Information Statement
Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
|X| Preliminary Information Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
|_| Definitive Information Statement
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ALADDIN SYSTEMS HOLDINGS, INC.
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(Name of Registrant As Specified In Charter)
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Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11(Set forth the amount on which the filing fee is
calculated and state how it was determined): The filing fee is determined in
accordance with Rule 0-11 based upon the consideration being paid which is
$8,000,000.00.
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4) Proposed maximum aggregate value of transaction: $8,000,000.00
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5) Total fee paid: $1,600.00
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|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1)Amount Previously Paid:
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2)Form, Schedule or Registration Statement No.:
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3)Filing Party:
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4)Date Filed:
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ALADDIN SYSTEMS HOLDINGS, INC.
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245 Westridge Drive
Watsonville, CA 95076
INFORMATION STATEMENT
March __, 2004
GENERAL INFORMATION
This Information Statement has been filed with the Securities and
Exchange Commission and is being furnished, pursuant to Section 14C of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the holders
(the "Stockholders") of the common stock, par value $.001 per share (the "Common
Stock"), of our subsidiary Aladdin Systems Holdings, Inc., a Nevada Corporation
(the "Company") in connection with the sale of our Aladdin Systems, Inc.
subsidiary (the "Transaction") to International Microcomputer Systems, Inc.
("IMSI").
The Company's Board of Directors, on January 19, 2004, approved the
Transaction. The Transaction also required approval by a majority of the voting
power of all outstanding shares of the Company's Common Stock. In order to
accelerate Stockholder approval and to reduce the costs of obtaining Stockholder
approval, our Board of Directors elected to obtain such approval by seeking the
written consent of the holders of a majority in interest of our Common Stock
(the "Consent"). On January 21, 2004, we executed a Stock Purchase Agreement
with IMSI. On or about February 2, 2004, Stockholders, who own in the aggregate
8,951,051 shares of our Common Stock, representing approximately 73.1% of our
outstanding shares (the "Majority Stockholders"), gave their written consent to
the Transaction.
The elimination of the need for a special meeting of Stockholders to
approve the Transaction is made possible by Chapter 78 of the Nevada Revised
Statutes (referred to herein as the "Nevada Corporation Act" or the "NCA") which
provides that the written consent of the holders of outstanding shares of voting
capital stock, having not less than the minimum number of votes which would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted, may be substituted for such a
special meeting.
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND A PROXY.
Under certain rules of the Securities and Exchange Commission, the
Transaction may not be completed until 20 days after the mailing of this
Information Statement have elapsed. This Information Statement is dated March
__, 2004, and is first being mailed or otherwise distributed to our stockholders
on or about March __, 2004.
This transaction has not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the Securities
and Exchange Commission or any state securities commission passed upon the
fairness or merits of this transaction nor upon the accuracy or adequacy of the
information contained in this document. Any representation to the contrary is a
criminal offense.
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Table of Contents
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION 5
SUMMARY 6
The Companies 6
Terms of the Transaction 7
Our Majority Stockholders; No Further Stockholder Approval Required 8
Approval by the Board of Directors 8
Interests of Officers and Directors in the Transaction 8
What is Needed to Complete the Transaction 8
Termination of the Stock Purchase Agreement 8
Material United States Federal Income Tax Consequences of the Transaction 8
Appraisal Rights 9
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS 9
THE TRANSACTION 9
Background of the Transaction 10
Sale and Purchase of the Stock of Aladdin Systems 10
Our Majority Stockholders; No Further Stockholder Approval Required 10
Approval by the Board of Directors 11
Certain Effects of the Transaction 11
Interests of Officers and Directors in the Transaction 11
Regulatory Matters 11
Change of Control 11
Material United States Federal Income Tax Consequences 12
Prior Commercial Relationships 12
THE STOCK PURCHASE AGREEMENT 12
Purchase and Sale of Stock in Aladdin Systems 12
Effect of the Transaction 12
Consideration 12
Completion of the Transaction 13
Representations and Warranties 14
Indemnification 16
Covenants 16
Conditions to Completing the Transaction 19
Conditions to the Obligations of the Company 19
Conditions to the Obligation of IMSI 20
Termination 21
Submission to Jurisdiction 22
Amendment and Waiver 22
Fees and Expenses 22
ESCROW AGREEMENT 22
REGISTRATION RIGHTS AGREEMENT 22
PLEDGE AGREEMENT 23
APPRAISAL RIGHTS 23
PROFORMA FINANCIAL DATA 23
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BENEFICIAL OWNERSHIP OF COMMON STOCK 26
RECORD DATE 27
EXPENSES OF INFORMATION STATEMENT 27
WHERE YOU CAN FIND MORE INFORMATION 27
INCORPORATION OF DOCUMENTS BY REFERENCE 28
Exhibit A--WRITTEN CONSENT OF STOCKHOLDERS
Exhibit B--STOCK PURCHASE AGREEMENT
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
Q: What transaction has been approved?
A: IMSI will acquire our Aladdin Systems subsidiary for $8,000,000 to be paid in
a combination of cash, promissory notes and newly issued shares of IMSI common
stock plus an additional amount of up to $2,000,000 in cash to be earned based
upon the revenues of Aladdin Systems during the three year period following the
closing of the Transaction.
Q: What will be the effect of the Transaction?
A: As a result of the Transaction, Aladdin Systems will become a wholly-owned
subsidiary of IMSI. Since the Transaction is the sale of one of the Company's
subsidiaries and not the Company itself, as of the Closing of the Transaction,
the Company will continue to exist. Additional, the Company's Aladdin Enterprise
Solutions, Inc, subsidiary will remain in business and trading in our common
stock on the OTC Bulletin Board will continue under the symbol "ALHI".
Q: What is the reason for the Transaction?
A: The principal purpose of the Transaction is to enable the Company to realize
a sale of Aladdin Systems and provide the Company with funds to, among other
things, seek other business opportunities, pay dividends to stockholders, and
for other potential purposes, all within the discretion of the Board of
Directors of the Company.
Q: Has the board of directors already approved the Transaction?
A: Yes. After careful consideration, on January 19, 2004, each member of our
Board of Directors, unanimously approved the Stock Purchase Agreement and the
Transaction, and has declared the Transaction to be fair and in the best
interests of the Company and its Stockholders.
Q: Why is there no stockholder vote?
A: The Majority Stockholders of the Company, who together own approximately
73.1% of our outstanding Common Stock, have acted by written consent to adopt
the Stock Purchase Agreement and approve the Transaction. This action by written
consent is sufficient to ensure that Stockholders owning a majority of the
Company's common stock adopt the Stock Purchase Agreement and approve the
Transaction without the vote of any other stockholder. Accordingly, your
approval is not required and is not being sought.
Q: Why did I receive this Information Statement?
A: Applicable laws require us to provide you with information regarding the
Transaction, even though your vote is neither required nor requested to complete
the Transaction.
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Q: What happens if the Transaction is not completed?
A: If the Transaction is not completed, we will continue to own Aladdin Systems.
We may be required to pay a termination fee to IMSI if the Transaction is not
completed for certain reasons.
Q: When will the Transaction be completed?
A: We are working towards completing the Transaction as quickly as possible. We
currently anticipate completing the Transaction on or about March __, 2004.
Q: What do I need to do now?
A: You do not need to do anything now. This Information Statement is for your
information only and it does not require or request you to take any action.
Q: Who can help answer my other questions about the Transaction?
A: If you have any questions, require assistance or need additional copies of
this Information Statement or other related materials, you should contact:
Alexandra Gonzalez, Chief Financial Officer
Aladdin Systems Holdings, Inc.
245 Westridge Drive
Watsonville, CA 95076
(831) 761-6200
SUMMARY
This summary highlights selected information from this Information Statement. It
may not contain all of the information that is important to you. To better
understand the Transaction and the related documents and for a more complete
description of the legal terms of the Transaction, you should carefully read
this Information Statement and the documents to which we refer you to that are
annexed to or incorporated by reference into this Information Statement.
Additional information about Aladdin Systems Holdings has been filed with the
Securities and Exchange Commission and is available as described under "Where
You Can Find More Information" on page 27.
The Companies
Aladdin Systems Holdings, Inc.
245 Westridge Drive
Watsonville, CA 95076
(831) 761-6200
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We are a technology holding company located in Watsonville, California. Through
our two wholly-owned subsidiaries Aladdin Systems, Inc. ("Aladdin Systems") and
Aladdin Enterprise Solutions, Inc. ("Aladdin Enterprise Solutions"), we focus on
providing software products that align people, business and technology and serve
the consumer, small business and corporate enterprise markets. Both our
subsidiaries are engaged primarily in developing, publishing, distributing and
marketing software. Aladdin Systems is the developer and publisher of software
for the Macintosh and Windows markets including the industry leading StuffIt
line of data compression products as well as the publisher of other software
products including Spring Cleaning, Internet Cleanup, iClean and DragStrip.
Aladdin Systems also publishes compilations of third party software products
under the "Ten for X" brand. Aladdin Enterprise Solutions develops and publishes
the NMX ActionPoint software suite which includes applications that facilitate
the control of network access, quality of service and prioritization of critical
applications. Our web site is at www.aladdinsys.com. Information on the web site
is not part of this Information Statement.
International Microcomputer Software, Inc. ("IMSI")
100 Rowland Way
Novato, CA 94945
Phone: (415) 878-4000
IMSI develops and publishes software targeted to small and medium-sized
businesses, professionals and consumers in two separate divisions. The Precision
Design Division anchored by IMSI's flagship product, TurboCAD and the recently
acquired DesignCAD line, also develops and markets other visual content and
design software such as FloorPlan. The division also includes several online
properties focused on the sale of content and services to the architectural,
engineering and construction market through its stock house plans site at
HousePlanGuys.com, its CAD add-on store, Cadalog.com and the online CAD symbol
site, CADsymbols.com. The Business Applications Division provides businesses and
end users with software solutions through its popular products such as
TurboProject, FormTool, FlowCharts&More, HiJaak and TurboTyping. IMSI's
Keynomics division provides ergonomic and keyboard training to Fortune 1000
companies for worker-related safety, productivity, and ergonomic compliance
improvements. IMSI's Web site is located at www.imsisoft.com. Information on
such Web site is not a part of this Information Statement.
Terms of the Transaction (See Page 10)
Pursuant to the Stock Purchase Agreement, IMSI will acquire all of the issued
and outstanding common stock of Aladdin Systems for a total of $8,000,000 to be
paid in a combination of cash, promissory notes and newly issued shares of IMSI
common stock plus an additional amount of up to $2,000,000 in cash to be earned
based upon the revenues of Aladdin Systems during the three year period
following the closing of the Transaction. As of the closing of the Transaction,
Aladdin Systems will become a wholly-owned subsidiary of IMSI and we will
continue in business and continue to operate our Aladdin Enterprise Solutions
subsidiary. Additionally, our common stock will continue to be listed on the OTC
Bulletin Board electronic quotation system under the symbol "ALHI".
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Our Majority Stockholders; No Further Stockholder Approval Required (See Page
10)
A majority vote of Aladdin Systems Holdings' Stockholders was required to
approve the Stock Purchase Agreement and Transaction. Under Nevada law, such
approval may be provided by written consent of a majority of stockholders and
without a meeting of the stockholders. On February 2, 2004, the Majority
Stockholders, who together own 8,951,051 shares or approximately 73.1% of our
outstanding Common Stock, executed the written Consent approving the Stock
Purchase Agreement and the Transaction. Accordingly, your approval of the
Transaction is not required, and is not being sought. A copy of the Consent is
included as Exhibit A.
Approval by the Board of Directors (See Page 11)
After careful consideration, on January 19, 2004, the members of our Board of
Directors, have unanimously approved the stock purchase agreement and the
Transaction, and have declared the Transaction to be fair and in the best
interests of the Company and its Stockholders.
Interests of Officers and Directors in the Transaction (See Page 11)
Three of our executive officers, Jonathan Kahn, Darryl Lovato and Alexandra
Gonzalez will continue to be employed by Aladdin Systems after the closing of
the Transaction. In addition, Messrs. Kahn and Lovato are also members of our
Board of Directors. Another member of our Board of Directors, Brad Peppard is
employed as a consultant to Aladdin Systems and will continue to be after the
Closing. Other than Messrs. Kahn, Lovato and Peppard and Ms. Gonzalez, none of
our directors or executive officers will be employed by or otherwise have any
role in the management of Aladdin Systems or any of its affiliates following the
Transaction. No other party related or affiliated with the Company has any
interest in the Transaction.
What is Needed to Complete the Transaction (See Page 11)
Completion of the Transaction is subject to the satisfaction or waiver of
certain conditions. We do not believe that any material federal or state
regulatory approvals, filings or notices are required in connection with the
Transaction other than approvals, filings or notices required under federal
securities laws.
Termination of the Stock Purchase Agreement (See Page 21)
The parties may mutually agree at any time to terminate the Stock Purchase
Agreement without completing the Transaction. Either party may terminate the
Stock Purchase Agreement if the Transaction is not consummated within 40 days of
the date thereof, unless the failure to consummate the Transaction is the result
of a breach of the stock purchase agreement by the party seeking to terminate
it, and for other reasons. Notwithstanding the foregoing, such date will be
extended in the event that we receive comments from the Securities and Exchange
Commission regarding this Information Statement.
Material United States Federal Income Tax Consequences of the Transaction (See
Page 12)
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Since no action is being taken in connection with the currently outstanding
shares of the Company's common stock, no gain or loss is anticipated to be
recognized by the Company's Stockholders in connection with the Transaction.
Appraisal Rights (See Page 23)
Pursuant to Nevada law, the Stockholders of Aladdin Systems Holdings have no
right to dissent from the Transaction.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This information statement and our filings with the Securities and
Exchange Commission that are incorporated by reference into this information
statement contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, statements relating to Aladdin
Systems Holdings anticipated financial performance, business prospects, new
developments, new merchandising strategies and similar matters, and/or
statements preceded by, followed by or that include the words "believes,"
"could," "should," "expects," "anticipates," "estimates," "intends," "plans,"
"projects," "seeks," or similar expressions. These forward-looking statements
are necessarily estimates reflecting the best judgment of our senior management
and involve a number of risks and uncertainties that could cause actual results
to differ materially from those suggested by the forward-looking statements.
These forward-looking statements are subject to risks, uncertainties and
assumptions that could have a material adverse effect on the Transaction and/or
on our businesses, financial condition or results of operations. In addition,
investors should consider the other information contained in or incorporated by
reference into our filings with the Securities and Exchange Commission,
including our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2002, especially in the Management's Discussion and Analysis section, our
most recent Quarterly Reports on Form 10-QSB and our Current Reports on Form
8-K. Other unknown or unpredictable factors also could have material adverse
effects on our future results, performance or achievements. In light of these
risks, uncertainties, assumptions and factors, the forward-looking events
discussed in this information statement may not occur. You are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date stated, or if no date is stated, as of the date of this Information
Statement.
You should understand that the following important factors, in addition
to those discussed elsewhere in this document and in the documents incorporated
into this information statement by reference, could affect our future results
and could cause those results to differ materially from those expressed in the
forward-looking statements:
o our failure to consummate the Transaction;
o conditions in the United States economy generally and as they
have affected, and may in the future affect, us;
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o the absence of reliable forecasts of our future results of
operations in light of current business conditions;
o future regulatory and legislative actions and conditions
affecting our operating areas;
o competition from others;
o product demand and market acceptance;
o the ability to protect proprietary information and technology
or to obtain necessary licenses on commercially reasonable
terms;
o acts of terrorism;
o war or political instability; and
o the risk factors and other items that are contained in our
reports and documents filed from time to time with the
Securities and Exchange Commission.
We are under no obligation, and we do not intend, to make publicly
available any update or other revisions to any of the forward-looking statements
contained in this information statement to reflect circumstances existing after
the date of this information statement or to reflect the occurrence of future
events even if experience or future events make it clear that any expected
results expressed or implied by those forward-looking statements will not be
realized.
THE TRANSACTION
Background of the Transaction
On December 2, 2003, the Board of Directors of the Company approved a
non-binding letter of intent for the sale of our Aladdin Systems subsidiary to
IMSI. On January 19, 2004, the Board of Directors of the Company approved the
Transaction and on January 21, 2004, the Company executed the Stock Purchase
Agreement.
Sale and Purchase of the Stock of Aladdin Systems
Pursuant to the Stock Purchase Agreement, we will sell to IMSI all of
the issued and outstanding capital stock of our wholly-owned subsidiary, Aladdin
Systems, Inc., a Delaware corporation. As of the Closing of the Transaction,
Aladdin Systems will become a wholly-owned subsidiary of IMSI.
Our Majority Stockholders Consented; No Further Stockholder Approval Required
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A majority vote of Aladdin Systems Holdings' Stockholders was required
to approve the Stock Purchase Agreement and Transaction. Under Nevada law, such
approval may be provided by written consent and without a meeting of the
stockholders. On February 2, 2004, the Majority Stockholders, who together own
8,951,051 shares or approximately 73.1% of our outstanding Common Stock,
executed the written Consent approving the Stock Purchase Agreement and the
Transaction. Accordingly, your approval of the Transaction is not required, and
is not being sought. A copy of the written Stockholder Consent is included as
Exhibit A.
Approval by the Board of Directors
After careful consideration, on January 19, 2004, the members of our
Board of Directors, unanimously approved the Stock Purchase Agreement and the
Transaction, and have declared the Transaction to be fair and in the best
interests of the Company and its Stockholders.
Certain Effects of the Transaction
As of the closing of the Transaction, Aladdin Systems will become a
wholly-owned subsidiary of IMSI. As of the Closing, we will continue in business
and continue to operate our Aladdin Enterprise Solutions subsidiary. The
Transaction will have no effect on the number of shares of our common stock
issued and outstanding (except in the event that any stock options are exercised
by employees) and common stock will continue to be listed on the OTC Bulletin
Board under the symbol "ALHI".
Interests of Officers and Directors in the Transaction
Three of our executive officers, Jonathan Kahn, Darryl Lovato and
Alexandra Gonzalez will continue to be employed by Aladdin Systems after the
closing of the Transaction. In addition, Messrs. Kahn and Lovato are also
members of our Board of Directors. Another member of our Board of Directors,
Brad Peppard is employed as a consultant to Aladdin Systems and will continue to
be so after the Closing. Other than Messrs. Kahn, Lovato and Peppard and Ms.
Gonzalez, none of our directors or executive will be employed by or otherwise
have any role in the management of Aladdin Systems or any of its affiliates
following the Transaction. No other party related or affiliated with the Company
has any interest in the Transaction.
Regulatory Matters
We do not believe that any material federal or state regulatory
approvals, filings or notices are required in connection with the other than
approvals, filings or notices required under federal securities laws.
Change of Control
Since the Transaction will be the sale of our Aladdin Systems
subsidiary and will not result in the sale or issuance of any capital stock of
the Company, there will be no change in control of the Company as a result of
the Transaction. Additionally, there has been no change of control of the
Company during the 18 month period proceeding the date hereof.
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Material United States Federal Income Tax Consequences
Since no action is being taken in connection with the currently
outstanding shares of the Company's common stock, no gain or loss is anticipated
to be recognized by the Company's Stockholders in connection with the
Transaction.
Prior Commercial Relationships
Except as set forth herein, there has been no contact between the
Company and IMSI regarding any business relationship, including the sale of
Aladdin Systems. Prior to the Transaction, Aladdin Systems and IMSI have had a
business relationship pursuant to which each company has offered its products
for sale to the customers of the other.
THE STOCK PURCHASE AGREEMENT
On January 21, 2004, Aladdin Systems Holdings, Inc. (the "Company") and
International Microcomputer Software, Inc. ("IMSI") entered into Stock Purchase
Agreement for the Company's wholly-owned Aladdin Systems, Inc. subsidiary (the
"Transaction"). The following is a summary of certain terms of the Stock
Purchase Agreement and is qualified by reference to the complete text of the
agreement, which is incorporated by reference and included as Exhibit B.
Purchase and Sell of Stock in Aladdin Systems
At the closing of the Transaction (the "Closing"), the Company will
sell to IMSI and IMSI will purchase from the Company, all of the issued and
outstanding capital stock of our wholly-owned subsidiary, Aladdin Systems, Inc.,
a Delaware corporation.
Effect of the Transaction
As of the Closing, Aladdin Systems, Inc. will cease being a
wholly-owned subsidiary of Aladdin Systems Holdings, Inc. and will become a
wholly-owned subsidiary of IMSI.
Consideration
The consideration to be paid to the Company by IMSI will be $8,000,000
plus an additional "earn-out" payment of up to $2,000,000, to be paid as
follows:
(a) $1,500,000 in cash at the Closing;
(b) $3,500,000 at the Closing, in the form of newly issued shares of
IMSI's common stock based upon the closing "bid" price of IMSI's common stock
for the twenty (20) trading days prior to the Closing.
(c) $3,000,000 at the Closing in the form of two separate 4% three year
convertible promissory notes, one note in the amount of $2,650,000 and one note
in the amount of $350,000. The Notes are convertible, by us at any time, into
shares of IMSI common stock at a conversion price of $3.00 per share (the
"Conversion Price") and convertible by IMSI, at the Conversion Price, at any
time after IMSI's common stock closes higher than $4.00 per share for ten (10)
consecutive trading days. The Notes will be secured by a pledge of the Aladdin
Systems' stock purchased by IMSI.
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(d) up to an additional "earn-out" payment of $2,000,000 in cash,
payable by IMSI, based upon the revenue of Aladdin Systems' products, during the
three year period following the Closing, as further described below.
During the first year after the closing of the Transaction, IMSI shall
pay to the Company, $1.00 for each $12.75 of qualified revenue earned by Aladdin
Systems; provided that, no such payment will be made unless the revenue is at
least $4,250,000.00 during such period and further provided that the maximum
payment for the first year period will not exceed $666,666.67.
During the second year after the closing of the Transaction, IMSI shall
pay to the Company, $1.00 for each $14.25 of qualified revenue earned by Aladdin
Systems; provided that, no such payment is to be made unless Aladdin Systems
earns at least $4,750,000.00 during such period and further provided that the
maximum payment for second year period will not exceed $666,666.67.
During the third year after the closing of the Transaction, IMSI shall
pay to the Company, $1.00 for each $17.25 of qualified revenue earned by Aladdin
Systems; provided that, no such payment is to be made unless Aladdin Systems
earns at least $5,750,000.00 during such period and further provided that the
maximum payment for third year period will not exceed $666,666.67.
Aladdin Systems revenue which is counted for the purposes of the
earn-out will be all revenue (less sales returns, allowances and bad debts) from
(a) all of Aladdin Systems products existing as of the Closing, (b) third party
products resold including IMSI's products, (c) all new products developed by
Aladdin Systems, (d) all new products published by Aladdin Systems, and (e) all
products published by Aladdin Systems which are acquired from third parties or
IMSI; provided that, such revenue shall be included until total revenue from any
such product shall reach a specific target revenue.
The earn-out payments will be made by IMSI to the Company quarterly
once the minimum revenues for each earn-out period have been achieved.
Completion of the Transaction
As soon as practicable after all of the conditions set forth in the
Stock Purchase Agreement have been satisfied or waived, the closing of the
Transaction will occur.
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Representations and Warranties
We have made certain representations and warranties to IMSI subject to
disclosure schedules and certain materiality thresholds. These include
representations and warranties as to the Company and/or Aladdin Systems:
o authority;
o organization;
o capitalization;
o authority to execute and deliver the Stock Purchase Agreement;
o no violation of charter documents or material agreements in
connection with the Transaction;
o subsidiaries;
o financial statements of Aladdin Systems;
o absence of undisclosed liabilities of Aladdin Systems;
o absence of certain changes and events;
o accounts receivable;
o inventory;
o real property;
o condition of property;
o compliance with legal requirements;
o affiliate agreements and liabilities;
o certain contracts;
o intellectual property;
o software products
o labor relations
o ERISA;
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o insurance;
o litigation;
o environmental matters;
o tax matters;
o interim operations;
o brokers;
o product liability;
o books and records;
o suppliers;
o certain payments;
o banks accounts;
o absence of material misstatements and omissions;
o investment intent; and
o material changes in the business of Aladdin Systems.
IMSI has made certain representations and warranties to the Company,
subject to disclosure schedules and certain materiality thresholds. These
include representations and warranties as to:
o authority to execute and deliver the Stock Purchase Agreement;
o no violation of charter documents, material agreements or law
in connection with the agreement;
o litigation;
o brokers;
o stock issued will be duly authorized, validly issued and
nonassessable;
o SEC regulatory compliance; and
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o investment intent.
The representations and warranties contained in the Stock Purchase
Agreement will survive the closing for a period of two years, except that the
representations and warranties made by the Company and Aladdin Systems with
respect to tax matters, will survive the closing for the maximum duration of the
longest statute of limitations applicable to such representation or warranty
plus six months and the representations and warranties made with respect to
environmental matters will survive the closing for a period of five years.
Indemnification
The Company has agreed to indemnify IMSI in respect of any losses,
obligations, liabilities, damages, taxes and claims arising out of the
following:
o any breach of a representations, warranties or covenants contained in
the Stock Purchase Agreement or in any certificate delivered by the Company
pursuant to the Stock Purchase Agreement;
o any taxes for any periods prior to the Closing; and
o any claim of any creditor or beneficiary or any of its affiliates
(other than the Company), whether arising prior to, on or after the Closing
Date.
IMSI has agreed to indemnify the Company in respect of any losses,
obligations, liabilities, damages, taxes and claims arising out of the
following:
o any misrepresentation of a fact contained in Stock Purchase Agreement
or in any certificate delivered by IMSI pursuant to the Stock Purchase
Agreement.
The foregoing indemnification obligations of both parties shall only
arise when the aggregate losses or damages suffered by the party seeking
indemnification exceed $25,000 and any individual claim for loss or damage
exceeds $10,000.
The foregoing indemnity obligations of the Company, on the one hand,
and of IMSI, on the other hand, are limited to a maximum aggregate indemnity
equal to the maximum amount of unpaid earn-out payments which may be payable by
IMSI to the Company as of the date on which a claim is made; provided that, such
limitation shall not apply to the indemnity obligations of the Company with
regard to taxes or claims of creditors.
The indemnification obligations of the parties under the Stock Purchase
Agreement will survive for the survival periods of the representations and
warranties contained in the Stock Purchase Agreement.
Covenants
In addition to the covenants of the Stock Purchase Agreement described
elsewhere herein, the Stock Purchase Agreement contains the following covenants.
16
Subject to certain exceptions contained in the Stock Purchase
Agreement, for a period of three years after the Closing, the Company has agreed
not to develop, sell or distribute utility software or spam management programs
for Windows, MacOS, Palm and other computer environments and not to resell
similar products developed by third parties and bundled or sold separately
through a distribution network.
Subject to certain exceptions contained in the Stock Purchase
Agreement, for a period of three years after the Closing, the Company has agreed
not to (i) solicit for hire or enter into any contractual arrangement with any
former employee of the Company or its subsidiaries, without the prior written
consent of IMSI unless any employee had not been employed by the Company or by
IMSI for a period of two (2) years, or (ii) call on or solicit any of the
customers or suppliers of the Company or make known the names and addresses of
such customers or suppliers or any information relating in any manner to the
Company's relationships with such customers or suppliers.
The Company has agreed to maintain the confidentiality of any
proprietary, material non-public, confidential or secret information to the
extent relating to Aladdin Systems (including, customer lists, supplier lists
and pricing and marketing arrangements with customers or suppliers) except as
required by law.
Subject to their compliance with certain Securities and Exchange
Commission disclosure requirements, the parties have agreed to consult with each
other before making any public announcements about the Transaction.
The parties have agreed to use their reasonable commercial efforts to
satisfy all conditions precedent to the completion of the Transaction. Moreover,
the parties have agreed to cooperate with each other in connection with making
all necessary filings and submissions necessary to complete the Transaction,
including this information statement, and to take all necessary action to
deliver such other documents or instruments as may be reasonably necessary to
consummate the Transaction.
The Company has agreed to pay all sales, use, purchase and transfer
taxes and any and all recording and filing fees with respect to the transfer of
the shares of Aladdin Systems owned by the Company.
The Company has agreed to prepare and file tax returns for Aladdin
Systems until the period ending as of the Closing and IMSI has agreed to prepare
and file tax returns for Aladdin Systems for all periods after the Closing.
In the event that the Company's tax advisor shall inform the Company
that the Transaction shall not be deemed to be a tax-free transaction, the
Company has agreed to cooperate with IMSI in making a Section 338(h)(10)
election with regard to the Transaction. IMSI agreed to pay, be responsible for
and indemnify the Company from any reasonable costs incurred by the Company or
any increased taxes imposed on the Company by reason of such election.
17
Except for the fees of Baytree Capital Associates, LLC which shall be
paid by the Company, each party has represented and warranted to each other that
no broker or agent was engaged or dealt with in connection with the Transaction,
and each party has agreed to indemnify and hold the other harmless from any
broker's fees, commissions or like payments asserted by any potential broker.
Jonathan Kahn, Darryl Lovato and Alexandra Gonzalez will be able to
continue to provide services to the Company as related to (a) serving on
Company's Board of Directors, (b) the Company's on-going Securities Act
reporting requirements, (c) management of the assets of the Company, (d) any
activities necessarily related to the Aladdin Knowledge Systems litigation, (e)
the sale of Company's Aladdin Enterprise Systems subsidiary, and (f)
distribution of the assets of the Company.
Until the Closing of the Transaction, we have agreed to continue to
conduct the business of Aladdin Systems in accordance with our past practices,
including preserving intact our current officers and key employees and
preserving relationships. Moreover, until the closing of the Transaction, we may
not, without the prior written consent of IMSI:
o sell, dispose, transfer or abandon any of our assets, except in the
ordinary course of business;
o fail to keep in full force any existing insurance policy;
o settle, release or forgive any material claim or litigation or waive
any material right;
o make, change or revoke, or permit to be made, changed or revoked,
material election or method of accounting with respect to taxes of Aladdin
Systems;
o enter into, or permit to be entered into, any closing or other
agreement or settlement with respect to taxes affecting or relating to Aladdin
Systems;
o enter into or amend any employee benefit plan and not to grant any
increase in the salary or other compensation of any employee of Aladdin Systems;
o enter into any employment contract with any director, executive
officer or employee of Aladdin Systems or make any loan to, or enter into any
material transaction of any other nature with, any director, executive officer
or employee of Aladdin Systems;
o acquire, lease or dispose or agree to acquire, lease or dispose of
any capital assets;
o change the authorized or issued capital stock of Aladdin Systems;
grant any stock option or right to purchase shares of capital stock of Aladdin
Systems;
o issue any security convertible into such capital stock of Aladdin
Systems;
o pay any dividends;
18
o incur any debt other than working capital borrowings in the ordinary
course of business;
o subject to liens any of the assets of Aladdin Systems; and
o take any action that would cause any of the representations and
warranties made by the Company in the Stock Purchase Agreement not to remain
true and correct.
Prior to the closing of the Transaction or the termination of the Stock
Purchase Agreement, neither the Company nor Aladdin Systems may directly or
indirectly solicit, entertain offers, negotiate with or in any manner encourage,
discuss, accept, or consider any proposal from any person relating to the
acquisition of the common stock of Aladdin Systems or purchase its assets (other
than in the ordinary course of business) or its business. Finally, we must
notify IMSI of any and all proposals or inquiries.
IMSI has agreed to take all reasonable steps necessary and required to
allow the Company to meet the applicable maximum earn-out payment for each of
the earn-out periods. IMSI has agreed to (a) not change pricing or business
models, (b) to staff Aladdin Systems in accordance with historical staffing
levels and with current revenue levels, and (c) provide sufficient marketing
resources or advertising budgets, in accordance with historical level and with
current revenue levels. IMSI has also agreed to use its best efforts to preserve
Aladdin Systems' business organization, sales channel and distribution network,
to keep available the services of the Aladdin Systems present officers and key
employees, to preserve the good will of those having business relationships with
Aladdin Systems and to continue its existing relationships with the Aladdin
Systems lenders, suppliers, customers and key employees.
Conditions to Completing the Transaction
Conditions to the Obligations of the Company
The obligations of the Company to complete the Transaction are subject
to the satisfaction or waiver of the following further conditions:
o the representations and warranties made by IMSI in the Stock Purchase
Agreement shall be true and correct in all material respects when made and as of
the Closing;
o IMSI shall have performed in all material respects its obligations,
covenants and agreements contained in the Stock Purchase Agreement;
o no governmental order shall restrain or prohibit completion of the
Transaction, and no litigation intended to restrain or prohibit completion of
the Transaction shall be pending or threatened;
o IMSI shall have executed the Escrow Agreement, the Pledge Agreement
and the Registration Rights Agreement;
19
o IMSI shall have executed the Executive Employment Agreements with
Jonathan Kahn and Darryl Lovato; and
o the Company shall have received satisfactory legal opinions from
counsel to IMSI.
Conditions to the Obligation of IMSI
The obligation of IMSI to complete the Transaction is subject to the
satisfaction or waiver of the following further conditions:
o the representations and warranties made by the Company in the Stock
Purchase Agreement shall be true and correct in all material respects when made
and as of the Closing;
o the Company shall have performed in all material respects its
obligations, covenants and agreements contained in the Stock Purchase Agreement;
o all required consents, permits, authorizations, approvals, waivers
and amendments shall have been obtained;
o no governmental order shall restrain or prohibit completion of the
Transaction, and no litigation intended to restrain or prohibit completion of
the Transaction shall be pending or threatened;
o at least 50% of the persons employed by Aladdin Systems as of the
date of the Stock Purchase Agreement shall continue to be employed as of the
Closing Date.
o Jonathan Kahn and Darryl Lovato shall have each executed the
Executive Employment Agreements; and
o no event has occurred which would have a material adverse effect on
the business of Aladdin Systems;
o no third party has asserted a claim asserting that such person has a
right to any of the purchase price or any right, title or interest to any of the
common stock of Aladdin Systems;
o IMSI shall have received a satisfactory legal opinion from counsel to
the Company;
o no governmental order shall restrain or prohibit completion of the
Transaction, and no litigation intended to restrain or prohibit completion of
the Transaction shall be pending or threatened;
o IMSI shall have received all business, legal, accounting and other
due diligence materials requested from the Company and Aladdin Systems, shall
have completed the review of said due diligence to its satisfaction, and such
due diligence shall be reasonably satisfactory in its sole discretion;
20
o the Company shall have executed the Escrow Agreement, the Pledge
Agreement and the Registration Rights Agreement;
o each of the directors of Aladdin Systems shall have tendered a
resignation;
o all outstanding options and warrants to purchase capital stock of
Aladdin Systems or any of its subsidiaries to have been cancelled or exercised;
o there are no outstanding liens on or in respect of any assets of
Aladdin Systems, and evidence of such absence of liens has been provided in a
form acceptable to IMSI; and
o any tax sharing agreements among Aladdin Systems or any of its
subsidiaries and any other person shall have been terminated.
Termination
The parties to the Stock Purchase Agreement may mutually agree, at any
time before the Closing, to terminate the Stock Purchase Agreement. In addition:
o the Company may terminate the Stock Purchase Agreement, upon five (5)
business days notice, if satisfaction of the conditions to be met by IMSI prior
to the Closing, is or becomes impossible (other than through the breach by the
Company of any of its representations or warranties or the failure of the
Company to perform any of its obligations pursuant to the Stock Purchase
Agreement);
o IMSI may terminate the Stock Purchase Agreement, upon five (5)
business days notice, if satisfaction of the conditions to be met by Company
prior to the Closing, is or becomes impossible (other than through the breach by
the IMSI of any of its representations or warranties or the failure of the IMSI
to perform any of its obligations pursuant to the Stock Purchase Agreement);
o either party may terminate (if the terminating party is not then in
default), if the Closing has not occurred within 40 days following the date of
the Stock Purchase Agreement; provided, however, that such date shall be
extended for ten (10) business days by either party; and provided that such date
shall be further extended as required to enable the Company to respond in good
faith and in timely fashion to comments from the SEC regarding the preliminary
information statement to be sent to the Company's Stockholders advising them of
the transactions contemplated hereby; or
o by IMSI in the event that the Company has violated the "no shop"
provision of the Stock Purchase Agreement.
If the Stock Purchase Agreement is validly terminated, it will become
void and have no effect, without any liability of any party to the other party,
unless that party has willfully breached the Stock Purchase Agreement. In
addition, if the Stock Purchase Agreement was terminated by IMSI because of a
violation by the Company of the "no shop" provision and the Company shall enter
into an agreement for the sale of Aladdin Systems within 18 months after the
termination, the Company shall pay to IMSI its reasonable, documented
attorneys', accountants', consultants' and other out-of-pocket expenses incurred
by IMSI in connection with the transactions contemplated by the Stock Purchase
Agreement.
21
The provisions of the Stock Purchase Agreement relating to
indemnification, public announcements, expenses and governing law will continue
to apply if the Stock Purchase Agreement is terminated.
Submission to Jurisdiction
If any legal proceeding or other legal action relating to the Stock
Purchase Agreement is brought or otherwise initiated, the venue for it will be
the state courts of the State of California or the federal courts sitting in the
State of California, which will be deemed to be a convenient forum.
Amendment and Waiver
The Stock Purchase Agreement may not be changed, amended or modified,
except by means of a written instrument executed by both parties.
Fees and Expenses
Each party will pay all of its expenses incurred in connection with the
Transaction, whether or not consummated.
ESCROW AGREEMENT
In connection with the Stock Purchase Agreement, we have agreed with
IMSI on the form of an Escrow Agreement which the parties will execute at the
Closing. The Escrow Agreement provides that at Closing, $150,000 of the cash
consideration paid to the Company and the $350,000 promissory note from IMSI to
the Company be placed in escrow with a third party escrow agent, as security for
Aladdin's indemnity obligations under the Stock Purchase Agreement. Provided
that IMSI has no valid indemnity claims pursuant to the Stock Purchase
Agreement, the $150,000 will be released to Aladdin from escrow on the 18 month
anniversary of the Closing and the $350,000 promissory note and all payments of
principal and interest made by IMSI thereon will be released to Aladdin upon the
settlement of the Aladdin Knowledge Systems litigation.
REGISTRATION RIGHTS AGREEMENT
In connection with the Stock Purchase Agreement, we have agreed with
IMSI on the form of a Registration Rights Agreement which the parties will
execute at the closing. The Registration Rights Agreement provides that within
90 days of the Closing, IMSI will, at its sole expense, file a registration
statement with the Securities and Exchange Commission registering for sale the
shares of IMSI common stock received by us as part of the purchase price.
22
PLEDGE AGREEMENT
In connection with the Stock Purchase Agreement and the promissory
notes, we have agreed with IMSI on the form of a Pledge Agreement which the
parties will execute at the Closing. The Pledge Agreement is intended to provide
us with security for the repayment of the promissory notes through the pledging
by IMSI of the stock of Aladdin Systems and the granting of a security interest
in the stock of Aladdin Systems. In the event of a default by IMSI under the
promissory notes or under the terms of the Pledge Agreement, we shall have the
right to declare all amounts under the promissory notes to be immediately due
and payable and we shall have the right to exercise all remedies provided for
under the Uniform Commercial Code including, but not limited to, the foreclosure
of our security interest in the Aladdin Systems stock.
APPRAISAL RIGHTS
Pursuant to Nevada law, the Stockholders of Aladdin Systems Holdings
have no right to dissent from the Transaction.
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been
derived by the application of pro forma adjustments to the historical financial
statements contained in our Form 10-KSB for the year ended December 31, 2002 and
our Quarterly Report on Form 10-QSB for the nine months ended September 30, 2003
filed, both of which are incorporated herein by reference. The unaudited pro
forma condensed consolidated balance sheet as of September 30, 2003 was prepared
as if the Transaction had occurred on such date. The unaudited pro forma
consolidated statement of operations for the nine months ended September 30,
2003 gives effect to the Transaction as if it had occurred as of the beginning
of such fiscal period. The pro forma adjustments are based upon available
information, preliminary estimates and certain assumptions that we believe are
reasonable, and are described in the accompanying notes. The pro forma financial
statements should not be considered indicative of actual balance sheet data or
results that would have been achieved had the transaction described below been
consummated on the dates indicated and do not purport to indicate balance sheet
data or results of operations as of any future date or for any future period.
The unaudited pro forma financial information should be read in conjunction the
discussion under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements and
the notes thereto contained in our Form 10-KSB for the year ended December 31,
2002 and our Quarterly Report on Form 10-QSB for the nine months ended September
30, 2003.
23
Aladdin Systems Holdings, Inc.
Condensed Consolidated Balance Sheet
As of September 30, 2003
Unaudited
Historical Adjustments Pro forma
---------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 265,555 $ (265,555) $ --
Accounts receivable (net of allowance of $72,056) 989,939 (989,939) --
Inventories 83,807 (83,807) --
Investment in Aladdin Systems 2,312,836 2,312,836
Prepaid expenses and other assets 202,227 (156,914) 45,313
---------- ----------- -----------
Total current assets 1,541,528 816,621 2,358,149
Capitalized software, net 1,555,648 (762,674) 792,974
Property and equipment, net 277,011 (234,351) 42,660
---------- ----------- -----------
$ 3,374,187 $ (180,404) $ 3,193,783
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturates of long-term debt 346,410 (346,410) --
Related party notes (demand notes) 110,062 (110,062) --
Related party note 196,000 (196,000) --
Note payable (intercompany) 1,361,990 1,361,990
Accounts payable 532,897 (418,117) 114,780
Accrued expenses and other liabilities 492,803 (383,966) 108,837
---------- ----------- -----------
Total current liabilities 1,678,172 (92,565) 1,585,607
Long-term debt 87,839 (87,839) --
Stockholders' equity
Common stock, $.001 par value:
50,000,000 shares authorized;
12,230,272 issued and outstanding 12,230 -- 12,230
Paid-in capital 2,144,842 -- 2,144,842
Accumulated deficit (548,896) -- (548,896)
---------- ----------- -----------
Total stockholders' equity 1,608,176 -- 1,608,176
$ 3,374,187 $ (180,404) $ 3,193,783
=========== ===========
24
Aladdin Systems Holdings, Inc.
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2003
Unaudited
Historical Adjustments Proforma
Sales $5,897,545 $(5,886,745) $10,800
Cost of sales 772,488 (768,313) 4,175
------------------------------------------------------------
Gross profit 5,125,057 (5,118,432) 6,625
Operating Expenses:
Marketing, sales and support 2,839,728 (2,413,658) 426,070
Research and development 1,817,909 (1,580,174) 237,735
General and administrative 997,622 (717,665) 279,957
------------------------------------------------------------
Total operating expenses 5,655,259 (4,711,497) 943,762
Loss from operations (530,202) (406,935) (937,137)
Other income (expense):
Interest expense (12,947) 12,947 -
Other income (expense): (43,144) (18,072) (61,216)
------------------------------------------------------------
Net loss before income taxes (586,293) (412,060) (998,353)
Income tax expense (benefit) - 0 -
------------------------------------------------------------
Net income loss $(586,293) $(412,060) $(998,353)
============================================================
Notes To Unaudited Pro Forma Financial Information
The unaudited pro forma condensed consolidated balance sheet as of
September 30, 2003, and the unaudited pro forma condensed consolidated statement
of operations for the nine months ended September 30, 2003 give effect to the
following:
o We have assumed that the Transaction occurred as of September 30,
2003 for purposes of the consolidated balance sheet as of September 30, 2003, as
of January 1, 2002 with respect to the consolidated statement of operations for
the nine months ended September 30, 2003.
The unaudited pro forma information is not necessarily indicative of
the results that would have occurred had the merger taken place at the
respective time periods specified nor does such information purport to project
the results of operations for any future date or period.
25
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information known to the Company
with respect to beneficial ownership of our Common Stock as of December 31, 2003
by (i) each of our executive officers and directors, (ii) all of our executive
officers and directors as a group and (iii) each person who is known to us to
own, of record or beneficially, more than five percent of our common stock.
Where the persons listed have the right to acquire additional shares of common
stock through the exercise of options or warrants within 60 days, such
additional shares are deemed to be outstanding for the purpose of computing the
percentage of outstanding shares owned by such persons, but are not deemed to be
outstanding for the purpose of computing the percentage ownership interests of
any other person. Unless otherwise indicated, each of the Stockholders shown in
the table below has sole voting and investment power with respect to the shares
beneficially owned.
Name and Address Number of Percentage
of Beneficial Owner (1) Common Shares Ownership(2)
- ----------------------- ------------- ------------
Directors
Jonathan Kahn 2,096,149(3) 16.67%
Darryl Lovato 1,964,421(4) 15.69%
David Schargel 1,571,789(5) 12.79%
Paul Goodman 101,000(6) 0.82%
Kwok Li 1,207,835 9.88%
Brad Peppard 138,400(7) 1.13%
All directors and executive officers as a
group (6 persons) 7,079,594 56.98%
Other Beneficial Owners
Benna Lovato 1,726,633(8) 14.06%
Baytree Capital Associates, LLC 915,000 7.48%
Marco Gonzalez 697,812(9) 5.71%
All officers, directors and 5% owners as a
group 10,419,039 84.23%
(1) The address of c/o Aladdin Systems Holdings' directors, other executives and
holders of more than 5% of its common stock is 245 Westridge Drive, Watsonville,
CA 95076.
(2) Based on 12,230,272 shares of common stock outstanding as of December 31,
2003. Except as otherwise set forth in the footnotes to this table, all shares
are beneficially owned and sole investment and voting power is held by the
persons named above, to the best of Aladdin Systems Holdings' knowledge. Shares
of Common Stock subject to options that are currently exercisable or exercisable
within 60 days of December 31, 2003 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person.
26
(3) Includes 341,829 shares of common stock issuable upon exercise of options.
(4) Includes 287,788 shares of common stock issuable upon exercise of options.
(5) Includes 50,000 shares of common stock issuable upon exercise of options.
(6) Includes 100,000 shares of common stock issuable upon exercise of options.
(7) Includes 138,400 shares of common stock issuable upon exercise of options.
(8) Includes 50,000 shares of common stock issuable upon exercise of options.
(9) Includes 21 shares of common stock issuable upon exercise of options.
RECORD DATE
The close of business February 2, 2004, has been fixed as the record
date for the determination of Stockholders entitled to receive this Information
Statement.
EXPENSES OF INFORMATION STATEMENT
The expenses of mailing this Information Statement will be borne by
the Company, including expenses in connection with the preparation and mailing
of this Information Statement and all documents that now accompany or may
hereafter supplement it. It is contemplated that brokerage houses, custodians,
nominees, and fiduciaries will be requested to forward the Information Statement
to the beneficial owners of the Common Stock held of record, on the Record Date,
by such persons and that the Company will reimburse them for their reasonable
expenses incurred in connection therewith.
WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
including annual and quarterly reports on Form 10-KSB and 10-QSB (the "1934 Act
Filings") with the Securities and Exchange Commission (the "Commission").
Reports and other information filed by the Company can be inspected and copied
at the public reference facilities maintained at the Commission at Room 1024,
450 Fifth Street, N.W., Washington, DC 20549. Copies of such material can be
obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a web site on the Internet (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission through the
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
27
INCORPORATION OF DOCUMENTS BY REFERENCE
As allowed by the Securities and Exchange Commission's rules, this
Information Statement does not contain all of the information relating to us.
Some of the important business and financial information relating to us that may
be important is not included in this information statement, but rather is
"incorporated by reference" to documents that have been previously filed by us
with the Securities and Exchange Commission. The information incorporated by
reference is deemed to be a part of this Information Statement, except for any
information superseded by information contained directly in this Information
Statement. The documents contain important information about us and our
finances.
The following documents as filed with the Commission by the Company are
incorporated herein by reference:
(1) Quarterly Reports on Form 10-QSB for the quarters end March 31,
2003, June 30, 2003 and September 30, 2003;
(2) Annual Report on Form 10-KSB for the year ended December 31, 2002;
and
(3) Current reports on Form 8-K, filed on February 10, 2004.
In addition, all of our filings with the Securities and Exchange
Commission after the date of this Information Statement under Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, shall be
deemed to be incorporated by reference until the closing of the Transaction. Any
statement contained in this Information Statement or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Information Statement to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
information statement.
You should rely only on the information contained in this Information
Statement. We have not authorized anyone to provide you with information that is
different from what is contained in this Information Statement. This Information
Statement is dated March __, 2004. You should not assume that the information
contained in this Information Statement is accurate as of any date other than
such date, and the mailing of this Information Statement to Stockholders shall
not create any implication to the contrary.
28
EXHIBITS
EXHIBITS
A--WRITTEN CONSENT OF STOCKHOLDERS
B--STOCK PURCHASE AGREEMENT (Confidential portion omitted and filed separated
with the Securities and Exchange Commission)
29
EXHIBIT A
ACTION BY WRITTEN CONSENT
OF
THE STOCKHOLDERS
OF
ALADDIN SYSTEMS HOLDINGS, INC.
A Nevada Corporation
February 2, 2004
Pursuant to the authority of Section 78.320 of the Nevada Revised
Statutes ("NRS"), the undersigned, constituting a majority of the stockholders
of ALADDIN SYSTEMS HOLDINGS, INC. (the "Corporation") do by this writing consent
to the following actions and adopt the following resolutions:
Approval of Sale of Aladdin Systems, Inc.
WHEREAS, the Corporation has negotiated with International
Microcomputer Software, Inc. ("IMSI") to sell to IMSI substantially all of the
assets of the Corporation, consisting of all of the capital stock of Aladdin
Systems, Inc., a wholly-owned subsidiary of the Corporation (the "Stock"),
pursuant to that certain Stock Purchase Agreement dated January 21, 2004 by and
between the Corporation and IMSI as attached hereto as Exhibit B (the "Purchase
Agreement"); and
WHEREAS, the Corporation's Board of Directors has reviewed and
unanimously approved the Purchase Agreement and the performance of all of the
Corporation's obligations under the Purchase Agreement, including, without
limitation, to execute and deliver each of the agreements, instruments and other
documents referenced in the Purchase Agreement; and
WHEREAS, such transaction constitutes a sale of substantially all of
the Corporation's assets, mandating the consent of the holders of a majority of
the Corporation's outstanding shares; and
WHEREAS, the Board of Directors recommends that the stockholders
approve the transaction in the form of a written consent of a majority of the
stockholders of the Corporation.
NOW, THEREFORE, BE IT RESOLVED, that the terms and provisions of the
Purchase Agreement, be and they hereby are approved;
RESOLVED, that the sale of the Stock to IMSI be approved on
substantially the terms set forth in the Purchase Agreement.
RESOLVED, that this Written Consent may be executed in counterparts.
A-1
IN WITNESS WHEREOF, the undersigned hereby adopts, confirms and
ratifies in all respects, the foregoing resolution and directs the Secretary of
the Corporation to file this Action by Written Consent of Stockholders in the
minute book of the Corporation.
____________________________________ ________________________________________
Signature Signature
Print Name: _______________________ Print Name:_____________________________
Representing _____________ shares of Representing __________________ shares
the outstanding stock of the of the outstanding stock of the
Corporation Corporation
____________________________________ ________________________________________
Signature Signature
Print Name: _______________________ Print Name:_____________________________
Representing _____________ shares of Representing __________________ shares
the outstanding stock of the of the outstanding stock of the
Corporation Corporation
____________________________________ ________________________________________
Signature Signature
Print Name: _______________________ Print Name:_____________________________
Representing _____________ shares of Representing __________________ shares
the outstanding stock of the of the outstanding stock of the
Corporation Corporation
A-2
EXHIBIT B
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into
as of January 20, 2004, between Aladdin Systems Holdings, Inc., a Nevada
corporation (the "Seller") and International Microcomputer Software, Inc., a
California corporation (the "Purchaser").
RECITALS
WHEREAS, the Seller owns 100% of the outstanding shares of capital stock
(the "Stock") of Aladdin Systems, Inc., a Delaware corporation (the "Company");
WHEREAS, the Purchaser desires to purchase the Stock from the Seller, and
the Seller desires to sell the Stock to the Purchaser, in each case upon the
terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 Definitions.
In addition to the terms defined elsewhere herein, the terms defined in
the introductory paragraph and the Recitals to this Agreement shall have the
respective meanings specified therein, and the following terms shall have the
meanings specified below when used herein with initial capital letters:
"Accounts Receivable" has the meaning set forth in Section 3.9.
"Affiliate" means "affiliate" as defined in Rule 405 promulgated
under the Securities Act.
"Affiliated Group" means any affiliated group within the meaning of
Code ss.1504(a) or any similar group defined under a similar provision of
state, local or foreign law.
"Agreement" has the meaning set forth in the preamble, and shall
include all Schedules and Exhibits hereto.
"AKS Litigation" shall mean the Trademark Opposition and the Federal
District Court for the Northern District of Illinois, civ. No. 03 C 8330.
B-1
"Arbiter" has the meaning set forth in Section 2.3(h)(ii).
"Aladdin Revenue" has the meaning set forth in Section 2.3(b).
"Acquired Products" has the meaning set forth in Section 2.3(b).
"Balance Sheet" has the meaning set forth in Section 3.6.
"Balance Sheet Date" means December 31, 2003.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that could reasonably be expected
to result in any specified consequence.
"Business" means the business and operations of the Company and its
Subsidiaries as conducted on the Closing Date, including but not limited
to the development, sale and distribution (electronically or otherwise) of
utility and spam management software for the Windows, Macintosh, Palm
operating environments and other computer systems, including, but not
limited to the StuffIt line of products, Spring Cleaning, Internet
Cleanup, SpamCatcher and other software products.
"Business Combination" has the meaning set forth in Section 11.2(b).
"Business Day" means a day, other than a Saturday or a Sunday, on
which commercial banks are not required or authorized to close.
"Cash Consideration" has the meaning set forth in Section 2.2(a).
"Cash Escrow Amount" has the meaning set forth in Section 9.3(a).
"Closing" has the meaning set forth in Section 9.1.
"Closing Date" has the meaning set forth in Section 9.1.
"Closing Date Cash Payment" has the meaning set forth in Section
9.3(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the Recitals hereto and,
except where the context otherwise requires includes the Company and the
Company's Subsidiaries.
"Competitive Business Activities" means developing, selling or
distributing utility software and/or spam management programs for Windows,
MacOS, Palm and other computer environments as well as the resale of
similar products developed by third parties and bundled or sold separately
through a distribution network.
"Contracts" as of any date means, collectively, all contracts,
agreements, commitments, instruments and guaranties to which the Company
is a party as of such date, including those listed or required to be
listed on Schedule 3.15, all unfilled orders outstanding as of such date
for the purchase of raw materials, goods or services by the Company, and
all unfilled orders outstanding as of such date for the sale of goods or
services by the Company.
B-2
"Costs of Remediation" means all losses, amounts paid in settlement,
investigation, removal, remediation, monitoring and reporting costs and
expenses, Taxes, claims, Damages, Liabilities, obligations, judgments,
settlements and out-of-pocket costs (including, without limitation, costs
of investigation or enforcement), expenses and attorneys' fees including,
without limitation, fees for services of attorneys, consultants,
contractors, experts, engineers and laboratories, and all other
out-of-pocket costs, incurred in connection with investigation,
characterization, remediation, monitoring, reporting or mitigation,
arising out of or related to the presence or Release of any Hazardous
Materials existing as of or prior to the Closing Date at, on, or emanating
from any of the Leased Property or any real property at or to which the
Company, any Subsidiary or predecessor of any of the foregoing disposed,
Released, transported, stored, emitted, treated, or arranged to dispose of
Hazardous Materials prior to the Closing Date including, without
limitation, off-site liability under any Environmental Law arising from or
in connection with transportation, treatment, storage, disposal, Release,
or arranging for disposal of Hazardous Materials.
"Damages" means any losses, amounts paid in settlement, claims,
damages, Liabilities, obligations, judgments, settlements and reasonable
out-of-pocket costs (including, without limitation, costs of investigation
or enforcement), expenses and attorneys' fees, including, without
limitation, (i) any consequential damages or (ii) any special or punitive
damages which are assessed against an Indemnified Party as a result of a
third party action.
"Earn-Out Calculation" has the meaning set forth in Section 2.3(h).
"Earn-Out Objection Notice" has the meaning set forth in Section
2.3(h).
"Earn-Out Payment" has the meaning set forth in Section 2.3(a).
"Earn-Out Period" means any one of the First Earn-Out Period, the
Second Earn-Out Period or the Third Earn-Out Period, as defined in Section
2.3(a).
"Employee Benefit Plan" means an Employee Pension Benefit Plan or an
Employee Welfare Benefit Plan, where no distinction is required by the
context in which the term is used.
"Employee Pension Benefit Plan" has the meaning set forth in Section
3(2) of ERISA.
"Employee Welfare Benefit Plan" has the meaning set forth in Section
3(1) of ERISA.
"Employees" means each individual who, on the applicable date,
performs services as an employee primarily for the Company or any of its
Subsidiaries (including such persons who are on an approved leave of
absence, vacation, short-term disability or otherwise treated as an active
employee of the Company or its Subsidiaries).
B-3
"Environmental Laws" means any Legal Requirement with respect to the
protection of the public health, safety or the environment, including,
without limitation, with respect to any Hazardous Materials, drinking
water, groundwater, wetlands, landfills, open dumps, storage tanks, solid
waste, or waste water, water, soil, air, pollution, the protection,
preservation or restoration of natural resources, plant and animal life or
human health or the environment, or waste management, regulation or
control. Without limiting the generality of the foregoing, the term shall
encompass each of the following statutes, and the regulations promulgated
thereunder, in each case as in effect as of Closing: (a) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (codified
in scattered sections of 26 U.S.C., 33 U.S.C., 42 U.S.C. and 42
U.S.C.ss.9601 et seq.); (b) the Resource Conservation and Recovery Act of
1976 (42 U.S.C.ss.6901 et seq.); (c) the Hazardous Materials
Transportation Act (49 U.S.C.ss.1801 et seq.); (d) the Toxic Substances
Control Act (15 U.S.C.ss. 2061 et seq.); (e) the Federal Water Pollution
Control Act (33 U.S.C.ss.1251 et seq.); (f) the Clean Air Act and
Amendments (42 U.S.C.ss.7401 et seq.); (g) the Safe Drinking Water Act (21
U.S.C.ss.349; 42 U.S.C.ss.201 andss. 300 et seq.); (h) the Superfund
Amendment and Reauthorization Act of 1986 (codified in scattered sections
of 10 U.S.C., 29 U.S.C., 33 U.S.C. and 42 U.S.C.); and (i) the
Occupational, Health and Safety Act (29 U.S.C.ss. 651 et seq.).
"Environmental Reference Date" has the meaning set forth in Section
3.22 .
"Equity Distributions" as of any date means the following: (i) all
dividends, distributions, forgiveness of debt, transfer of value or
similar transactions with respect to the Stock, and (ii) with respect to
each transaction between the Company on the one hand and the Seller, its
Affiliates, or advisors on the other hand, the amount (measured on a
transaction by transaction basis, which amount shall never be deemed to be
less than zero) by which the cash value of the goods or services received
by the Company was less than the greater of (x) the amount which the
Company would have had to pay in a comparable transaction with an
unaffiliated third party entered into on an arm's length basis, or (y) the
cash value of the goods and services paid by the Company in the
transactions.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) which has been under common control or treated as a single
employer with the Company under Section 414(b), (c) or (m) of the Code.
"Escrow Agreement" has the meaning set forth in Section 9.3(a).
"Excluded Costs" has the meaning set forth in Section 3.6.
"First Earn-Out Period" has the meaning set forth in Section 2.3(a).
B-4
"First Earn-Out Maximum" means eight million five hundred thousand
dollars ($8,500,000).
"First Earn-Out Threshold" has the meaning set forth in Section
2.3(a).
"First Note" has the meaning set forth in Section 2.2(a)(iii).
"Financial Statements" has the meaning set forth in Section 3.6.
"Former Employee" means each individual other than an Employee on
the Closing Date who at any time prior to the Closing Date performed
services as an employee primarily for the Company or any Subsidiary of the
Company.
"GAAP" has the meaning set forth in Section 1.2.
"Governmental Agency" means (a) any international, foreign, federal,
state, county, local or municipal government or administrative agency or
political subdivision thereof, (b) any governmental agency, authority,
board, bureau, commission, department or instrumentality, (c) any court or
administrative tribunal, (d) any non-governmental agency, tribunal or
entity that is vested by a governmental agency with applicable
jurisdiction, or (e) any arbitration tribunal or other non-governmental
authority with applicable jurisdiction.
"Hazardous Materials" means each and every element, compound,
chemical mixture, pollutant, contaminant, material, waste or other
substance which is defined, designated, regulated, determined, classified
or identified as of the Closing Date as hazardous, radioactive, harmful or
toxic under any Environmental Law, or the Release of which is prohibited
or regulated under any Environmental Law, or which to the knowledge of the
Seller could reasonably be expected to cause, whether now or with the
passage of time, damage to Persons, property, flora, fauna or the
environment. Without limiting the generality of the foregoing, the term
shall include any "toxic substance," "hazardous substance," "hazardous
waste," or "hazardous material" as defined in any Environmental Law as
amended to date, and any explosive or radioactive material, asbestos,
asbestos-containing material, waste water, sludge, untreated dye, other
effluent, coal ash, polychlorinated biphenyls, special waste, petroleum or
any derivative or byproduct thereof, and toxic waste.
"Indebtedness" means (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such
Person, (i) the principal of and premium, if any, in respect of any
indebtedness of such Person for money borrowed, (ii) the principal,
premium, if any, and interest of such Person with respect to obligations
evidenced by bonds, debentures, notes or, except for accrued liabilities
arising in the Ordinary Course of Business, other similar instruments,
including obligations incurred in connection with the acquisition of
property, assets or businesses (other than trade payables which are not
overdue or in default), (iii) all obligations of such Person in respect of
letters of credit or other similar instruments (including reimbursement
obligations with respect thereto) but only to the extent of drawings
thereunder, (iv) every obligation of such Person issued or assumed as the
deferred purchase price of property or services (excluding trade accounts
payable or accrued liabilities arising in the Ordinary Course of Business
which are not overdue or in default), (v) every capital lease obligation
(determined in accordance with GAAP) of such Person, (vi) all Indebtedness
of other Persons secured by a Lien on any asset of such Person, whether or
not such Indebtedness is assumed by such Person; provided, however, that
the amount of such Indebtedness shall be the lesser of (A) the fair market
value of such asset at such date of determination and (B) the amount of
such Indebtedness of such other Persons, (vii) the present value
(discounted using an interest rate of 5% per annum) as of the date of
determination of every obligation to pay rent or other payment amounts of
such Person with respect to any sale-leaseback transaction to which such
Person is a party, payable through the stated maturity of such
sale-leaseback transaction, and (viii) every obligation of the type
referred to in clauses (i) through (vii) of another Person the payment of
which, in any case, such Person has guaranteed or is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise.
B-5
"Indemnified Party" has the meaning set forth in Section 10.3(a) and
in the case of Purchaser shall also include the Company and its
Subsidiaries.
"Indemnifying Party" has the meaning set forth in Section 10.3(a).
"Insurance Policies" has the meaning set forth in Section 3.20.
"Intellectual Property" shall mean all of the following, owned, used
or licensed by the Company as licensee or licensor: (i) the names Aladdin,
Aladdin Systems, Installermaker, StuffIt, StuffIt Deluxe, Spring Cleaning,
iClean, Aladdin Tuner, Gobar, SpamCatcher, Aladdin Expander, all fictional
business names, trademarks and service marks (registered or unregistered),
trade dress, trade names and other names and slogans embodying business or
product goodwill or indications of origin, all applications or
registrations in any jurisdiction pertaining to the foregoing and all
goodwill associated therewith (collectively "Marks"); (ii) patents,
patentable inventions, discoveries, improvements, ideas, know-how, formula
methodology, processes, technology and computer programs, software and
databases (including source code, object code, development documentation,
programming tools, drawings, specifications and data) and all applications
or registrations in any jurisdiction pertaining to the foregoing,
including all reissues, continuations, divisions, continuations-in-part,
renewals or extensions thereof (collectively "Patents"); (iii) trade
secrets, know-how, including confidential and other non-public
information, and the right in any jurisdiction to limit the use or
disclosure thereof (collectively, "Trade Secrets"), (iv) copyrights in
writings, artwork, clipart, webart, sounds, graphics, photographs,
animations, images, designs, mask works or other works, and registrations
or applications for registration of copyrights in any jurisdiction; (v)
licenses, immunities, covenants not to sue and the like relating to any of
the foregoing; (vi) Internet Web sites, domain names and registrations or
applications for registration thereof; (vii) books and records describing
or used in connection with any of the foregoing; and (viii) claims or
causes of action arising out of or related to infringement or
misappropriation of any of the foregoing.
"Intellectual Property Licenses" has the meaning set forth in
Section 3.16.
B-6
"IRS" means the Internal Revenue Service of the U.S. Department of
the Treasury.
"Knowledge" as applied to the Seller, means the actual knowledge,
after reasonable inquiry, of any person listed on Schedule 1.1 hereto.
"Leased Property" has the meaning set forth in Section 3.11(b).
"Leases" has the meaning set forth in Section 3.11(b).
"Legal Requirement" means any federal, state, local, municipal,
foreign, international, multinational, or other administrative Order,
constitution, law, rule, ordinance, permit, principle of common law,
regulation, statute, or treaty.
"Liability" means any liability or obligation (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated and
whether due or to become due), including, without limitation, any
liability for Taxes.
"Lien" means any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest,
right of first refusal, or restriction of any kind, including any
restriction on use, voting, transfer, receipt of income, or exercise of
any other attribute of ownership.
"Listed Intellectual Property" has the meaning set forth in Section
3.16.
"Major Suppliers" has the meaning set forth in Section 3.28.
"Mark" has the meaning set forth in this Section 1.1 in the
definition of "Intellectual Property."
"Material Adverse Effect" means a material adverse change in or
effect with respect to the business, results of operations, properties,
financial condition or prospects of the Company and its subsidiaries.
"Multiemployer Plan" has the meaning set forth in Section 3(37) of
ERISA.
"Order" means any award, decision, injunction, judgment, order,
ruling, subpoena, or verdict entered, issued, made, or rendered by any
court, administrative agency, or other Governmental Agency or by any
arbitrator.
"Ordinary Course of Business" means an action which is both: (a)
consistent with the past practices of the Company and is taken in the
ordinary course of the normal day-to-day operations of the Company; and
(b) similar in nature and magnitude to actions customarily taken, without
any authorization by the board of directors, in the ordinary course of the
normal day-to-day operations of other Persons that are in a similar line
of business as the Company.
B-7
"Patent" has the meaning set forth in this Section 1.1 in the
definition of "Intellectual Property".
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permit" means any permit, approval, consent, authorization,
license, variance, or permission required by a Governmental Agency under
any Legal Requirement.
"Permitted Liens" means, with respect to any asset, (i) covenants,
conditions, restrictions, encroachments, encumbrances, easements, rights
of way, licenses, grants, building or use restrictions, exceptions,
reservations, limitations or other imperfections of title (other than a
Lien securing any Indebtedness) with respect to such asset which,
individually or in the aggregate, does not materially detract from the
value of, or materially interfere with the present occupancy or use of,
such asset and the continuation of the present occupancy or use of such
asset; (ii) the matters set forth on Schedule 1.2 hereto; (iii) unfiled
mechanic's, materialmen's and similar liens with respect to amounts not
yet due and payable or which are being contested in good faith through
appropriate proceedings and, for those existing on the Balance Sheet, for
which adequate reserves in accordance with GAAP are reflected on the
Balance Sheet, as the case may be; (iv) liens for Taxes not yet delinquent
or which are being contested in good faith through appropriate proceedings
and, for those existing on the Balance Sheet, for which adequate reserves
in accordance with GAAP are reflected on the Balance Sheet, as the case
may be; and (v) liens securing rental payments under capital lease
arrangements, which capital lease arrangements existing as of the Closing
Date are in accordance with GAAP reflected as Indebtedness on the Balance
Sheet.
"Person" means any individual, partnership, corporation, trust,
association, limited liability company, Governmental Agency or any other
entity.
"Plan" has the meaning set forth in Section 3.19(a).
"Pre-Closing Taxes" has the meaning set forth in Section
10.2(b)(ii).
"Product" has the meaning set forth in Section 3.26.
"Product Claim" has the meaning set forth in Section 3.26.
"Purchase Price" has the meaning set forth in Section 2.2.
"Purchaser" has the meaning set forth in the preamble hereto.
"Purchaser SEC Documents" has the meaning set forth in Section 4.6.
"Recalls" has the meaning set forth in Section 3.26(b).
"Registration Rights Agreement" has the meaning set forth in Section
7.5.
B-8
"Release" means any spilling, leaking, pumping, releasing,
depositing, pouring, emitting, emptying, migrating, discharging,
injecting, storing, escaping, leaching, dumping, burying, abandoning,
disposing or moving into the environment.
"Salaried Employee" has the meaning set forth in Section 3.24(h).
"Schedules" means, collectively, the various Schedules referred to
in this Agreement delivered separately to Purchaser on or before the date
of this Agreement.
"Second Earn-Out Period" has the meaning set forth in Section
2.3(a).
"Second Earn-Out Maximum" means nine million five hundred thousand
dollars ($9,500,000).
"Second Earn-Out Threshold" has the meaning set forth in Section
2.3(a).
"Second Note" has the meaning set forth in Section 2.2(a)(iii).
"Section 338(h)(10) Election" has the meaning set forth in Section
6.5(f).
"Section 338 Forms" has the meaning set forth in Section 6.5(d).
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Seller Entity" means the Seller and its respective Affiliates
(other than the Company and its Subsidiaries).
"Seller" has the meaning set forth in the preamble hereto.
"Seller's Opinion of Counsel" has the meaning set forth in Section
8.8.
"Single-Employer Plan" means an Employee Pension Benefit Plan which
is described in Section 4001(a)(15) of ERISA and which is subject to Title
IV of ERISA.
"Software Products" has the meaning set forth in Section 3.17.
"Stock" has the meaning set forth in the Recitals hereto.
"Stock Consideration" has the meaning set forth in Section 2.2(a).
"Subsidiary" means "subsidiary" as defined in Rule 405 promulgated
under the Securities Act.
"Tax Claim" has the meaning set forth in Section 10.5.
B-9
"Tax Return" means any report, return, information return, forms,
declarations, claims for refund, statements or other information
(including any amendments thereto and including any schedule or statement
thereto) required to be supplied to a Governmental Agency in connection
with Taxes. "Taxes" means all federal, state, local, foreign and other
taxes, assessments and water and sewer charges and rents, including
without limitation, income, gross receipts, excise, employment, sales,
use, transfer, license, payroll, franchise, severance, stamp, withholding,
Social Security, unemployment, real property, personal property, property
gains, registration, capital stock, value added, single business,
occupation, workers' compensation, alternative or add-on minimum,
estimated, or other tax, including without limitation any interest,
penalties or additions thereto.
"Third Earn-Out Period" has the meaning set forth in Section 2.3(a).
"Third Earn-Out Maximum" means eleven million five hundred thousand
dollars ($11,500,000).
"Third Earn-Out Threshold" has the meaning set forth in Section
2.3(a).
"Third Party" has the meaning set forth in Section 11.2(b).
"Trade Secret" has the meaning set forth in this Section 1.1 in the
definition of "Intellectual Property."
"Trademark Opposition" means opposition no. 91155736 brought before
the Trademark Trial and Appeal Board in opposition to the Company's
efforts to register the mark "Aladdin" pursuant to application no.
76144215.
"Transaction Documents" means this Agreement, the Registration
Rights Agreement, the Escrow Agreement, the Note, the Pledge Agreement and
the Security Agreement .
Section 1.2 Accounting Terms and Determinations.
All references in this Agreement to "generally accepted accounting
principles" or "GAAP" shall mean generally accepted accounting principles in
effect in the United States of America at the time of application thereof,
applied on a consistent basis. Unless otherwise specified herein, all accounting
terms used herein shall be interpreted, all determinations with respect to
accounting matters hereunder shall be made, and all financial statements and
certificates and reports as to financial matters required to be furnished
hereunder shall be prepared, in accordance with generally accepted accounting
principles, applied on a consistent basis.
B-10
ARTICLE II.
SALE AND PURCHASE
Section 2.1. Agreement to Sell and to Purchase. -- On the terms and
subject to the conditions set forth in this Agreement, at the Closing, the
Purchaser shall purchase from the Seller, and the Seller shall sell, transfer,
assign, convey and deliver to the Purchaser, the Stock. At the Closing, the
Seller shall deliver to the Purchaser or its designees a certificate or
certificates representing the Stock, duly endorsed in blank for transfer or
accompanied by appropriate powers duly executed in blank.
Section 2.2. Purchase Price.
(a) The purchase price (the "Purchase Price") for the Stock shall
consist of the following:
(i) $1,500,000, in immediately available funds (the "Cash
Consideration");
(ii) the number of shares of the restricted common stock, no
par value, of the Purchaser as shall be equal to $3,500,000 divided
by the average of the closing "bid" price of the Purchaser's stock
on the twenty (20) trading days prior to the Closing as reported by
the OTCBB, rounded up or down to the nearest whole share (the "Stock
Consideration");
(iii) A convertible three year Promissory Note in the
principal amount of $2,650,000 (the "First Note"), and a
non-negotiable convertible three year Promissory Note in the
principal amount of $350,000 (the "Second Note"), in the forms
attached as Exhibits A and B hereto, both secured by a pledge of the
Stock, as provided in the Pledge Agreement attached as Exhibit C.
(iv) Earn-Out Payments, if any, as set forth in Section 2.3
herein.
Section 2.3. Earn-Out Payments
(a) The Purchaser shall pay to the Seller the following amounts
(each, an "Earn-Out Payment" and collectively, the "Earn-Out Payments"),
subject to achievement of the minimum revenue amounts set forth below:
(i) In respect of the twelve (12) consecutive months
commencing on the first day of the month in which the Closing
occurs, or the first day of the next succeeding month, whichever
date shall be closest to the Closing Date (the "First Earn-Out
Period"), one Dollar ($1.00) for each twelve Dollars and
seventy-five cents ($12.75) of Aladdin Revenue, up to a maximum
payment in respect of such period of six hundred sixty-six thousand
six hundred sixty-six Dollars and sixty-seven cents ($666,666.67).
No payment shall be made during or for the First Earn-Out Period
until the Aladdin Revenue equal or exceeds four million two hundred
fifty thousand Dollars ($4,250,000) (the "First Earn-Out
Threshold"), and in the event that the Aladdin Revenue during the
First Earn-Out Period shall not equal or exceed the First Earn-Out
Threshold, no Earn-Out Payment shall be made to Aladdin for the
First Earn-Out Period.
B-11
(ii) In respect of the twelve (12) month period following the
First Earn-Out Period (the "Second Earn-Out Period"), one Dollar
($1.00) for each fourteen Dollars and twenty-five cents ($14.25) of
Aladdin Revenue, up to a maximum payment in respect of such period
of six hundred sixty-six thousand six hundred sixty-six Dollars and
sixty-seven cents ($666,666.67). No payment shall be made during or
for the Second Earn-Out Period until the Aladdin Revenue equal or
exceeds four million seven hundred fifty thousand Dollars
($4,750,000) (the "Second Earn-Out Threshold"), and in the event
that the Aladdin Revenue during the Second Earn-Out Period shall not
equal or exceed the Second Earn-Out Threshold, no Earn-Out Payment
shall be made to Aladdin for the Second Earn-Out Period.
(iii) In respect of the twelve (12) month period following the
Second Earn-Out Period (the "Third Earn-Out Period"), One Dollar
($1.00) for each seventeen Dollars and twenty-five cents ($17.25) of
Aladdin Revenue, up to a maximum payment in respect of such period
of six hundred sixty-six thousand six hundred sixty-six Dollars and
sixty-seven cents ($666,666.67). No payment shall be made during or
for the Third Earn-Out Period until the Aladdin Revenue for the
Third Earn-Out Period is below five million seven hundred fifty
thousand Dollars ($5,750,000) (the "Third Earn-Out Threshold"), and
in the event that the Aladdin Revenue during the Third Earn-Out
Period shall not equal or exceed the Third Earn-Out Threshold, no
Earn-Out Payment shall be made to Aladdin for the Third Earn-Out
Period.
(iv) Any payments to be made to the Seller pursuant to
paragraphs (a), (b) or (c) above shall be made forty five (45) days
following the end of each Earn-Out Period. Unpaid Earn-Out Payments
shall accrue interest at the rate of six percent (6%) simple
interest per year from the 60th day from the end of each Earn-Out
Period until paid. Potential, but unearned, Earn-Out Payments from
an Earn-Out Period may not be carried forward and earned in a
subsequent Earn-Out Period.
(b) Aladdin Revenue.
(i) For the purposes of this Section 2.3, "Aladdin Revenue"
shall mean, for any Earn-Out Period, the revenue of the Business as
calculated by the Purchaser in accordance with GAAP (for purposes
hereof, "GAAP" shall mean the Purchaser's treatment of revenues,
except that revenues derived from sales to Digital River shall be
treated using the Seller's historical methods) and adjusted as
necessary for sales returns, allowances and bad debts, for the sales
or licensing (including subscription fees) of: (i) all of the
Company's products existing as of the Closing, including all
upgrades and updates thereto made after the Closing Date; (ii) third
party products resold by the Company, including products owned by
Purchaser; (iii) all new products developed by the Company after the
Closing; (iv) all new products which the Company sells pursuant to
publishing or license agreement for which the Company pays a royalty
or licensing fee to the licensee; (v) all existing products owned by
Purchaser and transferred to the Company; provided, however, that
prior to the inclusion of such products, they shall be valued in
accordance with a formula to be provided by Baytree Capital
Associates, LLC; and provided further that following such valuation,
no revenue derived from such products shall be included as Aladdin
Revenue until the Purchaser has reported earnings from such products
equal to Mr. Gardner's valuation; (vi) all new products ("Acquired
Products") acquired (whether by acquisition of such products
individually, in groups or through the acquisition of whole
businesses, and considering as an "acquisition" the payment of the
purchase price in a single transaction or a group of transactions
effectively constituting a single transaction) or licensed by the
Company or the Purchaser for a fee less than $200,000; and (vii)
revenue from the sales or licensing by the Company of products
acquired (as defined above) for amounts in excess of $200,000 shall
be included in the Aladdin Revenue after the Purchaser has reported
earnings from each such product equal to the aggregate purchase
price or license fee paid for it.
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(c) In the event that the Purchaser enters into a transaction with a
non-Affiliate of the Purchaser prior to termination of the Third Earn-Out
Period regarding the sale or transfer to such third party of the Company
or substantially all of the assets of the Company (either in a single or a
series of transactions), then upon the closing date of such transaction or
transactions all Earn-Out Payments for Earn-Out Periods not completed as
of such closing date shall be deemed earned, and shall be paid to the
Seller as of the applicable payment dates described in Section 2.3(a)(iv)
above; and in the event that any of the assets of the Company are
transferred to an affiliate of the Purchaser pursuant to a reorganization,
Aladdin Revenue will continue to be calculated as though all products sold
by the Company prior to such reorganization continue to be held by the
Company. In the further event that the Purchaser sells or transfers to a
non-Affiliate any product or portion of a product sold by the Company
prior to termination of the Third Earn-Out Period, the Purchaser shall
reduce the Earn-Out Maximum for the Earn-Out Period during which the
product or portion of a product was sold, and each subsequent Earn-Out
Period, by the total amount of revenue reported by the Company during the
Earn-Out Period in which such sale is consummated (and the ratios of
Aladdin Revenue to Earn-Out expressed in paragraphs Section 2.3(a)(i) -
(iii) for each affected Earn-Out Period shall be adjusted accordingly),
and the Earn-Out Threshold for each such Earn-Out Period shall be reduced
by one-half of such revenue.
(d) The parties hereto acknowledge that the Earn-Out Payments
payable to the Sellers pursuant to this Section 2.3 have been negotiated
by the parties based on their inability to agree as to the valuation of
the Company as of the Closing Date, and such Earn-Out Payments are
intended by the parties to be treated as part of the consideration for the
Stock. The Purchaser and the Seller agree not to take any position,
including, without limitation, for federal, state, foreign or local tax
purposes, that is inconsistent with the intent expressed in this clause
(c).
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(e) The Purchaser agrees to keep true and accurate books and records
containing sufficiently detailed information to enable the Seller to
accurately determine the amount of the Earn-Out Payment due to the Seller
for each Earn-Out Period. The Purchaser further agrees to permit the
Seller and/or its designated agent access to such books and records at a
reasonable time at the Purchaser's principal offices (or at such other
location at which such books and records may be located) upon reasonable
request by the Seller commencing as of the Closing Date and ending on the
third anniversary of the Closing Date in order to inspect and audit such
books and records.
(f) Within forty-five (45) days after the end of each quarter during
any Earn-Out Period, the Purchaser shall provide the Seller with a report
of the Aladdin Revenue for such quarter, together with a report of the
bookings during such quarter of all sales that will at any time be
included as Aladdin Revenue (both in the form set forth as Exhibit D
hereto), and the amount of Earn-Out Payment due to Seller, if any, for
such quarter.
(g) At any time prior to payment of the Third Earn-Out, if any
Earn-Out Payment shall cause the aggregate amount of cash to be received
by the Seller pursuant to this Agreement to exceed sixty percent (60%) of
the total consideration to be received by the Seller pursuant to this
Agreement, then the portion of such Earn-Out Payment in excess of such 60%
threshold shall be paid to the Seller in shares of the Purchaser's Common
Stock. The number of shares to be issued in such event shall be equal to
the portion of the Earn-Out which the Seller wishes to receive in Common
Stock divided by the average of the closing "bid" price of the Purchaser's
stock on the twenty (20) trading days prior to the end of the applicable
Earn-Out Period as reported by the OTCBB, rounded up or down to the
nearest whole share.
(h) Disputes Regarding Earn-Out Payments.
(i) In the event the Seller and the Purchaser shall not reach
agreement on all aspects of an Earn-Out Payment, within forty-five
(45) days following the Seller's receipt of the Earn-Out Payment,
the Seller shall deliver to the Purchaser a written notice of its
objections (the "Earn-Out Objection Notice"): (i) objecting in good
faith to amount or basis for calculating the Earn-Out Payment, (ii)
setting forth the items being disputed and the reasons therefor, and
(iii) specifying the Seller's calculation of the disputed item(s)
and the adjustment of the Earn-Out Payment to be made accordingly.
In connection with the preparation of the Earn-Out Objection Notice,
the Purchaser shall grant the Seller's accountants and other
representatives reasonable access to all of the books and records of
the Company. If the Seller fails to deliver timely its Earn-Out
Objection Notice, the Earn-Out Payment shall be considered final and
binding upon the Purchaser and the Seller.
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(ii) The matters in dispute shall be determined by a
nationally recognized arbitration firm mutually satisfactory to the
Purchaser and the Seller (the "Arbiter") in accordance with such
firm's rules, and the Purchaser and the Seller shall promptly
deliver to the Arbiter Seller's Earn-Out Objection Notice, together
with all materials relating to the Purchaser's calculation of the
Earn-Out Payment (the "Earn-Out Calculation") for the disputed
Earn-Out Period. Promptly, but not later than thirty (30) days after
the acceptance of its appointment, the Arbiter shall determine
(based solely on presentations by the Seller and the Purchaser to
the Arbiter and not by independent review) only those items in
dispute and shall render a report as to its resolution of such items
and the resulting calculation of the applicable Earn-Out Payment.
For purposes of the Arbiter's determination, the amounts to be
included shall be the appropriate amounts from the Earn-Out
Calculation, as to items that are not in dispute, and the amounts
determined by the Arbiter, as to items that are submitted for
resolution by the Arbiter. In resolving any disputed item, the
Arbiter may not assign a value to such item greater than the
greatest value for such item claimed by either party in the Earn-Out
Calculation or Earn-Out Objection Notice or less than the lowest
value for such item claimed by either party in the Earn-Out
Calculation or Earn-Out Objection Notice. The Purchaser and the
Seller shall cooperate with the Arbiter in making its determination
and such determination shall be conclusive and binding upon the
Purchaser and the Seller.
(iii) The Seller shall bear the cost of the Arbiter unless the
Seller's inspection and audit reveals an underpayment of the
Earn-Out Payment by the Purchaser of five percent (5%) or more, in
which case the Purchaser shall bear the reasonable costs of the
Arbiter and shall reimburse Seller therefor.
(iv) Within five Business Days after the final determination
of a disputed Earn-Out Payment, if such determination is made in
favor of the Seller, the Purchaser shall pay the Seller by wire
transfer of immediately available funds the amount, if any, by which
the Earn-Out Payment is adjusted by the Arbiter's determination.
(v) Nothing in this Section 2.3 or in the statements, reports
or documents contemplated hereby shall affect the parties' rights
and obligations in respect of a breach or alleged breach of any
representation or warranty herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller represents and warrants to the Purchaser as set forth in this
Article III:
Section 3.1. Authority of the Seller.
The Seller is a corporation duly organized, validly existing and
before the Closing will be in good standing under the laws of the State of
Nevada. The Seller has full corporate power and authority to execute and deliver
the Transaction Documents, and the execution and delivery by the Seller of the
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly and validly authorized by all necessary
corporate action on the part of the Seller, including the consent or approval of
the holders of the requisite majority(ies) of the Seller's common stock and each
other class and series of equity securities of the Seller. This Agreement
constitutes, and the other Transaction Documents when executed and delivered by
the parties thereto will constitute, the legal, valid and binding obligations of
the Seller enforceable against the Seller in accordance with their terms, except
as such enforcement may be limited by applicable bankruptcy, insolvency,
moratorium, or similar laws from time to time in effect which affect creditors'
rights generally and by legal and equitable limitations on the enforceability of
specific remedies.
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Section 3.2. Organization of the Company.
As of the date hereof: (i) the Company is a corporation duly
organized, validly existing, and before the Closing will be in good standing
under the laws of the State of Delaware (ii) the Company is duly qualified to do
business and is in good standing in California, such states being each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except where the failure to so qualify,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect and (iii) the Company has the requisite corporate
power and authority to own its properties and to conduct its business as
presently conducted. Schedule 3.2 includes true and correct copies of the
Articles of Incorporation and By-Laws of the Company as in effect on the date
hereof.
Section 3.3. Capitalization of the Company.
As of the date hereof, the authorized capital stock of the Company
consists of (i) twenty million (20,000,000) shares of common stock, par value
$0.01 per share, of which one (1) share is outstanding and owned by the Seller
and (ii) no shares of preferred stock. There are or will be at Closing no
outstanding options, warrants, agreements, conversion rights, preemptive rights
or other rights to subscribe for, purchase or otherwise acquire shares of
capital stock of the Company.
Section 3.4. No Conflict or Violation; Consents.
Except as set forth on Schedule 3.4, neither the execution and
delivery of this Agreement or any other Transaction Document nor the
consummation or performance of any of the transactions contemplated hereby or
thereby will, directly or indirectly (with or without notice or lapse of time):
(a) contravene, conflict with, or result in a violation of (i) any
provision of the Articles of Incorporation or By-Laws of either the Seller or
the Company, or (ii) any resolution adopted by the board of directors or the
stockholders of either the Seller or the Company;
(b) contravene, conflict with, or result in a violation of, or give
any Governmental Agency or other Person the right to challenge any of the
transactions contemplated hereby or by any other Transaction Document or to
exercise any remedy or obtain any relief under, any Legal Requirement to which
the Company or the Seller, or any of the assets owned or used by the Company,
may be subject;
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(c) contravene, conflict with, or result in a violation of any of
the terms or requirements of, or give any Governmental Agency the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Permit that is held
by the Company or that otherwise relates to the business of, or any of the
assets owned or used by, the Company;
(d) cause any of the assets owned by the Company to be reassessed or
revalued by any taxing authority or other Governmental Agency;
(e) contravene, conflict with, or result in a violation or breach of
any provision of, or give any Person the right to declare a default or exercise
any remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any Contract, Lease or Permit;
(f) result in the imposition or creation of any Lien upon or with
respect to any of the assets owned or used by the Company; or
(g) except for filings under the Securities Act, and the Securities
Exchange Act, require the consent, approval, or authorization of, or
registration or filing with, any Governmental Agency or any other Person.
Section 3.5. Subsidiaries and Investments.
Except as set forth in Schedule 3.5, the Company does not own any
stock of, or any equity participation in, any Person and has no Subsidiaries.
Section 3.6. Financial Statements.
The unaudited balance sheet of the Company as of the Balance Sheet
Date (the "Balance Sheet"), and related statements of income, retained earnings
and cash flow for the periods then ended and the notes thereto (collectively,
the "Financial Statements"), (i) are included as Schedule 3.6: (ii) were
prepared in accordance with GAAP, (iii) present fairly the financial condition
and the results of operations of the Company as of the dates and for the periods
indicated thereon, (iv) are complete, correct and in accordance with the books
of account and records of the Company, (v) can be legitimately reconciled with
the financial statements and the financial records maintained and the accounting
methods applied by the Company for federal income tax purposes, and (vi) reflect
accurately all costs and expenses which the Company incurred, but not
necessarily all of the costs, or a pro-rata portion of the costs, incurred by
the Seller which may have been expenses of the Company if the Company were
independent and not affiliated with any other corporation or business ("Excluded
Costs", all of which are set forth in Schedule 3.6).
Section 3.7. Undisclosed Liabilities.
As of the Balance Sheet Date, the Company has and will have no
material Liabilities, except for Liabilities: (a) reflected or reserved for on
the Balance Sheet, as the case may be, (b) relating to performance obligations,
under Leases, Contracts and Permitted Liens in accordance with the terms and
conditions thereof which are not required by GAAP to be reflected on the Balance
Sheet, or (c) as set forth on Schedule 3.7.
B-17
Section 3.8. Material Adverse Effect.
Other than changes resulting from general economic conditions and
except as provided on Schedule 3.8, since the Balance Sheet Date, there has not
been any Material Adverse Effect or Basis therefor, nor have any events occurred
nor do any circumstances exist which, individually or in the aggregate, could
reasonably be expected to result in a Material Adverse Effect.
Section 3.9. Accounts Receivable.
All accounts receivable of the Company that are reflected on the
Balance Sheet or on the accounting records of the Company as of the Closing Date
(collectively, the "Accounts Receivable") represent or will represent valid
obligations arising from sales actually made or services actually performed in
the Ordinary Course of Business. There is no contest, claim, or right of
set-off, other than returns or other set-offs in the Ordinary Course of
Business, under any Contract with any obligor of an Accounts Receivable relating
to the amount or validity of such Accounts Receivable. Schedule 3.9 contains a
complete and accurate list of all Accounts Receivable as of the Balance Sheet
Date, which list sets forth the aging of such Accounts Receivable.
Section 3.10. Inventory.
The materials, supplies and work-in-process included in the
inventory of the Company as set forth on the Balance Sheet were (a)
substantially equivalent in quality and quantity, subject to seasonality, to the
materials, supplies and work-in-process, and additions thereto, generally
included in such inventory in the past; (b) reasonably suitable for the
manufacture and distribution of the Company's products in a manner substantially
equivalent in quality to that achieved generally by the Company in the past and
(c) valued in accordance with GAAP, in each case, subject to all reserves
reflected in the Balance Sheet with respect to such inventory existing on the
Balance Sheet Date. Such reserves on the Balance Sheet are adequate under GAAP
and are established in accordance with GAAP.
Section 3.11. Real Property.
(a) The Company does not own any real property.
(b) Schedule 3.11(b) contains a list of all leases and subleases,
together with any amendments thereto and any subordination, nondisturbance and
attornment agreements (the "Leases"), with respect to all real property leased
by the Company (the "Leased Property"). Each Lease is in full force and effect,
the Company has performed all material obligations required to be performed by
it to date under each of the Leases and neither the Company nor, to the Seller's
Knowledge, any other party thereto is in material default under any of the
Leases (and no event has occurred which, with due notice or lapse of time or
both, would constitute such a lapse or default). No amount due under the Leases
remains unpaid, no material controversy, claim, dispute or disagreement exists
between the parties to any of the Leases. The Seller has delivered to the
Purchaser a copy of each Lease, and all amendments thereto, listed in Schedule
3.11(b), except to the extent otherwise noted therein.
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(c) The covenants, conditions, restrictions, encroachments,
encumbrances, easements, rights of way, licenses, grants, building or use
restrictions, exceptions, reservations, limitations or other impediments
affecting the Leased Property do not and will not, with respect to each Leased
Property, materially impair the Company's ability to use any such Leased
Property in the operation of the Company's business as presently conducted. To
Seller's Knowledge there are no pending or threatened condemnation or similar
proceedings affecting the Leased Property. The Company has access to public
roads, streets or the like or valid easements over private streets, roads or
other private property for such ingress to and egress from the Leased Property,
except as would not materially impair the Company's ability to use any such
Leased Property in the operation of the Company's business as presently
conducted.
(d) All brokerage commissions and other compensation and fees
payable by reason of the Leases have been paid in full or are reflected in the
Balance Sheet except for such commissions and other compensation related to
options or extensions in the Leases which are not yet exercised.
(e) To the Seller's Knowledge, all improvements on the Leased
Property and the operations therein conducted conform in all material respects
to all applicable Legal Requirements, including without limitation, health,
fire, environmental, safety, zoning and building laws, ordinances and
administrative regulations, except for possible nonconforming uses or violations
which do not and will not expose any person or property to injury or damage,
materially and adversely affect any insurance coverage, give rise to strict
liability, penalties or fines, jeopardize any Permit or materially interfere
with the present use, operation or maintenance thereof by the Company as now
used, operated or maintained, and which do not and will not materially and
adversely affect the value thereof. To the Seller's Knowledge, all buildings,
structures, improvements and fixtures owned, leased or used by the Company in
the conduct of its business at the Leased Property conform in all material
respects to all applicable codes and rules adopted by national and local
associations and boards of insurance underwriters; and all such buildings,
structures, improvements and fixtures are in good operating condition and
repair.
(f) There are no outstanding requirements or recommendations by any
insurance company which has issued to the Company a policy covering the Leased
Property, or by any board of fire underwriters or other body exercising similar
functions, requiring or recommending any repairs or work to be done on such
property.
(g) All public utilities required for the operation of the Leased
Property and necessary for the conduct of the business of the Company are
installed and operating, and all installation and connection charges, to the
Seller's Knowledge, are paid in full.
(h) Except as set forth in Schedule 3.11(b), the Leased Property is
not subject to any lease, sublease, license or other agreement granting to any
Person any right to the use, occupancy or enjoyment of such property or any
portion thereof.
(i) The plumbing, electrical, heating, air conditioning, elevator,
ventilating and all other mechanical or structural systems for which the Company
is responsible under the Leases in the buildings or improvements are in good
working order and condition, and the roof, basement and foundation walls of such
buildings and improvements for which the Company is responsible under said
Leases are in good condition and free of leaks and other material defects. All
such mechanical and structural systems and such roofs, basement and foundation
walls for which others are responsible under said Leases are, to the Seller's
Knowledge, in good working order and condition and free of leaks and other
material defects.
B-19
Section 3.12. Condition and Compliance of Property.
(a) Schedule 3.12(a) contains a list of owned computers, information
technology, hardware, software, facsimile machines and copier machines with a
value of over $500. As of such date, the Company owned outright and had good and
marketable title to all such personal property subject to no Lien except
Permitted Liens and except as set forth on Schedule 3.12(a).
(b) Schedule 3.12(b) sets forth the name, parties and date of all
personal property leases to which the Company is a party or in respect of the
Business. Except as set forth in Schedule 3.12(b), the Company holds good
leaseholds in all of the personal property shown or required to be shown on
Schedule 3.12(b) as leased by the Company, in each case under valid and
enforceable leases. The Company is not, and to Seller's Knowledge no other party
to any such personal property lease is, in material breach of or default under
any lease of any item of personal property listed on Schedule 3.12(b) (and no
event has occurred which, with due notice or lapse of time or both, would
constitute such a lapse or default).
(c) The assets of the Company: (i) in the aggregate are adequate to
conduct the operations of the Company in substantially the manner currently
conducted, (ii) are suitable for the purposes for which they are currently used,
(iii) have been maintained in accordance with the Company's historical practices
since January 1, 2001, and (iv) are in good condition, ordinary wear and tear
excepted. Each plant, building, office, shop and other structure and each item
of personal property is in good operating condition and is suitable and
sufficient for the operation of the business of the Company, as currently
conducted and currently proposed to be conducted.
Section 3.13. Compliance with Legal Requirements.
(a) Except as set forth on Schedule 3.13(a), the Company has
complied with, has not received any notice of violation of, and has no Knowledge
of any Basis which with or without notice could reasonably be expected to
constitute a violation of, any material Legal Requirements. Since January 1,
2001, except as set forth on Schedule 3.13(a), neither the Seller nor the
Company has received any notice or other communication (whether oral or written)
from any Governmental Agency or any other Person regarding (i) any actual,
alleged, possible, or potential violation of, or failure to comply with, any
Legal Requirement, or (ii) any actual, alleged, possible, or potential
obligation on the part of the Seller or the Company to undertake, or to bear all
or any portion of the cost of, any remedial action of any nature, nor is there
any Basis for any such notice or other communication.
(b) Schedule 3.13(b) sets forth a list of each Permit that is
necessary or appropriate for the operations of the Company as currently
conducted or currently proposed to be conducted, including the issuing
Governmental Agency, the expiration date, and the permit number. All Permits
included on Schedule 3.13(b), except as noted therein, are in full force and
effect and no proceeding is pending or, to the Knowledge of the Seller,
threatened, to revoke or limit any such Permit, nor is there a Basis for any
such revocation. Except as set forth in Schedule 3.13(b):
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(i) the Company is, and at all times since January 1, 2001 has
been, in full compliance with all of the terms and requirements of
each Permit listed in Schedule 3.13(b);
(ii) since January 1, 2001, neither the Seller nor the Company
has received any notice or other communication (whether oral or
written) from any Governmental Agency or any other Person regarding
(A) any actual, alleged, possible, or potential violation of or
failure to comply with any term or requirement of any Permit, or (B)
any actual, proposed, possible, or potential revocation, withdrawal,
suspension, cancellation, termination of, or modification to any
Permit, nor is there any Basis for such notice or other
communication; and
(iii) all applications required to have been filed for the
renewal of the Permits have been duly filed on a timely basis with
the appropriate Governmental Agencies, and all other filings
required to have been made with respect to such Permits have been
duly made on a timely basis with the appropriate Governmental
Agencies.
Section 3.14. Affiliate Agreements and Liabilities.
Except as set forth on Schedule 3.14:
(a) there are no written or oral Contracts between the Company and
any Seller Entity including, without limitation, any such Contracts relating to
the provision of any services by the Company to any such Seller Entity, or by
any such Seller Entity to the Company; and
(b) (i) since the Balance Sheet Date, there have been, (ii) from the
date hereof to the Closing Date there will be, and (iii) after the Closing Date
there will be, no transactions, agreements, arrangements or indebtedness between
the Company and (x) any Seller Entity, (y) any director or officer of the
Company or (z) any member of the immediate family of any individual described in
clause (x) or (y) of this sentence.
Section 3.15. Contracts.
(a) Schedule 3.15 hereto lists all of the Contracts, commitments,
arrangements and understandings which are material to the properties, conduct,
operations or financial condition of the Company or are otherwise material.
(b) Except as set forth on Schedule 3.15 (and for Leases and
Permitted Liens), the Company is not a party to or bound by any of the
following, which are material to the properties, conduct, operations or
financial condition of the Company or are otherwise material:
(i) mortgage, indenture, note, or installment obligation, or
other instrument for or relating to Indebtedness;
B-21
(ii) guaranty of any obligation for borrowings or performance,
or guaranty or warranty of products or services, excluding
endorsements or guaranties of instruments made in the Ordinary
Course of Business in connection with the deposit of items for
collection, and statutory warranties;
(iii) agreement or arrangement for the sale or lease of any of
its assets other than in the usual, regular and Ordinary Course of
Business;
(iv) agreement or other arrangement for the purchase of any
real estate, machinery, equipment, or other capital assets;
(v) Contract for the future purchase of materials, supplies,
services, merchandise, or equipment parts;
(vi) Contract pursuant to which it is or may be obligated to
make payments, contingent or otherwise, on account of or arising out
of prior acquisitions or sales of businesses, assets, or stock of
other companies;
(vii) distribution, dealership, representative, broker, sales
agency, advertising or consulting Contract excepting any such
contract that is terminable at will, or by giving notice of 30 days
or less, without Liability;
(viii) lease or other agreement for the use of real or
personal property;
(ix) agreement imposing non-competition or exclusive dealing
obligations on it;
(x) agreement providing for payments to or by any Person based
on sales, purchases, or profits, other than direct payments for
goods;
(xi) license or royalty agreement with obligations payable by
or to the Company;
(xii) Contract or agreement for the employment of any
stockholder, director, officer, consultant or key employee not
terminable without penalty or Liability arising from such
termination or any severance or change-in-control contract or
arrangement;
(xiii) Contract relating to cleanup, abatement or other
actions in connection with environmental liabilities; or
(xiv) Contract which (A) involves future payment by or to the
Company or (B) is otherwise material to the extent relating to the
conduct of the business of the Company.
(c) Each Contract, including the Contracts listed or required to be
listed on Schedule 3.15, is valid, binding and enforceable against the Company,
and to the Seller's Knowledge the other parties thereto in accordance with its
terms, and is in full force and effect. The Company has performed all material
obligations required to be performed by it to date under each of the Contracts.
Except as set forth in Schedule 3.15, neither the Company nor, to the Seller's
Knowledge, any other party thereto is in material breach of or default under any
Contract to which the Company is a party or by which it is bound or to which its
assets are subject (and no event has occurred which, with due notice or lapse of
time or both, would constitute such a lapse or default). The Seller has
delivered to the Purchaser a copy of each Contract or other written evidence of
the obligations, and all amendments thereto, listed or required to be listed in
Schedule 3.15, except to the extent otherwise noted thereon.
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Section 3.16. Intellectual Property.
(a) Set forth on Schedule 3.16(a) is a true and complete list of all
Intellectual Property and Software Products (as defined in Section 3.17 below)
(collectively, the "Listed Intellectual Property") now used in the business of
the Company except the mass- market third-party software described in Section
3.16(d).
(b) Set forth on Schedule 3.16(b) is a complete list of all licenses
or agreements which in any way affect the rights of the Company to any of the
Listed Intellectual Property (the "Intellectual Property Licenses"); such list
indicates the specific Listed Intellectual Property affected by each such
Intellectual Property License.
(c) Except as set forth on Schedules 3.16(a) and Schedule 3.16(b),
neither the Listed Intellectual Property nor any Intellectual Property License
infringes or provides any basis to believe that the Company's operations or any
Listed Intellectual Property or Intellectual Property License would infringe
upon any validly issued trademark, trade name, service mark, copyright or, any
validly issued patent or other right of any other third party. The manner in
which the Company has manufactured, packaged, shipped, advertised, labeled and
sold its products complies with all applicable laws and regulations pertaining
thereto, the failure to comply with which would have a Material Adverse Effect.
(d) The Company has a valid license to use each copy of mass-market
third-party software used by it.
(e) Except as set forth on Schedule 3.16(a) and Schedule 3.16(b),
each of the Intellectual Property Licenses is valid, binding and enforceable in
accordance with its terms against the parties thereto, the Company has performed
all obligations imposed upon it thereunder, and neither the Company nor any
other party thereto is in default thereunder, nor is there any event which with
notice or lapse of time, or both, would constitute a default thereunder.
(f) All Marks, Patents and registered copyrights are valid,
subsisting, unexpired, in proper form and enforceable and all renewal fees and
other maintenance fees which have fallen due on or prior to the effective date
of this Agreement have been paid. The grants, registrations and applications for
such Marks, Patents and registered copyrights have not lapsed, expired or been
abandoned and, except for the Trademark Opposition, no application or
registration thereof is the subject of any legal or governmental proceeding
before any governmental, registration or other authority in any jurisdiction.
All products and materials containing a Mark bear the proper notice where
permitted by law.
B-23
(g) Trade Secrets
(i) With respect to each Trade Secret, the documentation
relating to such Trade Secret is current, accurate, and sufficient
in detail and content to identify and explain it and to allow its
full and proper use without reliance on the knowledge or memory of
any individual.
(ii) The Seller and the Company has taken all reasonable
precautions to protect the secrecy, confidentiality, and value of
the Trade Secrets.
(iii) The Company has good title and an absolute (but not
necessarily exclusive) right to use the Trade Secrets. The Trade
Secrets are not part of the public knowledge or literature, and, to
the Seller's Knowledge, have not been used, divulged, or
appropriated either for the benefit of any Person (other than the
Company) or to the detriment of the Company. No Trade Secret is
subject to any adverse claim or has been challenged or threatened in
any way.
(h) Except as set forth in Schedule 3.16, to the Knowledge of the
Seller, there are no conflicts with or infringements of any Intellectual
Property by any third party. Apart from the AKS Litigation, no Mark has been or
is now involved in any opposition, invalidation or cancellation and, to the
Seller's Knowledge, no such action is threatened with respect to any of the
Marks. Except as set forth in Schedule 3.16, the conduct of the Company's
business as currently conducted does not conflict with or infringe in any way
with any proprietary right of any third party, which conflict or infringement
could have a material adverse effect on the Company, the Intellectual Property
or the business of the Company. Except as set forth in Schedule 3.16, there is
no claim, suit, action or proceeding pending or threatened against the Company
(i) alleging any such conflict or infringement with any third party's
proprietary rights or (ii) challenging the ownership, use, validity or
enforceability of the Intellectual Property.
(i) No consents, filings or authorizations by or with Governmental
Agencies or third parties in respect of the Listed Intellectual Property are
necessary to consummate the transactions contemplated hereby.
(j) Neither the Seller nor the Company has entered into any material
consent, indemnification, forbearance to sue, settlement agreement or
cross-licensing arrangement with any person relating to the Intellectual
Property or the intellectual property of any third party other than as may be
contained in the license agreements listed in Schedule 3.16. Except as set forth
in Schedule 3.16, the Company is not under any obligation to pay royalties or
similar payments in connection with any license to any of its Affiliates.
(k) No former or present employees, officers or directors of the
Company hold any right, title or interest directly or indirectly, in whole or in
part, in or to any Intellectual Property.
B-24
Section 3.17. Software Products.
Except as specifically set forth on Schedule 3.17, the Company is
the sole and exclusive owner or licensee of:
(a) the Listed Intellectual Property, the Intellectual Property
Licenses and the technology, know-how and processes now used by the Company, or
used in connection with any product now being manufactured and sold by the
Company, in the manner that such product is now being manufactured and sold; and
(b) all rights, title and interest of whatever kind or nature
throughout the world in and to the fully or partially developed computer
software products listed on Schedule 3.16(a) and Schedule 3.16(b), with all
modifications, enhancements and additions thereto, including, without
limitation, all rights in and to all versions thereof and all source code,
object code, manuals and other documentation and related materials thereof
(collectively, the "Software Products"). Without limiting the generality of the
above, the Software Products shall also include all of the Company's related
programs, trade secrets, algorithms and processes relating to the Software
Products or such programs, the Company's copyright in and to each of the
Software Products and all works derivative therefrom, all current, previous,
enhanced and developmental versions of the source and object code and any
variations thereof, all user and programmer documentation, all design
specifications, all maintenance and installation routines, all system
documentation (including all flow charts, systems procedures and program
component descriptions), all procedures for modification and preparation for the
release of enhanced versions and all test data available (excluding all
proprietary information of third parties) with respect to the Software Products.
(c) The transactions contemplated hereby will not result in the
termination of any publishing or license agreements with respect to products or
materials incorporated in the Software Products or otherwise alter the Company's
ability to sell the Software Products.
(d) The Software Products are free from any significant software
defect or programming or documentation error, conform to the specifications
thereof, and, with respect to owned Software Products, the applications can be
recreated from their associated source code.
(e) Except as set forth on Schedule 3.17 hereto, the Seller has no
Knowledge of the existence of any bugs or viruses contained in CD-ROMs or in
downloadable files on which the Software Products are distributed which cause
the Software Products to be uninstallable.
Section 3.18. Labor Relations.
Except as set forth on Schedule 3.18, the Company is not a party to
any collective bargaining agreement covering Employees, there are no
controversies or unfair labor practice proceedings pending or, to the Seller's
Knowledge, threatened between the Company and any of its current or former
Employees or any labor or other collective bargaining unit representing any
current or former Employee of the Company that could reasonably be expected to
result in a labor strike, dispute, slow-down or work stoppage or otherwise have
a Material Adverse Effect. To the Seller's Knowledge, except as set forth on
Schedule 3.18, no organizational effort is presently being made or to the
Knowledge of the Seller, threatened by or on behalf of any labor union.
B-25
Section 3.19. Employee Benefits.
(a) Schedule 3.19(a) sets forth all Employee Benefit Plans and all
other employee benefit arrangements or payroll practices, including, without
limitation, any such arrangements or payroll practices providing severance pay,
sick leave, vacation pay, salary continuation for disability, retirement
benefits, deferred compensation, bonus pay, incentive pay, stock options,
hospitalization insurance, medical insurance, life insurance, scholarships or
tuition reimbursements, maintained by the Company or to which the Company is
obligated to contribute for Employees or Former Employees. Each of the employee
benefit plans, practices and arrangements set forth on Schedule 3.19(a) shall
hereafter be referred to as a "Plan" (or "Plans" as the context may require).
(b) Except with respect to any Multiemployer Plan, copies of the
following documents, with respect to each of the Plans as applicable, have been
delivered to Purchaser by the Seller: (i) all plan and related trust documents,
and amendments thereto; (ii) the most recent IRS Form 5500; (iii) the last IRS
determination letter; (iv) summary plan descriptions; and (v) the most recent
actuarial report.
(c) Except as set forth on Schedule 3.19(c), none of the Plans is a
Multiemployer Plan. Neither the Company nor any ERISA Affiliate has incurred any
Liability resulting from a complete or partial withdrawal from any Multiemployer
Plan, and none of them has incurred, or is reasonably likely to incur, any
Liability due to the termination or reorganization of a Multiemployer Plan which
has not been satisfied in full, and to the Knowledge of the Seller, no event has
occurred that would subject the Company or any ERISA Affiliate to any such
liability.
(d) Neither the Company nor any ERISA Affiliate has incurred, or is
reasonably likely to incur, any Liability under Section 4062, 4063 or 4064 of
ERISA to the PBGC or to a trustee appointed under Section 4042 of ERISA with
respect to any Single-Employer Plan, and to the Knowledge of the Seller, no
event has occurred that would subject the Company or any ERISA Affiliate to any
such Liability. All premiums due the PBGC with respect to all Single-Employer
Plans maintained by the Company and its ERISA Affiliates have been timely paid.
Neither the Company nor any ERISA Affiliate has engaged in any transaction
described in Section 4069 of ERISA. Except as set forth on Schedule 3.19(d),
there has been no "reportable event", within the meaning of Section 4043 of
ERISA, with respect to any Single-Employer Plan maintained by the Company or its
ERISA Affiliates which would require the giving of notice to the PBGC. No
Single-Employer Plan maintained by the Company or its ERISA Affiliates has
incurred an accumulated funding deficiency within the meaning of Section 412 of
the Code.
(e) Except with respect to any Multiemployer Plan, each Plan
complies with, and has been established, operated and administered in accordance
with its terms and the requirements of, ERISA, the Code and other applicable
laws.
(f) Except with respect to any Multiemployer Plan, there are no
material pending or, to Seller's Knowledge, threatened claims by, on behalf of
or involving any Plan Administrator or any Plan Trustee (other than routine
claims for benefits).
B-26
(g) Neither the Company nor any ERISA Affiliate has incurred any
liability for any tax or penalty imposed by Section 4975 of the Code or Section
502(i) of ERISA with respect to any Plan.
(h) With respect to each Plan that is a Single-Employer Plan, the
most recent actuarial report prepared by the Plan's actuary, using the actuarial
methods and assumptions contained in such report, fairly presents the fair
market value of the assets of each such Plan and the present value of the
Liabilities in respect of the benefits accrued under each such Plan, and since
the date of such actuarial report there has been no material adverse change in
the funded status of any such Plan after taking into account the additional
accrual of benefits by participants since the date of such actuarial report
through the Closing Date.
(i) Each Plan which is intended to qualify under Section 401(a) of
the Code has received an IRS determination letter concluding that such Plan so
qualifies in form, and no event has occurred and no condition exists that, to
the Seller's Knowledge, would cause such Plan to lose its qualified status.
(j) Except as set forth on Schedule 3.19(j) or as may be required
under Section 4980B of the Code, Section 601 of ERISA or other applicable
foreign, state or local law, the Company does not have any Liability for
post-retirement medical or life insurance benefits or coverage for any Employee
or Former Employee or any dependent of any such employee. The reserve reflected
in the Balance Sheet will be adequate in accordance with GAAP for the payment or
provision of all such benefits.
(k) Except as set forth on Schedule 3.19(k), the consummation of the
transactions contemplated by the Transaction Documents will not result in any
increase in the amount of compensation or benefits or accelerate the vesting or
timing of payment of any compensation or benefits payable by the Company to or
in respect of any Employee or Former Employee or the beneficiary or dependent of
any such employee under any Plan.
(l) All payments (including all employer contributions and employee
contributions with respect to the Employee Benefit Plans) required to have been
made under the Plans or by law (without regard to any waivers granted under
Section 412 of the Code) have been made by the due date thereof (including any
valid extension), and all payments for any period ending on or before the
Closing which are not yet due will have been paid or accrued by the Closing
Date.
Section 3.20. Insurance.
Schedule 3.20(a) sets forth a list of all insurance policies and all
material fidelity bonds or other insurance service contracts (the "Insurance
Policies") providing coverage for the properties or operations of the Company,
the type and amount of coverage, and the expiration dates of the Insurance
Policies. Except as set forth on Schedule 3.20(b), there is no claim by the
Company pending under any of the Insurance Policies as to which coverage has
been questioned, denied or disputed by the underwriters of such policies. All
premiums payable under all Insurance Policies have been paid, and the Company
has otherwise complied in all material respects with the terms and conditions of
all the Insurance Policies. The Insurance Policies are valid and enforceable in
accordance with their terms, are issued by an insurer that is reputable, are in
full force and effect and insure against risk and liabilities customary in the
industry and as required by Legal Requirements and the Contracts. Neither the
Seller nor the Company has received notice from any insurance carrier: (i)
threatening a suspension, revocation, modification or cancellation of any
Insurance Policy or a material increase in any premium in connection therewith,
or (ii) informing Seller that any coverage listed on Schedule 3.20 will or may
not be available in the future on substantially the same terms as now in effect.
B-27
Section 3.21. Litigation.
Except as set forth in Schedule 3.21, there are no claims, actions,
suits, proceedings, labor disputes or investigations pending or to the Seller's
Knowledge threatened before any Governmental Agency brought by or against the
Seller, the Company or any of their respective officers, directors, Employees,
agents or Affiliates involving, affecting or relating to any assets, properties
or operations of the Company or the transactions contemplated by the Transaction
Documents, nor to the Seller's Knowledge is there any Basis for any such action,
suit, proceeding or investigation. Schedule 3.21 sets forth a list and a summary
description of all such pending actions, suits, proceedings, disputes or
investigations. Neither the Company nor any of its assets or properties is
subject to any Order that affects or might affect its assets, properties,
operations, prospects, net income or financial condition or which would or might
interfere with the transactions contemplated by the Transaction Documents.
Section 3.22. Environmental Matters.
Except as set forth on Schedule 3.22, to its Knowledge:
(a) the Company is, and since January 1, 2001 (the "Environmental
Reference Date"), has been in compliance with all Environmental Laws;
(b) the Company has no Liability, whether contingent or otherwise,
under any Environmental Law;
(c) no request for information, notice, Governmental Agency inquiry,
demand letter, notice of violation or alleged violation of, non-compliance or
alleged non-compliance with or any Liability under, any Environmental Law by or
relating to operations or properties of the Company has been received by or
threatened in writing against the Company since the Environmental Reference
Date, or, to Seller's Knowledge, before the Environmental Reference Date;
(d) the Company has not entered into or been subject to, and is not
currently a party or respondent to, any Orders nor are any administrative, civil
or criminal actions, suits, proceedings or investigations pending or, to
Seller's Knowledge, threatened, relating to any Environmental Law affecting the
Company;
(e) the Company has neither expressly nor by operation of law,
assumed or undertaken any Liability, including without limitation any obligation
for Costs of Remediation, of any other Person;
B-28
(f) the Company has not, and the Seller has no Knowledge of any
other Person who has, caused any Release or threatened Release of any Hazardous
Material on, in, under, or from the Leased Property nor does the Seller have
Knowledge of any such Release; and
(g) the Company has not received any written or, to the Seller's
Knowledge, other communication indicating or claiming potential Liability for
Damages or Costs of Remediation with respect to a Release or threatened Release
of any Hazardous Material.
Section 3.23. Tax Matters.
(a) Except as otherwise disclosed in Schedule 3.23(a), (i) the
Company has filed (or joined in the filing of) when due all Tax Returns required
by applicable law to be filed with respect to the Company and all Taxes shown to
be due on such Tax Returns have been paid; (ii) all such Tax Returns were true,
correct and complete as of the time of each such filing; (iii) all Taxes
relating to periods ending on or before the Closing Date owed by the Company
(whether or not shown on any Tax Return) or to which the Company may be liable
under Treasury Regulations ss. 1.1502-6 (or analogous state or foreign
provisions) by virtue of having been a member of any Affiliated Group (or other
group filing on a combined or unitary basis) at any time on or prior to the
Closing Date, if required to have been paid, have been paid (except for Taxes
which are being contested in good faith); (iv) any liability of the Company for
Taxes not yet due and payable, or which are being contested in good faith, has
been provided for on the financial statements of the Company in accordance with
generally accepted accounting principles; (v) there is no action, suit,
proceeding, investigation, audit or claim now pending against, or with respect
to, the Company in respect of any Tax or assessment, nor is any claim for
additional Tax or assessment asserted by any Governmental Agency; (vi) since
January 1, 2001, no claim has been made by any Governmental Agency in a
jurisdiction where the Company does not currently file a Tax Return that it is
or may be subject to Tax by such jurisdiction, nor to the Seller's Knowledge is
any such assertion threatened; (vii) there is no outstanding request for any
extension of time within which to pay any Taxes or file any Tax Returns (viii)
there has been no waiver or extension of any applicable statute of limitations
for the assessment or collection of any Taxes of the Company; (ix) the Company
is not a party to any agreement, whether written or unwritten, providing for the
payment of Taxes, payment for Tax losses, entitlements to refunds or similar Tax
matters; (x) no ruling with respect to Taxes (other than a request for
determination of the status of a qualified pension plan) has been requested by
or on behalf of the Company; and (xi) the Company has withheld and paid all
material Taxes required to be withheld in connection with any amounts paid or
owing to any employee, creditor, independent contractor or other third party.
(b) (i) no property of the Company is "tax-exempt use property"
within the meaning of Section 168(h) of the Code; (ii) the Company is not a
party to any lease made pursuant to former Section 168(f)(8) of the Internal
Revenue Code of 1954; (iii) the Company has not filed any agreement or consent
under Section 341(f) of the Code; (iv) the Seller is not a "foreign person"
within the meaning of Section 1445 of the Code; (v) the Company has not been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code; and (vi) the Company has withheld and paid all
material Taxes required to be withheld in connection with any amounts paid or
owing to any employee, creditor, independent contractor or other third party.
B-29
Section 3.24. Interim Operations.
Since the Balance Sheet Date, the Company has operated only in the
Ordinary Course of Business, and except as set forth in Schedule 3.24 the
Company has not:
(a) suffered any material adverse change in the assets, properties,
business, operations, prospects, net income or financial condition of the
Company or any Basis therefor;
(b) changed its authorized or issued capital stock; granted any
stock option or right to purchase shares of capital stock; issued any security
convertible into such capital stock; or made any Equity Distributions;
(c) incurred or become subject to, or agreed to incur or become
subject to, any material obligation or Liability, except in the Ordinary Course
of Business;
(d) mortgaged or pledged any of its assets, tangible or intangible,
except for Permitted Liens;
(e) sold or transferred or agreed to sell or transfer any of its
assets, or canceled or agreed to cancel any debts or claims except in the
Ordinary Course of Business;
(f) suffered any extraordinary losses or, except in the Ordinary
Course of Business, waived any material rights;
(g) terminated any contract, agreement, license, or other instrument
to which it is a party, except in the Ordinary Course of Business;
(h) increased the rate of compensation payable by it to any
employee, whose compensation is determined other than by multiplying the number
of hours worked by an hourly rate (a "Salaried Employee"), over the rate being
paid or accrued to them as of the Balance Sheet Date;
(i) made or agreed to make any accrual or arrangement for or payment
of bonuses or special compensation of any kind to any of its Salaried Employees;
or general increase in the salary or bonus payable or to become payable by the
Company to any Employee other than Salaried Employees (other than increases
granted to individual employees for merit, length of service, change in position
or responsibility or other reasons applicable to specific Employees and not
generally to a class or group thereof);
(j) entered into any agreement, written or oral, providing for the
employment of any Employee or any severance or termination benefits payable or
to become payable by the Company to any Employee;
(k) taken any action which would have constituted a breach of any
negative covenant of the Seller set forth in Article V or VI if such negative
covenant had applied since the Balance Sheet Date; or
B-30
(l) suffered any shortages of materials or supplies or any casualty
that individually or in the aggregate has had or could reasonably be expected to
have a Material Adverse Effect.
Section 3.25. Brokers.
All negotiations relative to the Transaction Documents and the
transactions contemplated hereby and thereby have been carried on by the Seller
without the intervention of any other Person acting on their behalf in such
manner as to give rise to any valid claim by any such Person against the Company
or Purchaser for a finder's fee, brokerage commission or other similar payment
based on an arrangement with the Seller, with the exception of Baytree Capital
Associates, LLC.
Section 3.26. Product Liability.
Except as disclosed in Schedule 3.26:
(a) to the Company's knowledge (without the requirement of due
inquiry) there has not been during the past six (6) years and there is no
notice, demand, claim, action, suit, inquiry, hearing, proceeding, notice of
violation or investigation of a civil, criminal or administrative nature by or
before any Governmental Agency against or involving any product, substance or
material (collectively, a "Product"), or class of claims or lawsuits involving a
Product manufactured, produced, distributed or sold by or on behalf of the
Company which is pending or, to the Seller's Knowledge (without the requirement
of due inquiry), threatened, on behalf of the ultimate retail purchaser of any
Product, resulting from an alleged defect in design, manufacture, materials or
workmanship of any Product manufactured, produced, distributed or sold by or on
behalf of the Company, or any alleged failure to warn, or from any breach of
express or implied specifications or warranties or representations (a "Product
Claim");
(b) there has not been, nor is there under consideration or
investigation by the Company, any Product recall, rework, retrofit or post-sale
warning (collectively, "Recalls") conducted by or on behalf of the Company
concerning any Products manufactured, produced, distributed or sold by or on
behalf of the Company or, to the Knowledge of the Seller, any Recall conducted
by or on behalf of any entity as a result of any alleged defect in any Product
supplied by the Company; and
(c) there is no Product Claim pending or, to the Seller's Knowledge
threatened, on behalf of a customer of the Company or any Governmental Agency
which individually or in the aggregate has had or could reasonably be expected
to have a Material Adverse Effect.
Section 3.27. Books and Records of the Company.
The books of account, minute books, stock record books, and other
records of the Company, all of which have been made available to the Purchaser,
are complete and correct, accurately reflect in reasonable detail the
transactions to which the Company is a party or by which its properties are
bound in accordance with GAAP and have been maintained in accordance with sound
business practices and the requirements of Section 13(b)(2) of the Securities
Exchange Act (regardless of the fact that the Company is not subject to that
Section), including the maintenance of an adequate system of internal controls.
The minute books of the Company contain accurate and complete records of all
meetings held of, and corporate action taken by, the stockholders, the boards of
directors, and committees of the board of directors of the Company, and no
meeting of any such stockholders, board of directors, or committee has been held
for which minutes have not been prepared and are not contained in such minute
books. At the Closing, all of those books and records will be delivered to the
Purchaser.
B-31
Section 3.28. Suppliers.
Schedule 3.28 lists the ten largest suppliers (measured by dollar
volume) of the Company during the last fiscal year ("Major Suppliers") and the
amount of business done with each Major Supplier in such year. As of the date of
this Agreement, except as set forth on Schedule 3.28, (a) the Company is not
engaged in a material dispute with any Major Supplier, (b) there has been no
material adverse change in the business relationship of the Company with any
Major Supplier since December 31, 2002, and (d) no Major Supplier has threatened
in writing any material modification or change in the business relationship with
the Company.
Section 3.29. Certain Payments.
Since January 1, 2001, neither the Seller nor the Company nor any of
their respective directors, officers, agents, or Employees, or to the Seller's
Knowledge any other Person associated with or acting for or on behalf of the
Seller or the Company, has directly or indirectly (a) made any contribution,
gift, bribe, rebate, payoff, influence payment, kickback, or other payment to
any Person, private or public, regardless of form, whether in money, property,
or services (i) to obtain favorable treatment in securing business, (ii) to pay
for favorable treatment for business secured, (iii) to obtain special
concessions or for special concessions already obtained, for or in respect of
the Company, or (iv) in violation of any Legal Requirement, or (b) established
or maintained any fund or asset that has not been recorded in the books and
records of the Company.
Section 3.30. Accounts .
Schedule 3.30 hereto correctly identifies each bank account,
brokerage account and safety deposit box maintained by or on behalf or for the
benefit of the Company and the name of each person with any power or authority
to act with respect thereto.
Section 3.31. Disclosure.
(a) No representation or warranty of the Seller in this Agreement
omits to state a material fact necessary to make the statements herein or
therein, in light of the circumstances in which they were made, not misleading.
(b) There is no fact known to the Seller that has specific
application to either the Seller or the Company (other than general economic or
industry conditions) and that materially adversely affects or, as far as the
Seller can reasonably foresee, materially threatens the assets, business,
prospects, financial condition, or results of operations of the Company that has
not been set forth in this Agreement or the Schedules hereto.
B-32
Section 3.32. Investment Intent; Status.
The Stock Consideration will be acquired hereunder solely for the
account of the Seller for investment, and not with a view to the resale or
distribution thereof in violation of the Securities Act, subject to the right of
the Seller to sell, assign, transfer or distribute any or all of the Stock
Consideration to any Person which is an Affiliate of the Seller. Seller is an
"accredited investor" within the meaning of Regulation 501 promulgated under the
Securities Act.
Section 3.33. No Change to Business.
Since the date of the Balance Sheet, there has been no material
change to the conduct or operation of the Business.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Seller as follows:
Section 4.1. Authority of Purchaser.
The Purchaser is a corporation duly organized, validly existing, and
in good standing under the laws of the State of California. The Purchaser has
full corporate power and authority to execute and deliver the Transaction
Documents, the execution and delivery by Purchaser of the Transaction Documents
and the consummation of the transactions contemplated hereby and thereby have
been duly and validly authorized by all necessary corporate action on the part
of the Purchaser, and this Agreement constitutes, and the other Transaction
Documents when executed and delivered by the parties thereto will constitute,
the legal, valid and binding obligation of the Purchaser enforceable against the
Purchaser in accordance with their terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, moratorium or similar laws from
time to time in effect which affect creditors' rights generally, and by legal
and equitable limitations on the enforceability of specific remedies. The
Purchaser has the requisite corporate power and authority to own its properties
and to carry on the business presently being conducted by it.
Section 4.2. No Conflict or Violation.
Neither the execution and delivery of the Transaction Documents by
the Purchaser, nor the consummation or performance of any of the transactions
contemplated hereby or thereby will, directly or indirectly (with or without
notice or lapse of time):
(a) contravene, conflict with, or result in a violation of (i) any
provision of the Articles of Incorporation or By-Laws of the Purchaser, or (ii)
any resolution adopted by the board of directors or the stockholders of the
Purchaser;
(b) contravene, conflict with, or result in a violation of, or give
any Governmental Agency or other Person the right to challenge any of the
transactions contemplated hereby or to exercise any remedy or obtain any relief
under, any Legal Requirement to which the Purchaser may be subject;
B-33
(c) contravene, conflict with, or result in a violation or breach of
any provision of, or give any Person the right to declare a default or exercise
any remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any material contract, lease, or permit of the Purchaser;
or
(d) except for filings under the Securities Act, and the Securities
Exchange Act, require the consent, approval, or authorization of, or
registration or filing with, any Governmental Agency or any other Person on
behalf of Purchaser;
provided, however, that no representation or warranty is made hereby
by the Purchaser with respect to the effect of antitrust laws or regulations.
Section 4.3. Litigation.
There are no actions, causes of action, claims, suits, proceedings
or Orders pending or, to the actual knowledge, after reasonable inquiry, of the
executive officers of the Purchaser, threatened against the Purchaser at law, in
equity, in admiralty or otherwise, or before or by any Governmental Agency,
which seek to restrain or enjoin the consummation of the transactions
contemplated hereby.
Section 4.4. Brokers.
All negotiations relative to this Agreement and the transactions
contemplated hereby have been carried on by the Purchaser without the
intervention of any other Person acting on its behalf in such manner as to give
rise to any valid claim by any such Person against the Seller or its Affiliates
(other than, after the Closing, the Company) for a finder's fee, brokerage
commission or other similar payment based on an arrangement with the Purchaser.
Section 4.5. Stock Consideration.
The issuance of the Stock Consideration to the Seller has been duly
authorized and, when issued in accordance with the terms of this Agreement, will
be validly issued, fully paid and nonassessable.
Section 4.6. SEC Reports and Financial Statements.
The Purchaser has filed with the Securities and Exchange Commission
true and complete copies of the Purchaser's Annual Report on Form 10-KSB for the
year ended June 30, 2003 and all forms, reports, schedules, statements and other
documents required to be filed by the Purchaser under the Securities Act, or the
Securities Exchange Act, from and after the filing thereof (such annual report,
forms, reports, schedules, statements and other documents, including any
financial statements or schedules included therein, the "Purchaser SEC
Documents"). The Purchaser SEC documents, at the time filed, (a) did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (b) complied in all material respects with the applicable
requirements of the Securities Exchange Act, and the Securities Act, as the case
may be, and the applicable rules and regulations promulgated thereunder. There
have not been any amendments to the Purchaser SEC Documents since the initial
filing thereof. The financial statements of the Purchaser contained in the
Purchaser SEC Documents have been prepared in accordance with GAAP applied on a
consistent basis during the period involved (except as may be indicated in the
notes thereto or, in the case of the unaudited statements, as permitted by Rule
10-01 of Regulation S-X promulgated by the Securities and Exchange Commission)
and fairly present (subject, in the case of the unaudited statements, to normal,
recurring audit adjustments) the consolidated financial position of the
Purchaser and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended.
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Section 4.7. Investment Intent; Status.
The Stock will be acquired hereunder solely for the account of the
Purchaser for investment, and not with a view to the resale or distribution
thereof in violation of the Securities Act, subject to the right of the
Purchaser and any such designees to sell, assign, transfer or distribute any or
all of the Stock to any Person which is an Affiliate of the Purchaser. Purchaser
is an "accredited investor" within the meaning of Regulation 501 promulgated
under the Securities Act.
ARTICLE V
CERTAIN COVENANTS OF THE SELLER
The Seller covenants with the Purchaser that from and after the date
hereof through the Closing Date (except as consented to or approved by the
Purchaser in writing):
Section 5.1. Conduct of Business.
The Seller shall cause the Company:
(a) to operate only in the Ordinary Course of Business and to
continue to maintain, in all material respects, its properties in accordance
with present practices in a condition suitable for their current use.
**Confidential portion omitted and filed separately with the Securities and
Exchange Commission**;
(b) to use commercially reasonable efforts to keep available
generally the services of its present officers and Employees, and preserve
generally the present relationships with Persons having business dealings with
it;
(c) not to make any sale, assignment, transfer, abandonment, or
other conveyance of any of its assets or any part thereof;
(d) to keep in full force and effect insurance comparable in amount
and scope to coverage maintained by it (or on behalf of it) on the date hereof;
(e) not to settle, release or forgive any material claim or
litigation or waive any material right; **Confidential portion omitted and filed
separately with the Securities and Exchange Commission**;
(f) not to make, change or revoke, or permit to be made, changed or
revoked, without the consent of the Purchaser, which shall not be unreasonably
withheld, any material election or method of accounting with respect to Taxes;
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(g) not to enter into, or permit to be entered into, without the
consent of the Purchaser any closing or other agreement or settlement with
respect to Taxes affecting or relating to the Company;
(h) not to enter into or amend any Plan and not to grant any
increase in the salary or other compensation of any Employee, except as would
not constitute a breach of Section 3.24;
(i) Except as set forth in Schedule 5.1, not to enter into any
employment Contract with any director, executive officer or Employee of the
Company or make any loan to, or enter into any material transaction of any other
nature with, any director, executive officer or Employee of the Company;
(j) Except as set forth in Schedule 5.1, not to acquire, lease or
dispose or agree to acquire, lease or dispose of any capital assets;
(k) not to change its authorized or issued capital stock; grant any
stock option or right to purchase shares of capital stock; issue any security
convertible into such capital stock; or make any Equity Distribution;
(l) not to incur any Indebtedness other than working capital
borrowings in the Ordinary Course of Business;
(m) not to incur, or suffer to exist, any Lien on the assets of the
Company other than Permitted Liens;
(n) not to take any action that would cause any of the
representations and warranties made by the Seller in this Agreement not to
remain true and correct; and
(o) to inform the Purchaser of the occurrence of any event which
could reasonably be expected to result in a breach of any representation or
warranty contained in Article III.
Section 5.2. Information and Access.
The Seller shall permit and cause the Company to permit
representatives of the Purchaser to have reasonable access during normal
business hours, and in a manner so as not to interfere with the normal
operations of the Company, to all premises, properties, personnel, accountants,
books, records, contracts and documents of the Company.
Section 5.3. Confidentiality Agreements.
At the Closing, the Seller shall assign to the Purchaser the
benefits of all confidentiality agreements, if any, relating to the possible
sale of the Company or any material portion of the assets thereof to the extent
such assignment is not expressly prohibited by the terms of such agreements.
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Section 5.4. Best Efforts.
Upon the terms and subject to the conditions of this Agreement, each
of the parties hereto shall use reasonable best efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable consistent with applicable law to consummate and make effective in
the most expeditious manner practicable the transactions contemplated hereby;
provided, however, that nothing in this covenant or any other provision of this
Agreement or any other Transaction Document shall require the Purchaser to agree
to any divestiture, hold-separate or other similar agreement or requirement.
Section 5.5. No Shop.
(a) The Seller shall not and shall cause the Company not to,
directly or indirectly, through any representative or otherwise, solicit or
entertain offers from, negotiate with or in any manner encourage, discuss,
accept, or consider any proposal of any other Person relating to the acquisition
of the Stock or the Company, its assets or business, in whole or in part,
whether directly or indirectly, through purchase, merger, consolidation, or
otherwise (other than sales of inventory in the ordinary course); and
(b) The Seller shall immediately notify the Purchaser regarding any
contact between the Seller, the Company or their respective representatives and
any other Person regarding any such offer or proposal or any related inquiry.
Section 5.6. Notices of Certain Events.
The Seller shall promptly notify the Purchaser of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement or any other Transaction Document;
(b) any notice or other communication from any Governmental Agency
in connection with the transactions contemplated by this Agreement or any other
Transaction Document; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to or involving or
otherwise affecting the Seller or the Company if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to Section
3.21 or that relate to the consummation of the transactions contemplated by this
Agreement or any other Transaction Document.
Section 5.7. No Duplicates.
Neither the Seller nor any of its Affiliates shall directly or
indirectly retain, use or transfer any copies, duplicates or derivative versions
of any of the Company's databases or mailing lists (whether in postal or e-mail
form) from and after the Closing Date without the Purchaser's prior express
written consent; provided, however that the Seller may continue to use the
Seller's own databases and mailing lists which contain some limited overlap of
information with that contained in the Company's databases and mailing lists, so
long as the Seller does not take any action inconsistent with the Purchaser's
sole rights in the Company's databases and mailing lists.
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ARTICLE VI
CERTAIN COVENANTS AND AGREEMENTS
Section 6.1. Transfer Taxes.
All sales, recording, transfer, stamp, registration, conveyance,
value added, use, or other similar Taxes, duties, excise, governmental charges
or fees (including penalties and interest) imposed as a result of the sale of
the Stock to the Purchaser or the issuance of the Stock Consideration to the
Seller pursuant to this Agreement shall be borne by the Seller. The Purchaser
shall promptly remit any refunds of such items to the Seller. The Seller and the
Purchaser, to the extent required by Legal Requirements, shall prepare and file
all Tax Returns and other documentation on a timely basis with respect to any
such Taxes or fees.
Section 6.2. Obligation to File Tax Returns.
The Seller shall cause to be prepared and filed all Tax Returns with
the appropriate federal, state, local and foreign Governmental Agencies relating
to the Company for periods ending on or prior to the Closing Date and shall pay
all Taxes due with respect to such Tax Returns. The Purchaser shall cause to be
prepared and filed all Tax Returns required to be filed by the Company for
periods after to the Closing Date and shall pay all Taxes due with respect to
such Tax Returns.
Section 6.3. Certain Provisions Relating to Consents.
The Seller shall use commercially reasonable efforts prior to and
after the Closing Date to obtain all consents that are required in connection
with the transactions contemplated by this Agreement and the other Transaction
Documents. The Seller shall not obtain any consent that will affect the
Purchaser or the Company to the economic detriment of either, including any
modification of any Contract, Lease or Permit. The Purchaser shall cooperate as
reasonably necessary or desirable to secure the third party consents, including,
without limitation, providing to such third party information, including
financial information; provided, however, that neither the Purchaser nor the
Company shall be required to incur any liability or obligation in connection
therewith, other than for the underlying matter for which such consent was
obtained as in effect immediately prior to such consent.
Section 6.4. Nondisclosure; Noncompetition; Non-solicitation.
(a) Except as required by law, from and after the Closing Date, the
Seller shall not use, divulge, furnish or make accessible to anyone any
proprietary, material non-public, confidential or secret information to the
extent relating to the Company (including, without limitation, customer lists,
supplier lists and pricing and marketing arrangements with customers or
suppliers) or the Business, and the Seller shall cooperate reasonably with the
Purchaser in preserving such proprietary, confidential or secret aspects of the
Company and the Business. Notwithstanding the foregoing, nothing in this
Agreement shall prohibit the disclosure of the tax treatment and tax structure,
each as defined in Treasury Regulations Section 1.6011-4, of the transaction
(but no other details about the matters covered by this Agreement, including,
without limitation, the identities of the parties except as may be required by
legal rule, regulation or legal process).
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(b) Prior to the end of the Third Earn-Out Period, Seller shall not
engage in Competitive Business Activities. Subject to Section 6.9, the Seller
shall not, directly or indirectly, for a period of three (3) years from the
Closing Date, (i) solicit for hire or enter into any contractual arrangement
with any Employee without the prior written consent of the Purchaser unless such
Employee has not been employed by the Company or the Purchaser for a period of
two (2) years; or (ii) call on or solicit any of the customers or suppliers of
the Business or make known the names and addresses of such customers or
suppliers or any information relating in any manner to the Business or the
Company's relationships with such customers or suppliers. The Seller agrees that
a violation of this Section will cause irreparable injury to the Purchaser, and
the Purchaser shall be entitled, in addition to any other rights and remedies it
may have at law or in equity, to an injunction enjoining and restraining the
Seller from doing or continuing to do any such violation and any other
violations or threatened violations of this Section.
(c) The Seller acknowledges and agrees that the covenants set forth
in this Section are reasonable and valid in scope and in all other respects. If
any of such covenants is found to be invalid or unenforceable by a final
determination of a court of competent jurisdiction (i) the remaining terms and
provisions hereof shall be unimpaired and (ii) the invalid or unenforceable term
or provision shall be deemed replaced by a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid or
unenforceable term or provision. In the event that, notwithstanding the first
sentence of this paragraph (c), any of the provisions of this Section relating
to scope of the covenants contained therein or the nature of the business
restricted thereby shall be declared by a court of competent jurisdiction to
exceed the maximum restrictiveness such court deems enforceable, such provision
shall be deemed to be replaced herein by the maximum restriction deemed
enforceable by such court.
Section 6.5. Section 338(h)(10) Election.
(a) With respect to the sale of the Stock, in the event that Seller
is unable to obtain assurances from its tax advisors and if so requested by the
Purchaser upon notice to the Seller on or before the Closing Date, the Seller
and the Purchaser shall jointly make a Section 338(h)(10) Election (as
hereinafter defined) in accordance with applicable laws and under any comparable
provision of state, local or foreign law for which a separate election is
permissible and as set forth herein. The Purchaser and the Seller shall take all
necessary steps to properly make a Section 338(h)(10) Election in accordance
with applicable laws and under any comparable provision of state, local or
foreign law for which a separate election is permissible. The Purchaser and the
Seller agree to cooperate in good faith with each other in the preparation and
timely filing of any Tax Returns required to be filed in connection with the
making of such an election, including the exchange of information and the joint
preparation and filing of Form 8023 and related schedules. The Purchaser and the
Seller agree to report the transfers under this Agreement consistent with such
elections and shall take no position contrary thereto unless required to do so
by applicable tax law pursuant to a determination as defined in Section 1313(a)
of the Code.
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(b) The Purchaser shall be responsible for the preparation and
filing of all Section 388 Forms (as hereinafter defined) in accordance with
applicable tax laws and the terms of this Agreement and shall deliver such
Section 338 Forms to the Seller at least 30 days prior to the date such Section
338 Forms are required to be filed. Seller shall execute and deliver to the
Purchaser such documents or forms (including executed Section 338 Forms) as are
requested and are required by any laws in order to properly complete the Section
338 Forms at least 20 days prior to the date such Section 338 Forms are required
to be filed. The Seller shall provide the Purchaser with such information as the
Purchaser reasonably requests in order to prepare the Section 338 Forms by the
later of 30 days after the Purchaser's request for such information or 30 days
prior to the date on which the Purchaser is required to deliver such forms to
the Seller.
(c) The Purchase Price, liabilities of the Company and other
relevant items shall be allocated in accordance with Section 338(b)(5) of the
Code and the Treasury Regulations thereunder. Purchaser shall, at its option,
determine the fair market value of the assets of the Company (the "Valuation").
The Valuation shall be binding on the Purchaser and the Seller unless the Seller
shall, within 10 days of delivery to the Seller of the Valuation, conclude in
good faith that the Valuation is manifestly unreasonable. The Purchaser shall be
under no obligation to have such Valuation prepared by an independent appraiser.
All values contained in the Valuation shall be used by each party in preparing
the forms referred to in Section 6.5(b) above and all other relevant Tax
Returns.
(d) "Section 338 Forms" means all returns, documents, statements,
and other forms that are required to be submitted to any federal, state, county
or other local Tax authority in connection with a Section 338(h)(10) Election.
Section 338 Forms shall include, without limitation, any "statement of section
338 election" and IRS Form 8023 (together with any schedules or attachments
thereto) that are required pursuant to Treas. Regs. Section 1.338-1 or Treas.
Regs. Section 1.338(h)(10)-1 or any successor provisions.
(e) Notwithstanding any other provision of this Agreement to the
contrary, the Seller agrees that any income and gain recognized as a result of,
and in accordance with, the making of the Section 338(h)(10) Election will be
included in the consolidated federal income tax return of the Seller's
consolidated group and any resulting tax liability will be paid by the Seller,
as the common parent of the Seller's consolidated group. The Purchaser agrees
that it will pay and be responsible for, and will indemnify and save the Seller
harmless from, any reasonable costs incurred by the Seller (including but not
limited to costs incurred in connection with the preparation or restatement of
any Tax Return) or Taxes imposed on the Seller by any federal, state or local
Tax authority, in each case resulting from the Purchaser's election to treat the
purchase of the Stock as an asset acquisition under the statutes of any such Tax
authority.
(f) "Section 338(h)(10) Election" means an election described in
Section 338(h)(10) of the Code with respect to Purchaser's acquisition of Shares
pursuant to this Agreement. Section 338(h)(10) Election shall include any
corresponding election under state or local law pursuant to which a separate
election is permissible with respect to Purchaser's acquisition of Shares
pursuant to this Agreement.
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Section 6.6. Ongoing Tax/Audit Cooperation.
(a) If the Closing occurs, the Seller and the Purchaser shall
cooperate fully with each other and make available or cause to be made available
to each other in a timely fashion such Tax data, prior Tax Returns and filings
and other information as may be reasonably required for the preparation by the
Purchaser or the Seller of any Tax Returns, elections, consents or certificates
required to be prepared and filed by the Purchaser or the Seller and any audit
or other examination by any Governmental Agency, or judicial or administrative
proceeding relating to liability for Taxes. Without limiting the generality of
the foregoing, each of the Purchaser and the Seller shall retain copies of all
Tax Returns, supporting work schedules and other records relating to tax periods
or portions thereof ending prior to or including the Closing Date until the
later of (i) the expiration of the statute of limitations for the taxable
periods to which such Tax Returns and other documents relate, without regard to
extensions except for extensions obtained by that party or its Affiliates or
extensions regarding which such party has received written notice from another
party, or (ii) six years following the due date (without extensions) for such
Tax Returns; provided, however, that no party will dispose of its copies without
first notifying the other parties and providing such other parties with a
reasonable period of time to assume possession of such copies. In addition,
without limiting the generality of the foregoing, each party shall make its
personnel and those of its Affiliates reasonably available for deposition and
testimony in any tax controversy or proceeding. The Purchaser shall cooperate
with the Seller to the extent reasonably necessary for the Seller's preparation
of its financial statements and Tax Returns and in the sharing of financial and
accounting information with respect thereto or with respect to any audit,
examination, or other proceeding with respect thereto.
(b) If the Closing occurs, the Seller and the Purchaser shall
cooperate fully with each other and make available or cause to be made available
to each other in a timely fashion such financial data and other information as
may be reasonably required for the preparation by the Purchaser and the Seller
of their year-end audits and Form 10-KSB filings for their fiscal year ended
December 31, 2003 and June 30, 2004, respectively, and any other filings
required to be prepared and filed by the Seller or Purchaser by any Governmental
Agency. Without limiting the generality of the foregoing, the Purchaser and the
Seller shall retain copies of all financial data and other financial records
relating to the Company. The Purchaser and Seller shall cooperate to the extent
reasonably necessary for the preparation of its financial statements and
accounting information with respect thereto or with respect to any audit.
(c) No information or documentation provided pursuant to this
Section 6.6 shall be disclosed by the recipient thereof to any Person except its
accountants and relevant tax authorities or as required by applicable law (in
which case the disclosing party shall consult in good faith with the other party
prior to making any such disclosure).
Section 6.7. Tax Related Covenants.
Without the prior written consent of the Purchaser, neither the
Company nor any of its Subsidiaries shall make or change any election, change an
annual accounting period, adopt or change any accounting method, file any
amended Tax Return, enter into any closing agreement, settle any Tax claim or
assessment relating to the Company or any of its Subsidiaries, surrender any
right to claim a refund of Taxes, consent to any extension or waiver of the
limitation period applicable to any Tax claim or assessment relating to the
Company or any of its Subsidiaries, or take any other similar action relating to
the filing of any Tax Return or the payment of any Tax, if such election,
adoption, change, amendment, agreement, settlement, surrender, consent or other
action would have the effect of increasing the Tax liability of the Company or
any of its Subsidiaries for any period ending after the Closing Date or
decreasing any Tax attribute of the Company or any of its Subsidiaries existing
on the Closing Date.
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Section 6.8. Further Assurances.
Upon the request of the Purchaser at any time after the Closing
Date, the Seller shall forthwith execute and deliver such further instruments of
assignment, transfer, conveyance, endorsement, direction or authorization and
other documents as the Purchaser may reasonably request in order to perfect
title of the Purchaser and its successors and assigns to the Stock or otherwise
to effectuate the purposes of this Agreement.
Section 6.9. Purchaser Conduct of Business.
(a) Purchaser agrees to take all reasonable steps necessary and
required to allow the Company to meet the applicable maximum Earn-Out Payment
for each of the Earn-Out Periods. In furtherance thereof and not in limitation
thereto, except as otherwise agreed to by Seller, the Purchaser, until the
termination of the Third Earn-Out Period, covenants:
(i) to continue to operate the Business and maintain the Company as
a separate subsidiary, allowing it to conduct its business in the ordinary
course and not to materially change its operations, including, but not
limited to, not discontinuing any of the Company's products, services,
business models or development efforts.
(ii) to not take any action which would materially adversely affect
the ability of the Company to earn and realize the Aladdin Revenue,
including, but not limited to, (A) changing pricing or business models,
(B) not properly staffing the Company, in accordance with historical
staffing levels and with current revenue levels, and (C) not providing
sufficient marketing resources or advertising budgets, in accordance with
historical level and with current revenue levels.
(iii) to use its best efforts to preserve the Company's business
organization, sales channel and distribution network, to keep available
the services of the Company's present officers and key employees, to
preserve the good will of those having business relationships with the
Company and to continue its existing relationships with the Company's
lenders, suppliers, customers and key employees.
(b) Seller shall provide notice to Purchaser promptly upon the
occurrence of any breach of this Section 6.9, whereupon the Purchaser shall have
a period of 30 days to correct such breach. In the event the breach is not cured
within such 30 day period, the balance of the Earn-Out Payments not yet earned
during then-current and future Earn-Out Periods shall be deemed earned, and
shall be paid to the Seller immediately.
(c) Notwithstanding anything to the contrary herein, Seller and
Purchaser may, from time to time, agree in writing, to modify the provisions of
this so that it better reflects, in light of changing business circumstances,
the intent of the parties to allow the Company to achieve the maximum amount of
the Earn Out Payment.
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Section 6.10. Management of Seller.
Notwithstanding any other provision in this Agreement or the
Transaction Documents, Purchaser acknowledges that Jonathan Kahn, Darryl Lovato
and Alexandra Gonzalez may continue to provide services to Seller as related to
(a) serving on Seller's Board of Directors, (b) Seller's on-going Securities Act
reporting requirements, (c) management of the assets of the Seller, (d)
**Confidential portion omitted and filed separately with the Securities and
Exchange Commission**, (e) the sale of Seller's Aladdin Enterprise Systems
subsidiary, and (f) distribution of the assets of the Seller (including the
establishment of a trust for the benefit of Seller's stockholders. Purchaser
agrees that no such acts on the part of Jonathan Kahn, Darryl Lovato and
Alexandra Gonzalez shall be deemed to be a breach of this Agreement, any of the
Transaction Documents or a breach of any duty any of the foregoing might owe to
Purchaser or the Company as employees.
Section 6.11. Use of Aladdin Name.
Notwithstanding anything to the contrary contained herein, Seller
may continue to use the name "Aladdin" as part of its corporate name for a
reasonable period of time, as solely determined by the Seller.
Section 6.12. Transfer of Purchaser Products.
On the Closing Date, Purchaser shall assign to the Company,
Purchaser's HiJaak and Net Accelerator software lines for sale by the Company,
along with such other product lines as may be mutually agreed by the parties.
Section 6.13. **Confidential portion omitted and filed separately
with the Securities and Exchange Commission**
ARTICLE VII
CONDITIONS TO SELLER'S OBLIGATIONS
The obligation of the Seller to consummate the transactions
contemplated by this Agreement is subject to the satisfaction (unless waived in
writing by the Seller) of each of the following conditions on or prior to the
Closing Date:
Section 7.1. Representations and Warranties.
The representations and warranties of the Purchaser contained in
this Agreement which are qualified as to materiality shall be true and correct
on and as of the Closing Date as though such representations and warranties were
made anew on and as of the Closing Date, and all other representations and
warranties of the Purchaser contained in this Agreement shall be true and
correct in all material respects on and as of the Closing Date as though such
representations and warranties were made anew on and as of the Closing Date. The
Purchaser shall have delivered to the Seller a certificate of its President or a
Vice President, dated the Closing Date, to the foregoing effect.
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Section 7.2. Compliance with Agreement.
The Purchaser shall have performed and complied with all covenants
to be performed or complied with by it on or prior to the Closing Date. The
Purchaser shall have delivered to the Seller a certificate of its President or a
Vice President, dated the Closing Date, to the foregoing effect.
Section 7.3. No Violation of Orders.
No preliminary or permanent injunction or other order issued by any
court or Governmental Agency, nor any statute, rule, regulation, decree or
executive order promulgated or enacted by any Governmental Agency that declares
this Agreement or any other Transaction Document invalid or unenforceable in any
respect or which prevents the consummation of the transactions contemplated
hereby or thereby shall be in effect; and no action or proceeding before any
court or Governmental Agency, shall have been instituted or threatened by any
Governmental Agency or by any other person or entity, which seeks to prevent or
delay the consummation of the transactions contemplated by this Agreement or any
other Transaction Document or which challenges the validity or enforceability
hereof or thereof.
Section 7.4. Corporate Documents.
The Seller shall have received from the Purchaser certified copies
of the resolutions duly adopted by the board of directors of the Purchaser
approving the execution and delivery of this Agreement and the other Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby, and such resolutions shall be in full force and effect as of the
Closing Date.
Section 7.5. Transaction Documents.
The Purchaser shall have executed and delivered to the Seller an
Escrow Agreement in substantially the form set forth in Exhibit E (the "Escrow
Agreement"), and a Registration Rights Agreement in substantially the form
attached hereto as Exhibit F (the "Registration Rights Agreement").
Section 7.6. Employment Agreements.
The Purchaser shall have agreed to engage Jonathan Kahn and Daryl
Lovato on substantially the terms set forth in those Executive Employment
Agreements set forth as Exhibit G and H.
Section 7.7. Opinion of Counsel.
Seller shall have received an opinion of Niesar & Diamond LLP,
counsel to the Purchaser, in the form of Exhibit I, with such customary changes
and modifications as the Purchaser shall reasonably request in light of the
nature of the transactions contemplated hereby.
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ARTICLE VIII
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligation of the Purchaser to consummate the transactions
contemplated by this Agreement is subject to the satisfaction (unless waived in
writing by the Purchaser) of each of the following conditions on or prior to the
Closing Date:
Section 8.1. Representations and Warranties.
The representations and warranties of the Seller contained in this
Agreement which are qualified as to materiality or Material Adverse Effect shall
be true and correct on and as of the Closing Date as though such representations
and warranties were made anew on and as of the Closing Date (unless such
representations are expressly made as of some other date, in which case they
shall be true and correct as of such date), and all other representations and
warranties of the Seller contained in this Agreement shall be true and correct
in all material respects on and as of the Closing Date as though such
representations and warranties were made anew on and as of the Closing Date
(unless such representations are expressly made as of some other date, in which
case they shall be true and correct as of such date). The Seller shall have
delivered to the Purchaser a certificate of its President or Vice President,
dated the Closing Date, to the foregoing effect.
Section 8.2. Compliance with Agreement.
The Seller shall have performed and complied with all covenants to
be performed or complied with by it on or prior to the Closing Date. The Seller
shall have delivered to the Purchaser a certificate of its President or Vice
President, dated the Closing Date, to the foregoing effect.
Section 8.3. Consents.
All consents, Permits, authorizations, approvals, waivers and
amendments which are listed on Schedule 8.3 hereto shall have been obtained.
Section 8.4. Corporate Documents.
The Purchaser shall have received from the Seller certified copies
of the resolutions duly adopted by the board of directors of the Seller
approving the execution and delivery of this Agreement and the other Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby, and such resolutions shall be in full force and effect as of the
Closing Date.
Section 8.5. Employees.
At least 50% of the persons employed by the Company on the date
first set forth above shall continue to be employed by the Company as of the
Closing Date. Mssrs. Jonathan Kahn and Darryl Lovato shall have agreed to accept
employment by Purchaser on substantially the terms set forth in those Executive
Employment Agreements set forth as Exhibit G and H.
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Section 8.6. Material Adverse Effect.
Since the date of this Agreement, there shall not have occurred (i)
a Material Adverse Effect or (ii) any event which could reasonably be expected
to result in a Material Adverse Effect.
Section 8.7. No Claim Regarding Stock Ownership or Sale Proceeds.
There must not have been made or threatened by any Person any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any Stock of, or any
other voting, equity, or ownership interest in, the Company, or (b) is entitled
to all or any portion of the Purchase Price payable for the Stock.
Section 8.8. Opinion of Counsel.
Purchaser shall have received an opinion of Cyruli Shanks & Zizmor,
LLP, counsel to the Seller, in the form attached as Exhibit J, with such
customary changes and modifications as the Seller shall reasonably request in
light of the nature of the transactions contemplated hereby ("Seller's Opinion
of Counsel").
Section 8.9. No Violation of Orders.
No preliminary or permanent injunction or other order issued by any
court or Governmental Agency, nor any statute, rule, regulation, decree or
executive order promulgated or enacted by any Governmental Agency that declares
this Agreement or any other Transaction Document invalid or unenforceable in any
respect or which prevents the consummation of the transactions contemplated
hereby or thereby shall be in effect; and no action or proceeding before any
court or Governmental Agency, shall have been instituted or threatened by any
Governmental Agency or by any other person or entity, which seeks to prevent or
delay the consummation of the transactions contemplated by this Agreement or any
other Transaction Document or which challenges the validity or enforceability
hereof or thereof.
Section 8.10. Due Diligence.
The Purchaser shall have received all business, legal, accounting
and other due diligence materials requested from the Company and the Seller,
shall have completed the review of said due diligence to its satisfaction, and
such due diligence shall be reasonably satisfactory to the Purchaser in its sole
discretion.
Section 8.11. Transaction Documents.
The Seller shall have executed and delivered to the Purchaser the
Registration Rights Agreement, the Pledge Agreement and the Escrow Agreement.
Section 8.12. Resignations.
The Purchaser shall have received the resignations, effective as of
the Closing Date, of each of the directors of the Company.
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Section 8.13. Options and Warrants.
The Seller shall have caused any and all outstanding options and
warrants to purchase capital stock of the Company or any of its subsidiaries to
have been (i) cancelled in accordance with their terms or (ii) exercised in
accordance with their terms, and in the case of (ii) the Seller shall have
repurchased all shares of its capital stock underlying such exercised options.
Section 8.14. No Liens.
There shall be no outstanding Liens on or in respect of any assets
of the Company or the Business, and the Seller shall have provided evidence of
such absence of Liens to the Purchaser in form acceptable to the Purchaser in
its sole discretion.
Section 8.15. Tax Sharing Agreements.
Any tax sharing agreements among the Company or any Subsidiaries and
any other Person shall have been terminated as of the Closing Date with no
further liability to the Purchaser, the Company or any such Subsidiary.
ARTICLE IX.
THE CLOSING
Section 9.1. The Closing.
The Closing of the transactions contemplated hereby (the "Closing")
shall be held two Business Days after each of the conditions precedent set forth
in Articles VII and VIII have been satisfied or waived by the party entitled to
the benefit thereof and in any event within 35 days following the date first set
forth above (the "Closing Date") or at such other time as the parties may
mutually agree. The Closing shall be held at the offices of Niesar & Diamond
LLP, 90 New Montgomery Street, 9th Floor, San Francisco, CA 94105 or at such
other place as the parties may mutually agree. At the Closing, all of the
transactions provided for in Article II hereof shall be consummated on a
substantially concurrent basis.
Section 9.2. Deliveries by the Seller at the Closing.
At the Closing, the Seller shall deliver, or cause to be delivered,
to the Purchaser, the following items:
(a) the duly executed officer's certificates and certified
resolutions referred to in Sections 8.1, 8.2, and 8.4;
(b) the consents listed on Schedule 8.3;
(c) Seller's Opinion of Counsel;
(d) the resignations referred to in Section 8.12.
(e) the Escrow Agreement, the Pledge Agreement and the Registration
Rights Agreement duly executed by the Seller;
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(f) a certificate or certificates representing the Stock, duly
endorsed in blank for transfer or accompanied by appropriate powers duly
executed in blank; and
(g) all other previously undelivered documents that the Seller is
required to deliver to the Purchaser pursuant to this Agreement.
Section 9.3. Deliveries by the Purchaser at the Closing.
At the Closing, the Purchaser shall deliver, or cause to be
delivered, to the Seller, the following items:
(a) by wire transfer of immediately available funds the amount equal
to one million three hundred fifty thousand Dollars ($1,350,000) (the "Closing
Date Cash Payment");
(b) the originally executed First Note;
(c) the duly executed officer's certificates referred to in Sections
7.1, 7.2, and 7.4;
(d) duly executed and acknowledged transfer tax and other required
tax forms reasonably required by the Seller to consummate the transactions
contemplated hereby, all in the form required by applicable law;
(e) the Escrow Agreement, the Pledge Agreement and the Registration
Rights Agreement duly executed by the Purchaser;
(f) evidence of receipt by the Escrow Agent of the Cash Escrow
Amount and the Second Note; and
(g) all other previously undelivered documents that the Purchaser is
required to deliver to the Seller pursuant to this Agreement.
Section 9.4. Establishment of Escrow.
Immediately upon the Closing, the Purchase shall cause to be
delivered to the Escrow Agent, by wire transfer of immediately available funds,
the remaining amount of the Cash Consideration, constituting $150,000 (the "Cash
Escrow Amount") and the Second Note, to be held in escrow in accordance with the
terms of the Escrow Agreement.
ARTICLE X
INDEMNIFICATION
Section 10.1. Survival.
Except as otherwise set forth in Section 10.2(b), all of the
representations and warranties of the Seller contained in Article III of this
Agreement or in any certificate delivered by the Seller pursuant to this
Agreement shall survive the Closing and continue in full force and effect as
follows: (a) in the case of the representations and warranties of the Seller
contained in Section 3.23 (Tax Matters), until six months after the expiration
of the statute of limitations with respect to the matter to which the claim
relates (including any extension of the statute of limitation consented to by or
on behalf of the Company), (b) in the case of the representations and warranties
of the Seller contained in Section 3.22 (Environmental Matters), until the fifth
anniversary of the Closing Date, and (c) in the case of any other representation
or warranty of the Seller contained in this Agreement and any certificate
delivered by the Seller pursuant to this Agreement pertaining to any of the
Seller's representations and warranties, until the second anniversary of the
Closing Date. Notwithstanding the foregoing, any notice given in accordance with
Section 12.1 of this Agreement claiming an alleged breach of any representation
or warranty hereunder shall without further action extend the survival period
for the representation or warranty alleged to have been breached as applied to
the circumstances set forth in such notice until immediately after the final
resolution of the matter. All of the representations and warranties of the
Purchaser contained in Article IV of this Agreement or in any certificate
delivered by the Purchaser pursuant to this Agreement pertaining thereto shall
survive the Closing and continue in full force and effect until the second
anniversary of the Closing Date.
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Section 10.2. Indemnification Provisions for Benefit of Purchaser.
(a) In the event that the Seller breaches any of its
representations, warranties or covenants contained in this Agreement or in any
certificate delivered by the Seller pursuant hereto and provided that, as to any
claim for breach of representations or warranties, the Purchaser makes a written
claim for indemnification against the Seller within the applicable survival
period, if applicable, then the Seller agrees to indemnify the Purchaser and its
Affiliates from and against all Damages the Purchaser and its Affiliates suffer
resulting from or arising out of such event; provided, however, that the Seller
shall not have any obligation to indemnify the Purchaser from and against any
Damages resulting from the breach of any representation or warranty of the
Seller (as opposed to any covenant of the Seller) contained in Article III of
this Agreement until the Purchaser has suffered aggregate Damages, by reason of
all such breaches in excess of $25,000; provided further that (i) and Seller
shall have no obligation to indemnify the Purchaser for the initial $25,000 in
Damages, and (ii) no claim may be made by Purchaser under this Section 10.2(a)
unless such claim exceeds $10,000 in value. In any event, the maximum amount
that Seller shall be required to pay as to all claims made under this Section
10.2(a) shall be equal to the amount of unpaid Earn-Out Payments as of the date
on which each claim is made.
(b) Without limiting the generality or effect of the foregoing, the
Seller shall indemnify, defend and hold harmless the Company, the Purchaser and
any of their respective Affiliates from and against any and all Damages
resulting from or arising out of any of the following (which indemnification,
defense and hold harmless shall not be subject to any of the limitations set
forth in Section 10.2(a)):
(i) Any claim of any creditor or beneficiary of the Seller or
any of its Affiliates (other than the Company), whether arising
prior to, on or after the Closing Date.
(ii) Pre-Closing Taxes. For purposes of this Agreement,
"Pre-Closing Taxes" shall mean, except to the extent included in the
determination of Adjusted Net Assets, (a) all liability for Taxes of
the Company for tax periods ending prior to the Closing Date; (b)
all liability for Taxes described in Section 6.1; (c) all liability
attributable to any misrepresentation or breach of warranty made by
the Seller in Section 3.23 of this Agreement; (d) all liability for
Taxes attributable to any failure to comply with any of the
covenants or agreements of the Seller or the Company under this
Agreement; and (e) all liability for Taxes of any other person
pursuant to any contractual agreement entered into on or before the
Closing Date.
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Section 10.3. Matters Involving Third Parties.
(a) If any third party notifies the Purchaser (the
"Indemnified Party") with respect to any matter which may give rise
to a claim (other than a Tax Claim) for indemnification against the
Seller (the "Indemnifying Party") under Section 10.2, then the
Indemnified Party shall use reasonable efforts to notify the
Indemnifying Party thereof promptly and in any event within ten days
after receiving any written notice from a third party; provided,
however, that no delay on the part of the Indemnified Party in
notifying the Indemnifying Party shall relieve the Indemnifying
Party from any obligation hereunder unless, and then solely to the
extent that, the Indemnifying Party is actually prejudiced thereby.
(b) Once the Indemnified Party has given notice of the matter
to the Indemnifying Party, the Indemnified Party may, subject to the
Indemnifying Party's rights to assume the defense of such matter
pursuant to paragraph (c) below, defend against the matter in any
manner it deems appropriate.
(c) The Indemnifying Party may at any point in time choose to
assume the defense of all of such matter, in which event:
(i) the Indemnifying Party shall defend the Indemnified
Party against the matter with counsel of its choice reasonably
satisfactory to the Indemnified Party,
(ii) the Indemnified Party may retain separate counsel
at its sole cost and expense (except that the Indemnifying
Party shall be responsible for the fees and expenses of one
separate co-counsel for all Indemnified Parties to the extent
the Indemnified Party is advised, in writing by its counsel,
that either (x) the counsel the Indemnifying Party has
selected has a conflict of interest, or (y) there are legal
defenses available to the Indemnified Party that are different
from or additional to those available to the Indemnifying
Party), and
(iii) the Indemnifying Party shall reimburse the
Indemnified Party for the reasonable costs of defense or
investigation for the period prior to the assumption of the
defense.
(d) Assumption of the defense of any matter by the Indemnifying
Party shall without further action constitute an irrevocable waiver by the
Indemnifying Party of its right to claim at a later date that such third
party action for which the defense was assumed is not a proper matter for
indemnification pursuant to this Article X.
(e) The Indemnified Party shall not consent to the entry of a
judgment or enter into any settlement with respect to any matter which may
give rise to a claim for indemnification without the written consent of
the Indemnifying Party, which consent may not be unreasonably withheld or
delayed; provided, however, that if the Indemnifying Party has failed to
provide indemnification required to be provided pursuant to this Article X
for fifteen days after a request therefor, then the Indemnified Party may
take any such action without the consent of the Indemnifying Party.
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(f) The Indemnifying Party shall not consent to the entry of a
judgment with respect to any matter which may give rise to a claim for
indemnification or enter into any settlement which does not include a
provision whereby the plaintiff or claimant in the matter releases the
Indemnified Party from all liability with respect thereto, without the
written consent of the Indemnified Party (not to be unreasonably withheld
or delayed).
Section 10.4. Certain Additional Provisions Relating to
Indemnification.
(a) Notwithstanding Section 12.11, after the Closing Date, the
indemnification provisions set forth in this Article X shall constitute the sole
and exclusive recourse and remedy available to the Purchaser with respect to the
breach of any representation or warranty contained in this Agreement or in any
certificate delivered pursuant to this Agreement except for actual fraud.
(b) Notwithstanding anything in this Agreement to the contrary, for
purposes of this Article X, in determining the existence of a breach of any
representation, warranty, covenant or agreement and the amount of Damages, no
effect shall be given to any qualification as to materiality or Material Adverse
Effect.
(c) All payments by an Indemnifying Party under Article X shall be
treated as an adjustment to the Purchase Price for all foreign, federal, state
and local income tax purposes.
(d) The Indemnification provided for in this Article X shall survive
any investigation at any time made by or on behalf of the Purchaser or any
knowledge or information that the Purchaser may have.
Section 10.5. Procedures Relating to Tax Claims.
If a claim is made by any Tax authority which, if successful, is
likely to result in an indemnity payment to the Purchaser or any of its
Affiliates pursuant to this Article X, the Purchaser shall notify the Seller of
such claim (a "Tax Claim"), stating the nature and basis of such claim and the
amount thereof, to the extent known. Failure to give such notice shall not
relieve the Seller from any liability which it may have on account of this
indemnification or otherwise, except to the extent that the Seller is materially
prejudiced thereby. The Seller will have the right, at its option, upon timely
notice to the Purchaser, to assume control of any defense of any Tax Claim
(other than a Tax Claim relating solely to Taxes of the Company for a Straddle
Period) with its own counsel, provided, however, such counsel is reasonable
satisfactory to the Purchaser. The Seller's right to control a Tax Claim will be
limited to amounts in dispute which would be paid by the Seller or for which the
Seller would be liable pursuant to this Article X. Costs of such Tax Claims are
to be borne by the Seller unless the Tax Claim relates to taxable periods ending
after the Closing Date, in which event such costs will be fairly apportioned.
The Purchaser and the Company shall cooperate with the Seller in contesting any
Tax Claim, which cooperation shall include the retention and, upon the Seller's
request, the provision of records and information which are reasonably relevant
to such Tax Claim and making employees available on a mutually convenient basis
to provide additional information or explanation of any material provided
hereunder. Notwithstanding the foregoing, the Seller shall neither consent nor
agree (nor cause the Company to consent or agree) to the settlement of any Tax
Claim with respect to any liability for Taxes that may affect the liability for
any state or federal income tax of the Company or any Affiliated Group of which
the Company is a member for any taxable period ending subsequent to the Closing
Date without the prior written consent of the Purchaser, and neither the Seller,
nor any Seller Entity, shall file an amended Tax Return that may affect the
liability for Taxes of the Company without the prior written consent of the
Purchaser. The Purchaser and the Seller shall jointly control all proceedings
taken in connection with any claims for Taxes relating solely to a Straddle
Period of the Company.
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Section 10.6. Purchaser's Indemnification of Seller.
In the event that the Purchaser breaches any of its representations,
warranties or covenants contained in this Agreement or in any certificate
delivered by the Purchaser pursuant hereto and provided that, as to any claim
for breach of representations or warranties, the Seller makes a written claim
for indemnification against the Purchaser within the applicable survival period,
if applicable, then the Purchaser agrees to indemnify the Seller and its
Affiliates from and against all Damages the Seller and its Affiliates suffer
resulting from or arising out of such event; provided, however, that the Seller
shall not have any obligation to indemnify the Purchaser from and against any
Damages resulting from the breach of any representation or warranty of the
Purchaser (as opposed to any covenant of the Purchaser) contained in Article IV
of this Agreement until the Seller has suffered aggregate Damages, by reason of
all such breaches in excess of $25,000; provided further that (i) and Purchaser
shall have no obligation to indemnify the Seller for the initial $25,000 in
Damages, and (ii) no claim may be made by Seller under this Section unless such
claim exceeds $10,000 in value. In any event, the maximum amount that Purchaser
shall be required to pay as to all claims made under this Section shall be the
maximum indemnification amount set forth in Section 10.2(a) for Seller's
indemnification of Purchaser. For the purposes of this Section 10.5, the
representations and warranties of Purchaser hereunder shall survive for a period
of two (2) years after the Closing Date.
ARTICLE XI.
TERMINATION
Section 11.1. Termination.
Anything in this Agreement to the contrary notwithstanding, this
Agreement and the transactions contemplated hereby may be terminated in any of
the following ways at any time before the Closing and in no other manner:
(a) By mutual written consent of the Purchaser and the Seller;
(b) By the Purchaser upon five (5) Business Days notice if, at or
before the Closing Date, satisfaction of any condition set forth in Article VIII
is or becomes impossible (other than through the breach by the Purchaser of any
of its representations or warranties or the failure of the Purchaser to perform
any of its obligations pursuant to this Agreement) and the Purchaser shall not
have waived such condition in writing at or before the Closing Date;
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(c) By the Seller upon five (5) Business Days notice if, at or
before the Closing Date, satisfaction of any condition set forth in Article VII
is or becomes impossible (other than through the breach by the Seller of any of
its representations or warranties or the failure of the Seller to perform any of
its obligations pursuant to this Agreement) and the Seller shall not have waived
such condition in writing at or before the Closing Date;
(d) By the Purchaser or the Seller (if such terminating party is not
then in default of any obligation hereunder), if the Closing has not occurred
within 40 days following the date first set forth above; provided, however, that
such date shall be extended for ten (10) Business Days after any notice given
pursuant to Section 11.1(b) on or prior to such date; and provided that such
date shall be further extended as required to enable Seller to respond in good
faith and in timely fashion to comments from the SEC regarding the preliminary
information statement to be sent to Seller's shareholders advising them of the
transactions contemplated hereby; or
(e) By the Purchaser if the Purchaser has reasonable grounds to
believe that the Seller has violated the terms of Section 5.5.
Section 11.2. Effect of Termination; Termination Fee.
(a) In the event this Agreement is terminated pursuant to Section
11.1, all further obligations of the parties hereunder shall terminate, except
for the obligations set forth in Article X and in Sections 11.2(b), 12.3, 12.4,
and 12.8, and except that nothing in this Section 11.2 shall relieve any party
hereto of any liability for breach of any of the covenants or any of the
representations or warranties contained in this Agreement prior to such
termination.
(b) If (i) this Agreement is terminated pursuant to Section 11.1(e),
and (ii) a Business Combination shall occur within eighteen months after the
date this Agreement is terminated, then the Seller shall immediately, upon
consummation of such Business Combination, pay to the Purchaser in same day
funds all reasonable, documented attorneys', accountants', consultants' and
other out-of-pocket expenses incurred by Purchaser in connection with the
transactions contemplated by this Agreement. For purposes of this Agreement, the
term "Business Combination" means any of the following events: (i) the Company,
directly or indirectly, is acquired by merger or otherwise by any person or
group, including, without limitation, any officer or director or any group which
includes such officer or director as a member (a "Third Party"); (ii) the
Company or the Seller enters into an agreement with a Third Party which
contemplates the acquisition, directly or indirectly, of 30% or more of the
total assets of the Company; (iii) the Company or the Seller enters into a stock
purchase, subscription, merger, consolidation, share exchange or other agreement
with a Third Party which contemplates the acquisition, directly or indirectly,
of 30% or more of the outstanding shares of the Company's capital stock; (iv) a
Third Party directly or indirectly acquires 30% or more of the total assets of
the Company; (v) a Third Party directly or indirectly acquires 30% or more of
the outstanding shares of the Company's capital stock; or (vi) the Company or
the Seller adopts a plan of liquidation relating to 30% or more of the total
assets of the Company.
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ARTICLE XII.
MISCELLANEOUS PROVISIONS
Section 12.1. Notices.
All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given (a) when delivered personally to
the recipient, (b) when sent to the recipient by telecopy (receipt
electronically confirmed by sender's telecopy machine) if during normal business
hours of the recipient, otherwise on the next Business Day, (c) one Business Day
after the date when sent to the recipient by reputable express courier service
(charges prepaid), or (d) seven Business Days after the date when mailed to the
recipient by certified or registered mail, return receipt requested and postage
prepaid. Such notices, demands and other communications shall be sent to the
Seller and to the Purchaser at the addresses indicated below:
If to the Seller: Aladdin Systems Holdings, Inc.
245 Westridge Dr.
Watsonville, CA 95076
Fax: (831) 761-6206
With a copy to: Cyruli Shanks & Zizmor, LLP
(which shall not constitute notice) 420 Lexington Avenue, Suite 2020
New York, New York 10170
212-661-6800
Attn: Paul Goodman, Esq.
212-661-5350 (Fax)
If to the Purchaser: International Microcomputer
Software, Inc.
75 Rowland Way
Novato, CA 94945-5037
Attn: Gordon Landies, President
Fax: (415) 897-2544
With a copy to: Niesar & Diamond LLP
(which shall not constitute notice) 90 New Montgomery Street,
9th Floor
San Francisco, CA 94105
Attn: Gerald V. Niesar, Esq.
Fax: (415) 882-5400
or to such other address as either party hereto may, from time to time,
designate in writing delivered pursuant to the terms of this Section.
Section 12.2. Amendments.
The terms, provisions and conditions of this Agreement may not be
changed, modified or amended in any manner except by an instrument in writing
duly executed by both of the parties hereto.
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Section 12.3. Announcements.
All press releases, notices to customers and suppliers and similar
public announcements prior to or within five days after the Closing Date with
respect to this Agreement and the transactions contemplated by this Agreement
shall be approved by both the Purchaser and the Seller prior to the issuance
thereof; provided that either party may make any public disclosure it believes
in good faith is required by law, regulation or rule of any stock exchange on
which its securities are traded (in which case the disclosing party shall use
reasonable efforts to advise the other party prior to making such disclosure and
to provide the other party a reasonable opportunity to review the proposed
disclosure).
Section 12.4. Expenses.
Except as expressly set forth in this Agreement, each party to this
Agreement shall bear all of its legal, accounting, investment banking, and other
expenses incurred by it or on its behalf in connection with the transactions
contemplated by this Agreement, whether or not such transactions are
consummated.
Section 12.5. Entire Agreement.
This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof, supersedes and is in full
substitution for any and all prior agreements and understandings among them
relating to such subject matter, and no party shall be liable or bound to the
other party hereto in any manner with respect to such subject matter by any
warranties, representations, indemnities, covenants, or agreements except as
specifically set forth herein. The Exhibits and Schedules to this Agreement are
hereby incorporated and made a part hereof and are an integral part of this
Agreement.
Section 12.6. Descriptive Headings.
The descriptive headings of the several sections of this Agreement
are inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.
Section 12.7. Counterparts.
For the convenience of the parties, any number of counterparts of
this Agreement may be executed by any one or more parties hereto, and each such
executed counterpart shall be, and shall be deemed to be, an original, but all
of which shall constitute, and shall be deemed to constitute, in the aggregate
but one and the same instrument.
Section 12.8. Governing Law; Jurisdiction.
(a) This Agreement and the legal relations between the parties
hereto shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts made and performed therein without
regard to principles of conflicts of law.
(b) Any legal action or proceeding with respect to this Agreement
shall be brought in the courts of the State of California or of the United
States of America for the Northern District of California, and, by execution and
delivery of this Agreement, the parties hereto hereby accept for themselves and
in respect of their property, generally and unconditionally, the jurisdiction of
the aforesaid courts. The parties hereto hereby irrevocably waive any objection,
including any objection to the laying of venue or based on the grounds of forum
non conveniens, which any of them may now or hereafter have to the bringing of
any such action or proceeding in such respective jurisdictions.
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Section 12.9. Construction.
The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rule of
strict construction will be applied against any party. Any references to any
federal, state, local or foreign statute or law will also refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise.
Unless the context otherwise requires: (a) a term has the meaning assigned to it
by this Agreement; (b) including means "including but not limited to"; (c) "or"
is disjunctive but not exclusive; (d) words in the singular include the plural,
and in the plural include the singular; and (e) "$" means the currency of the
United States of America.
Section 12.10. Severability.
In the event that any one or more of the provisions contained in
this Agreement or in any other instrument referred to herein, shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, then to
the maximum extent permitted by law, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement or any
other such instrument. Furthermore, in lieu of any such invalid or unenforceable
term or provision, the parties hereto intend that there shall be added as a part
of this Agreement a provision as similar in terms to such invalid or
unenforceable provision as may be possible and be valid and enforceable.
Section 12.11. Specific Performance.
Without limiting or waiving in any respect any rights or remedies of
Purchaser under this Agreement now or hereinafter existing at law or in equity
or by statute, each of the parties hereto shall be entitled to seek specific
performance of the obligations to be performed by the other in accordance with
the provisions of this Agreement.
IN WITNESS WHEREOF, the Seller and the Purchaser have executed and
delivered this Agreement as of the day and year first written above.
SELLER Aladdin Systems Holdings, Inc.
By: /s/ Jonathan Kahn
----------------------------------------
Name: Jonathan Kahn
Title: President
PURCHASER International Microcomputer Software, Inc.
By: /s/ Gordon Landies
----------------------------------------
Name: Gordon Landies
Title: President
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