing Date such permits or authorizations, and shall have taken such other
action, as may be required to taken by Acquirer to consummate the Merger by any
regulatory authority having jurisdiction over the parties and the actions herein
proposed to be taken, including but not limited to, requirements under
applicable federal and state securities laws.
7.3 OPINION OF ACQUIRER'S COUNSEL. Target shall have received from
counsel to Acquirer an opinion substantially in the form of EXHIBIT 7.3.
7.4 SHAREHOLDER APPROVAL. The principal terms of this Agreement
and the Articles of Merger shall have been approved and adopted by Target
Shareholders, as required by applicable law and Target's Articles of
Incorporation and Bylaws.
8. CONDITIONS TO OBLIGATIONS OF ACQUIRER
The obligations of Acquirer and Sub hereunder are subject to the
fulfillment or satisfaction on, and as of the Closing, of each of the following
conditions (any one or more of which may be waived by Acquirer, but only in a
writing signed by Acquirer):
8.1 COMPLIANCE WITH LAW. There shall be no order, decree, or
ruling by any court or governmental agency or threat thereof, or any other fact
or circumstance, which would prohibit or render illegal the transactions
contemplated by this Agreement.
8.2 GOVERNMENT CONSENTS. Target has obtained at or prior to the
Closing Date such permits or authorizations required to be obtained by Target,
and has taken such other action, as may be required by Target to consummate the
Merger by any regulatory authority having jurisdiction over the parties and the
actions herein proposed to be taken, including but not limited to, requirements
under applicable federal and state securities laws.
29
8.3 OPINION OF TARGET'S COUNSEL. Acquirer shall have received from
counsel to Target, an opinion substantially in the form of EXHIBIT 8.3.
8.4 NO LITIGATION. There is no litigation or proceeding threatened
or pending for the purpose or with the probable effect of enjoining or
preventing the consummation of any of the transactions contemplated by this
Agreement.
8.5 REQUISITE APPROVALS. The principal terms of this Agreement and
the Articles of Merger shall have been approved by the holders of no less than
ninety-five percent (95%) of Target Common Stock and the waiver of amounts to be
received by any Principal from treatment under Section 280G of the Code shall
have been approved by the holders of no less than seventy-five percent (75%) of
Target Common Stock.
8.6 DISSENTING SHARES. There shall be no more than five percent
(5%) of Target Dissenting Shares.
9. TERMINATION OF AGREEMENT
9.1 PRIOR TO CLOSING. This Agreement may be terminated at any time
prior to the Closing by the mutual written consent of each of the parties
hereto.
9.2 AT THE CLOSING. At or prior to the Closing, this Agreement may
be terminated and abandoned:
9.2.1 By Acquirer if any of the conditions precedent to
Acquirer's obligations set forth in Section 8 above have not been fulfilled or
waived at and as of the Closing; or
9.2.2 By Target if any of the conditions precedent to
Target's obligations set forth in Section 7 above have not been fulfilled or
waived at and as of the Closing.
9.2.3 Any termination of this Agreement under this Section
9.2 will be effective by the delivery of notice of the terminating party to the
other party hereto.
9.3 REMEDIES. Any termination of this Agreement pursuant to this
Section 9 will be without further obligation or liability upon any party in
favor of the other party hereto other than except as set forth in this Section
9.3 and the obligations provided in Sections 11.7 and 11.15, which will survive
termination of this Agreement; provided, however, that nothing herein will limit
the obligation of Target and Acquirer to use their best efforts to cause the
Merger to be consummated, as set forth in Sections 4.10 and 5.3 hereof,
respectively.
10. SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES, CONTINUING
COVENANTS
10.1 SURVIVAL OF REPRESENTATIONS. All representations, warranties
and covenants of Target, Acquirer and Sub contained in this Agreement will
survive the Effective Time and remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the parties to this
Agreement, until the termination of this Agreement or one year after
30
the Closing Date, whereupon such representations, warranties and covenants will
expire (except for covenants that by their express terms state that they survive
for a longer period), PROVIDED HOWEVER, that representations, warranties and
covenants involving intentional fraud or willful misconduct shall survive the
Closing without the limitation set forth in this Section 10.1 and that
representations contained in Section 2.7 shall survive the Closing until the
expiration of the applicable statute of limitations (including extensions).
10.2 AGREEMENT TO INDEMNIFY.
10.2.1 Subject to the limitations set forth in this Section
10, up and until the Closing, the Material Target Shareholders shall severally
(in accordance with their respective pro rata percentage interests) indemnify,
defend and hold harmless the Acquirer, its Affiliates, officers, directors,
employees, consultants and agents (hereinafter referred to individually as an
"INDEMNIFIED PERSON" and collectively as "INDEMNIFIED PERSONS") from and against
any and all claims, liabilities, damages and/or costs including, including
without limitation attorneys fees ("DAMAGES"):
(a) arising out of any misrepresentation or
breach of or default in connection with any of the representations, warranties
and covenants given or made by Target and the Principals in this Agreement or in
any certificate, document or instrument delivered by or on behalf of Target
pursuant hereto; or
(b) Resulting from any failure of any Target
Shareholders to have good, valid and marketable title to the issued and
outstanding Target Common Stock held by such Shareholders, free and clear of all
liens, claims, pledges, options, adverse claims, assessments or charges of any
nature whatsoever, or to have full right, capacity and authority to vote such
Target Common Stock in favor of the Merger and the other transactions
contemplated by the Articles of Merger.
(c) Resulting from the failure of Acquirer or
Target to obtain consents described in the second sentence of Section 4.4
hereto.
10.2.2 Subject to the limitations set forth in this Section
10, after the Closing, the Target Shareholders will indemnify and hold harmless
the Indemnified Persons from and against any and all Damages arising out of any
misrepresentation or breach of or default in connection with any of the
representations and warranties given or made by Target or the Principals in
Section 2 of this Agreement.
10.2.3 In seeking indemnification for Damages under this
Section 10, the Indemnified Persons shall first exercise their remedies with
respect to the Escrow Cash and Shares and any other assets deposited in escrow
pursuant to the Escrow Agreement and the Escrow Cash and Shares and such other
assets shall be the initial source of indemnification in connection therewith.
In seeking indemnification for Damages under Section 10.2.2, the Indemnified
Persons shall exercise their remedies first with respect to the Escrow Cash and
Shares deposited in escrow pursuant to the Escrow Agreement. The maximum
liability of any
31
Target Shareholder with respect to any claim for intentional fraud or willful
misconduct shall be several and not joint.
10.2.4 Acquirer will indemnify, defend and hold harmless
Target, its Affiliates, officers, directors, employees, consultants and agents
from any and all Damages arising from any misrepresentations or breach of or
default in performance of any of the representations and warranties and
covenants given or made by Acquirer in this Agreement, in any certificate,
document or instrument delivered by or on behalf of Acquirer pursuant hereto.
10.2.5 Except as set forth in Section in the last sentence
of this Section 10.2.5, the Escrow Cash and Shares and any other assets
deposited in escrow pursuant to the Escrow Agreement shall be the Indemnified
Persons' sole recourse under this Section 10.2, and no claim for Damages shall
first be made under this Section 10.2 after expiration of the Escrow Period. The
aggregate amount of Acquirer Damages shall not exceed the Purchase Price divided
by three (3). Except as set forth in Section 10.2.6, the remedies set forth in
this Section 10 shall be the exclusive remedies of Acquirer and the other
Indemnified Persons against any Material Shareholder, but shall not be deemed to
limit any other remedies of Acquirer, legal or otherwise, against Target. None
of the limitations set forth in this Section 10.2.5 or the last sentence of
Section 10.2.6 shall in any manner limit the liability or indemnification
obligations of the Material Shareholders or Acquirer with respect to intentional
fraud or willful misconduct.
10.2.6 The indemnification provided for in this Article 11
shall not apply unless the aggregate Target Damages or Acquirer Damages, as the
case may be, for which one or more Indemnified Persons seeks indemnification
exceeds $150,000. In the event that such Damages do exceed $150,000, Material
Shareholders or Acquirer, as the case may be, will indemnify the full amount of
such Damages, including the initial $150,000 of Damages.
11. MISCELLANEOUS
11.1 GOVERNING LAW. The internal laws of the State of California
(irrespective of its conflict of law principles) will govern the validity of
this Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto.
11.2 ASSIGNMENT; BINDING UPON SUCCESSORS AND ASSIGNS. Neither party
hereto may assign any of its rights or obligations hereunder without the prior
written consent of the other party hereto and any attempt to do so will be void.
This Agreement will be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
11.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and 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 the void or unenforceable provision.
32
11.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
all parties reflected hereon as signatories.
11.5 AMENDMENT AND WAIVERS. Any term or provision of this Agreement
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default. The Agreement may be amended by the parties hereto at any
time before or after approval of the Target Shareholders; but, after such
approval, no amendment will be made which by applicable law requires the further
approval of the Target Shareholders without obtaining such further approval.
11.6 NO WAIVER. The failure of any party to enforce any of the
provisions hereof will not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
11.7 EXPENSES. In the event that the transaction is not
consummated, each company will be responsible for its own fees and expenses in
connection with the proposed transaction. In the event that the transaction is
consummated, Acquirer will be responsible for its own fees and expenses and for
Target's reasonable fees and expenses in connection with the transaction.
11.8 ATTORNEYS' FEES. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party will be entitled to
recover, as an element of the costs of the suit, and not as damages, reasonable
attorneys' fees, including without limitation, costs, expenses and fees on any
appeal.
11.9 NOTICES. Any notice or other communication required or
permitted to be given under this Agreement will be in writing, will be delivered
personally, by registered or certified mail, postage prepaid, by telecopy or by
nationally recognized courier service, and will be deemed given upon delivery,
if delivered personally, or three days after deposit in the mails, if mailed, to
the following addresses:
(i) If to Acquirer:
Integrated Systems, Inc.
201 Moffett Drive
Sunnyvale, CA 94089
Facsimile: (650) 568-6039
Attention: President
WITH A COPY TO:
Fenwick & West LLP
33
Two Palo Alto Square
Palo Alto, CA 94306
Facsimile: (650) 494-1417
Attention: Fred Greguras, Esq.
(ii) If to Target:
Software Development Systems, Inc.
777 Prospect Avenue
Winetka, IL 60093
Facsimile: (630) 971-5901
Attention: President
WITH A COPY TO:
Sachnoff & Weaver LLP
30 S. Wacker Drive
Chicago, IL 60614
Facsimile: (312) 207-6400
Attention: Seth Hemming, Esq.
(iii) If to Principals:
To the address or facsimile number indicated below
such individuals name on EXHIBIT A hereto
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 11.9.
11.10 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated
by the respective parties hereto and their attorneys and the language hereof
will not be construed for or against either party. A reference to a Section or
an exhibit will mean a Section in, or exhibit to, this Agreement unless
otherwise explicitly set forth. The titles and headings herein are for reference
purposes only and will not in any manner limit the construction of this
Agreement which will be considered as a whole.
11.11 NO JOINT VENTURE. Nothing contained in this Agreement will be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other. No party will hold itself out as having any authority or
relationship in contravention of this Section.
11.12 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written
34
assurances as may be reasonably requested by any other party to evidence and
reflect the transactions described herein and contemplated hereby and to carry
into effect the intents and purposes of this Agreement.
11.13 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of
this Agreement are intended, nor will be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, partner or any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof will be personal solely between the parties
to this Agreement.
11.14 PUBLIC ANNOUNCEMENT. Upon execution of the Agreement by both
parties, and until the consummation of the Merger, all press releases and other
public and private communications shall be made by the parties only with the
prior mutual written consent of Target and Acquirer, except that Acquirer may
make such disclosures as are required by applicable law; provided, however, that
a copy of such disclosure shall first be submitted to Target within a reasonable
time period prior to the dissemination thereof.
11.15 CONFIDENTIALITY. Acquirer and Target each recognize that they
have received and will receive confidential information concerning the other
during the course of the Merger negotiations and preparations. Accordingly, the
terms of the Confidentiality Agreement are incorporated herein by reference.
11.16 ENTIRE AGREEMENT. This Agreement, the exhibits hereto and the
Confidentiality Agreement constitute the entire understanding and agreement of
the parties hereto with respect to the subject matter hereof and supersede all
prior and contemporaneous agreements or understandings, inducements or
conditions, express or implied, written or oral, between the parties, with
respect hereto. The express terms hereof control and supersede any course of
performance or usage of the trade inconsistent with any of the terms hereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
35
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
"ACQUIRER" "TARGET"
INTEGRATED SYSTEMS, INC. SOFTWARE DEVELOPMENT SYSTEMS, INC.
By: /s/ Charles M. Boesenberg By: /s/ James E. Challenger
------------------------------ ------------------------------
Name: Charles M. Boesenberg Name: James E. Challenger
--------------------------- ----------------------------
Its: President & CEO Its: CEO
---------------------------- ----------------------------
"SUB"
ISI ACQUISITION CORPORATION
By: /s/ Charles M. Boesenberg
-------------------------------
Name: Charles M. Boesenberg
----------------------------
Its: President & CEO
------------------------------
36
"PRINCIPALS"
James E. Challenger, Jr. 1994
GST Trust U/A 12/30/94
/s/ James E. Challenger, Jr. By: /s/ James E. Challenger, Jr.
- -------------------------------- ------------------------------
James E. Challenger, Jr. James E. Challenger, Jr.,
Trustee
/s/ Robert M. Zierserl /s/ Anthony D. Skiba
- -------------------------------- ---------------------------------
Robert M. Zieserl Anthony D. Skiba
Robert M. Zieserl Irrevocable Gift Trust Robert M. Zieserl Irrevocable
f/b/o John William Zieserl, dated March Gift Trust f/b/o Charles Moran
19, 1999 Zieserl, dated March 19, 1999
By: /s/ James F. Shaw, Jr. By: /s/ James F. Shaw, Jr.
- ------------------------------- -----------------------------
James F. Shaw, Jr., Trustee James F. Shaw, Jr., Trustee
John William Zieserl Minority Trust Charles Moran Zieserl Minority
dated 12/23/98 Trust dated 12/23/98
By: /s/ James F. Shaw, Jr. By: /s/ James F. Shaw, Jr.
- ------------------------------ -----------------------------
James F. Shaw, Jr., Trustee James F. Shaw, Jr., Trustee
[SIGNATURE PAGE FOR AGREEMENT AND PLAN OF REORGANIZATION]
37
LIST OF EXHIBITS AND SCHEDULES
Exhibit A List of Principals
Exhibit B Articles of Merger
Schedule 1.1.1(iv) Hewlett Packard $5,513,920 Target
Convertible Debt
Exhibit 1.3 Escrow Agreement
Schedule 1.4 Directors and Officers of Surviving
Corporation
Exhibit 1.5 Registration Rights Agreement
Exhibit 1.6A Acquirer Officers Tax Certificate
Exhibit 1.6B Target Officers Tax Certificate
Schedule 2.0 Target Disclosure Schedule
Schedule 2.3 List of all holders and numbers held of
Target Common Stock and Target Options.
Schedule 2.4 List of Target's subsidiaries
Schedule 2.5 Third Party Consents
Schedule 2.8 Target's 1998 Financial Statements and
May Financial Statements
Schedule 2.9 Title to Properties
Schedule 2.11 Material Agreements
Schedule 2.12 Target IP Rights Agreements and
applications, registration and filings
to protect Target IP Rights and related
disclosures
Schedule 2.15.1 Employment Contracts and Consulting
Agreements
Schedule 2.15.3 Target Employee Plans
Schedule 2.15.5 Target Pension Plan
Schedule 2.15.6 Target Benefit Arrangements
Schedule 2.15.7 Amendments to Benefit Plan or
Arrangement
Schedule 2.15.12 List of all Employees, Officers and
Consultants
Schedule 3.0 Acquirer Disclosure Schedule
Exhibit 7.3 Form of Opinion of Acquirer's Counsel
Exhibit 8.3 Form of Opinion of Target's Counsel
Exhibit A
Target Principals
James E. Challenger, Jr.
Robert M. Zierserl
Anthony Skiba