AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
among:
GRAPHON CORPORATION,
a Delaware corporation;
GRAPHON NES SUB, LLC,
a California limited liability company;
GRAPHON VIA SUB III INC.
a Delaware corporation;
NETWORK ENGINEERING SOFTWARE, INC.,
a California corporation;
and
RALPH WESINGER
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Dated as of December 3, 2004
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TABLE OF CONTENTS
PAGE
SECTION 1. Description of Transaction...........................2
1.1 The Transaction........................................2
1.2 Effect of the Merger...................................2
1.3 Closing................................................2
1.4 Articles of Incorporation; Bylaws; Articles of
Organization; Limited Liability Company Operating
Agreement; Directors and Officers......................3
1.5 Conversion of Shares...................................3
1.6 Company Stock Options..................................5
1.7 Closing of the Company's Transfer Books................5
1.8 Exchange of Certificates; Cardinal Shares; Deposit
into Escrow............................................5
1.9 Dissenting Shares......................................7
1.10 Issuance of Shares to Sierra Patent Group..............7
1.11 Tax Consequences.......................................7
1.12 Further Action.........................................8
SECTION 2. Representations and Warranties of the Company........8
2.1 Due Organization; No Subsidiaries; Etc.................8
2.2 Articles of Incorporation and Bylaws; Records..........8
2.3 Capitalization, Etc....................................9
2.4 Financial Statements..................................10
2.5 Absence of Changes....................................10
2.6 Title to Assets.......................................11
2.7 Bank Accounts; Receivables............................11
2.8 Equipment; Leasehold..................................12
2.9 Intellectual Property.................................12
2.10 Contracts.............................................16
2.11 Liabilities...........................................17
2.12 Compliance with Legal Requirements....................17
2.13 Governmental Authorizations...........................17
2.14 Tax Matters...........................................18
2.15 Employee and Labor Matters; Benefit Plans.............19
i.
2.16 Environmental Matters.................................22
2.17 Insurance.............................................22
2.18 Related-Party Transactions............................22
2.19 Legal Proceedings; Orders.............................23
2.20 Authority; Binding Nature of Agreement................23
2.21 Non-Contravention; Consents...........................23
2.22 Vote Required.........................................24
2.23 Information Statement.................................24
SECTION 3. Representations and Warranties of Parent and
Merger Sub..........................................24
3.1 SEC Filings; Financial Statements.....................24
3.2 Authority; Binding Nature of Agreement................25
3.3 Valid Issuance........................................25
SECTION 4. Certain Covenants of the Company....................25
4.1 Access and Investigation; Cooperation.................25
4.2 Operation of the Company's Business...................26
4.3 Notification; Updates to Disclosure Schedule..........27
4.4 No Negotiation........................................28
4.5 No Interference.......................................29
SECTION 5. Additional Covenants of the Parties.................29
5.1 Filings and Consents..................................29
5.2 Securities Compliance; Blue Sky.......................29
5.3 Company Shareholders' Approval........................29
5.4 Public Announcements..................................30
5.5 Best Efforts..........................................30
SECTION 6. Conditions Precedent to Obligations of Parent
and Merger Subs.....................................30
6.1 Accuracy of Representations...........................30
6.2 Performance of Covenants..............................30
6.3 Shareholder Approval..................................30
6.4 Dissenters' Rights....................................31
ii.
6.5 Consents..............................................31
6.6 Agreements and Documents..............................31
6.7 Resolution of Legal Proceedings and Disputes;
Removal of Liens......................................32
6.8 Financing.............................................32
6.9 Questionnaires........................................32
6.10 No Restraints.........................................32
6.11 No Legal Proceedings..................................33
6.12 No Material Adverse Effect............................33
SECTION 7. Conditions Precedent to Obligations of the
Company.............................................33
7.1 Accuracy of Representations...........................33
7.2 Performance of Covenants..............................33
7.3 No Restraints.........................................33
SECTION 8. Termination.........................................33
8.1 Termination Events....................................33
8.2 Termination Procedures................................34
8.3 Effect of Termination.................................34
SECTION 9. Indemnification, Etc................................34
9.1 Survival of Representations, Etc......................34
9.2 Indemnification.......................................35
9.3 Escrow Fund...........................................36
SECTION 10. Miscellaneous Provisions............................36
10.1 Further Assurances....................................36
10.2 Fees and Expenses.....................................36
10.3 Attorneys' Fees.......................................37
10.4 Notices...............................................37
10.5 Time of the Essence...................................38
10.6 Headings..............................................38
10.7 Counterparts..........................................38
10.8 Governing Law.........................................38
iii.
10.9 Successors and Assigns................................38
10.10Remedies Cumulative; Specific Performance.............38
10.11Waiver................................................38
10.12Amendments............................................39
10.13Severability..........................................39
10.14Parties in Interest...................................39
10.15Entire Agreement......................................39
10.16Construction..........................................39
iv.
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of December 3, 2004, by and among: GRAPHON CORPORATION, a
Delaware corporation ("Parent"); GRAPHON VIA SUB III INC., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub I"); GRAPHON
NES SUB, LLC, a California limited liability company and a wholly owned
subsidiary of Parent ("Merger Sub II" and, together with Merger Sub II, "Merger
Subs"); RALPH WESINGER ("Wesinger"); and NETWORK ENGINEERING SOFTWARE, INC., a
California corporation (the "Company"). Certain other capitalized terms used in
this Agreement are defined in Exhibit A.
RECITALS
A. Upon the terms and subject to the conditions of this Agreement,
Parent, Merger Subs and the Company intend to effect (i) a merger of Merger Sub
I with and into the Company ("Merger I") in accordance with the California
General Corporation Law (the "CGCL") and the Delaware General Corporation Law
(the "DGCL"), and (ii) following the effectiveness of Merger I, a merger of the
Company with and into Merger Sub II in accordance with the CGCL and the
California Beverly-Killea Limited Liability Company Act (the "LLC Act") ("Merger
II," and together with Merger I, the "Transaction"). Upon consummation of the
Transaction, the Company will cease to exist.
B. Parent, Merger Subs and the Company intend that Merger I and Merger
II shall be treated as an integrated transaction and that the Transaction shall
qualify as a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
C. This Agreement has been approved by the respective boards of
directors of Parent, Merger Sub I and the Company and by the sole Member of
Merger Sub II. The board of directors of the Company has approved and determined
to recommend that the shareholders of the Company adopt this Agreement and
approve Merger I.
D. On July 28, 2004, a shareholder of the Company, Crystal Bay Capital,
LLC ("CBC"), the managing member of which is Nick Sprinkel ("Sprinkel," and
together with CBC, the "CBC Parties"), filed a complaint in Superior Court in
the County of Santa Clara, California, case number 104-CV-024028 (as amended,
the "CBC Action") against the Company, Wesinger and Richard Berhorst, a director
of the Company ("Berhorst"). On September 6, 2004, a default was entered against
Wesinger in connection with the CBC Action.
E. Contemporaneously with the execution and delivery of this Agreement,
(i) Parent, CBC and the Company are executing a Settlement Agreement and Release
(the "CBC Release") relating to the CBC Action, which, following execution, will
be placed in escrow and be delivered and become effective upon the Closing (as
defined in Section 1.3) and (ii) Parent is entering into voting agreements with
each of CBC and Wesinger (the "Voting Agreements").
1.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 The Transaction. At the Effective Time of Merger I (as defined in Section
1.3), and upon the terms and subject to the conditions set forth in this
Agreement, Merger Sub I shall be merged with and into the Company, and the
separate existence of Merger Sub I shall cease. The Company shall continue as
the surviving corporation in Merger I ("Surviving Entity I"). Following the
Effective Time of Merger I, upon the terms and subject to the conditions set
forth in this Agreement and in accordance with the CGCL and the LLC Act,
Surviving Entity I will be merged with and into Merger Sub II, and the separate
existence of Surviving Entity I shall cease. Merger Sub II shall continue as the
surviving entity in Merger II (the "Surviving Entity") and shall succeed to and
assume all the rights and obligations of the Company or Surviving Entity I in
accordance with the CGCL and the LLC Act.
1.2 Effect of the Merger. The Merger shall have the effects set forth in this
Agreement and in the applicable provisions of the CGCL and the LLC Act.
1.3 Closing. The consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Cooley Godward LLP,
One Maritime Plaza, 20th Floor, San Francisco, California 94111, at 10:00 a.m.
on a date to be designated by Parent, which shall be no later than 15 days after
the satisfaction or waiver of the last to be satisfied or waived of the
conditions set forth in Section 6 (other than the condition set forth in Section
6.2, satisfaction of which cannot be determined until the Closing) and Sections
7.1 and 7.4 (the "Scheduled Closing Time"). (The date on which the Closing
actually takes place is referred to in this Agreement as the "Closing Date.")
If, at the Scheduled Closing Time, any condition set forth in Section 6 or 7 has
not been satisfied or waived. Parent shall have the right, in its sole
discretion, to extend and delay the Scheduled Closing Time by up to 15 days.
Subject to the provisions of this Agreement, an Agreement of Merger for Merger
I, satisfying the applicable requirements of the CGCL (the "Agreement of
Merger"), shall be duly executed by the Company and concurrently with or as soon
as practicable following the Closing filed with the Secretary of State of the
State of California in accordance with the relevant provisions of the CGCL and a
Certificate of Merger for Merger I, satisfying the applicable requirements of
the DGCL, shall be duly executed by the Company and concurrently with or as soon
as practicable following the Closing filed with the Secretary of State of
Delaware in accordance with the relevant provisions of the DGCL (the time of
such filings with the Secretary of State of the State of California and the
Secretary of State of the State of Delaware (or such later time as may be agreed
in writing by the parties and specified in the Agreement of Merger) being the
"Effective Time of Merger I"). Subject to the provisions of this Agreement, a
Certificate of Merger for Merger II, satisfying the applicable requirements of
the LLC Act (the "Second Certificate of Merger"), shall be duly executed by
Merger Sub II and, following the Effective Time of Merger I, filed with the
Secretary of State of the State of Delaware in accordance with the relevant
provisions of the DGCL and the LLC Act (the time of such filing with the
Secretary of State of the State of Delaware (or such later time as may be agreed
in writing by the parties and specified in the Second Certificate of Merger)
being the "Effective Time of Merger II").
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1.4 Articles of Incorporation; Bylaws; Articles of Organization; Limited
Liability Company Operating Agreement; Directors and Officers.
(a) The directors of Surviving Entity I immediately after the Effective
Time of Merger I shall be the respective individuals who are directors of Merger
Sub I immediately prior to the Effective Time of Merger I. The officers of
Surviving Entity I immediately after the Effective Time of Merger I shall be
the individuals set forth on Exhibit B.
(b) The Operating Agreement of the Surviving Entity immediately after the
Effective Time of Merger II shall be the Operating Agreement of Merger Sub II
immediately prior to the Effective Time of Merger II.
(c) The officers of the Surviving Entity immediately after the Effective
Time of Merger II shall be the respective individuals who are officers of
Surviving Entity I immediately prior to the Effective Time of Merger II. The
Manager of the Surviving Entity after the Effective Time of Merger II shall be
the individual who is the Manager of Merger Sub II immediately prior to the
Effective Time of Merger II.
1.5 Conversion of Shares.
(a) Subject to Sections 1.8(c) and 1.9, at the Effective Time of Merger
I, by virtue of Merger I and without any further action on the part of Parent,
Merger Sub I, the Company or any shareholder of the Company:
(i) each share of Company Common Stock outstanding immediately prior
to the Effective Time shall be converted into a number of shares of the common
stock, par value $0.0001 per share, of Parent (the "Parent Common Stock") equal
to the Per Share Exchange Ratio (as defined in Section 1.5(c)); and
(ii) each share of the common stock (with no par value) of Merger Sub
I outstanding immediately prior to the Effective Time of Merger I shall be
converted into one share of common stock of Surviving Entity I.
(b) If any shares of Company Common Stock outstanding immediately prior to
the Effective Time of Merger I are unvested or are subject to a repurchase
option, risk of forfeiture or other condition under any applicable restricted
stock purchase agreement or other agreement with the Company, then the shares of
Parent Common Stock issued in exchange for such shares of Company Common Stock
will also be unvested and subject to the same repurchase option, risk of
forfeiture or other condition, and the certificates representing such shares of
Parent Common Stock may accordingly be marked with appropriate legends.
(c) The Per Share Exchange Ratio is the quotient obtained by dividing the
Net Share Consideration by 80,142. For purposes of this calculation:
(i) "Net Share Consideration" is equal to Gross Share Consideration
less the Expense Shares and less the Sierra Shares.
(ii) "Gross Share Consideration" is equal to 10,000,000 shares of
Parent Common Stock;
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(iii) "Expense Shares" is equal to the quotient obtained by dividing
the Aggregate Company Expense and Liability Amount by $0.27;
(iv) The "Aggregate Company Expense and Liability Amount" is the
aggregate dollar value of the Excess Liability Amount (as defined below) and all
Transaction-Related Expenses (as defined in Section 10.2) incurred by the
Company relating to services performed before the Closing Date. In order to
calculate the aggregate dollar value of all Transaction-Related Expenses, the
Company shall include an estimate of the Aggregate Company Expense Amount in the
Information Statement and provide to Parent, no later than one business day
prior to the Scheduled Closing Date, a written accounting of all Company
expenses included in the Aggregate Company Expense and Liability Amount,
together with appropriate supporting documentation of such expenses and a good
faith estimate of expenses to be incurred from the date of such accounting until
the Closing Date (the "Aggregate Company Expense Amount Notice").
(A) To the extent the Company incurs additional Transaction-Related
Expenses relating to services performed on or after the Closing Date (the
"Additional Company Expenses"), Parent is expressly authorized to treat the
aggregate value of such Additional Company Expenses as Damages for which Parent
shall be indemnified pursuant to the terms of Section 9.
(B) To the extent that, after the Closing, Parent or the Company
owes any Transaction-Related Expenses of the Company relating to services
performed before the Closing Date and that were not accounted for in the
Aggregate Company Expense Amount Notice, Parent is expressly authorized to treat
an amount equal to two times the aggregate value of such unpaid
Transaction-Related Expenses as Damages for which Parent shall be indemnified
pursuant to the terms of Section 9.
(v) "Excess Liability Amount" is equal to the aggregate value of all
amounts owed by NES, and all amounts paid by or on behalf of NES before the
Closing, that relate to (A) any Legal Proceeding to which NES is a party, (B)
any judgment entered against NES or under which NES has any liability and (C)
any claim against the Company by, or contractual liability of the Company to,
any third party that would be reflected on a balance sheet prepared in
accordance with GAAP but that is not reflected on the Company's balance sheet as
of October 31, 2004 that is included in the Company Financial Statements (as
defined in Section 2.4); provided, however, that up to $300,000 in the aggregate
relating to the following enumerated items shall be excluded from the Excess
Liability Amount: (1) amounts paid or owed to Cardinal pursuant to the Cardinal
Agreement; (2) amounts paid or owed to Sierra (as defined in Section 1.10) with
respect to fees and expenses accrued by Sierra prior to the Closing; (3) amounts
owed that relate to the judgment lien evidenced by UCC Filing #199828660431, on
which "M. Snow" is listed as the Secured Party; (4) amounts owed that relate to
the judgment lien evidenced by UCC Filing #200126860629, on which "Heritage
Communications of St. Louis" is listed as the Secured Party; (5) amounts paid or
owed to Golf U.S.A. (as defined in Section 6.7(d)) under the Golf U.S.A.
Agreement (as defined in Section 6.7(d)); and (6) up to $25,000 owed to Bruce
Horton ("Horton") in repayment of the outstanding principal balance on a
promissory note issued to Mr. Horton in 1997 (the "Horton Note").
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(vi) "Sierra Shares" is equal to 1,750,000 shares of Parent Common
Stock, issued to Sierra (subject to the terms of Section 1.8) at the Effective
Time of Merger I pursuant to the Sierra Agreement.
1.6 Company Stock Options. Parent will not assume any stock options or other
securities representing the right to acquire shares of the Company's capital
stock, whether vested or unvested, in connection with Merger I.
1.7 Closing of the Company's Transfer Books. At the Effective Time of Merger
I, holders of certificates representing shares of the Company's Common Stock
that were outstanding immediately prior to the Effective Time of Merger I (the
"Holders") shall cease to have any rights as shareholders of the Company, and
the stock transfer books of the Company shall be closed with respect to all
shares of such capital stock outstanding immediately prior to the Effective Time
of Merger I. No further transfer of any such shares of the Company's capital
stock shall be made on such stock transfer books after the Effective Time of
Merger I. If, after the Effective Time of Merger I, a valid certificate
previously representing any of such shares of the Company's capital stock (a
"Company Stock Certificate") is presented to Surviving Entity I or to the
Surviving Entity or Parent, such Company Stock Certificate shall be canceled and
shall be exchanged as provided in Section 1.8. Except as otherwise set forth in
this Agreement, Sierra shall be included in the definition of "Holders" and
shall be treated as a "Holder" for all purposes under this Agreement.
1.8 Exchange of Certificates; Cardinal Shares; Deposit into Escrow.
(a) As soon as practicable after the Effective Time of Merger I, Parent
will send to the Holders (other than Sierra) (i) a letter of transmittal in
customary form and containing such provisions as Parent may reasonably specify
and (ii) instructions for use in effecting the surrender of Company Stock
Certificates in exchange for certificates representing Parent Common Stock. Upon
surrender of a Company Stock Certificate to Parent for exchange, together with a
duly executed letter of transmittal and such other documents as may be
reasonably required by Parent, such Holder shall be entitled to receive in
exchange therefor a certificate representing the number of whole shares of
Parent Common Stock that such Holder has the right to receive pursuant to the
provisions of this Section 1, and the Company Stock Certificate so surrendered
shall be canceled. Until surrendered as contemplated by this Section 1.8, each
Company Stock Certificate shall be deemed, from and after the Effective Time of
Merger I, to represent only the right to receive upon such surrender a
certificate representing shares of Parent Common Stock (and cash in lieu of any
fractional share of Parent Common Stock) as contemplated by this Section 1. If
any Company Stock Certificate has been lost, stolen or destroyed, Parent may, in
its discretion and as a condition precedent to the issuance of any certificate
representing Parent Common Stock, require the owner of such lost, stolen or
destroyed Company Stock Certificate to provide an appropriate affidavit and to
deliver a bond (in such sum as Parent may reasonably direct) as indemnity
against any claim that may be made against Parent, Surviving Entity I or the
Surviving Entity with respect to such Company Stock Certificate.
5
(b) At or as soon as practicable after the Effective Time of Merger I, and
subject to and in accordance with the provisions of Section 9.3, Parent, on
behalf of the Holders, shall take, or cause to be taken, the following actions:
(i) Parent shall withhold from, and not deliver to, the Holders, (A)
certificates representing 1,237,500 shares of Parent Common Stock out of the Net
Share Consideration, representing a pro rata reduction from the number of shares
of Parent Common Stock that each Holder (other than Sierra) would have otherwise
received; and (B) a certificate representing 262,500 Sierra Shares, withheld
from, and not delivered to, Sierra (the 1,500,000 total shares referenced in
this Section 1l.8(b)(i) being referred to as the "Escrow Amount");
(ii) From the Escrow Amount, Parent shall cause to be delivered to
Cardinal, in accordance with the terms of the Cardinal Agreement (as defined in
Section 6.7(c)), a certificate representing 500,000 shares of Parent Common
Stock;
(iii) Parent shall cause to be delivered to the Escrow Agent (as
defined in Section 9.3) certificates representing the remaining 1,000,000 shares
of the Escrow Amount (the "Deposited Shares") which shall be registered in the
name of the Escrow Agent as nominee for the Holders that surrendered their
Company Stock Certificates pursuant to the terms of this Section 1.8. The
Deposited Shares shall be beneficially owned by such Holders, shall be held in
escrow and shall be available to settle certain contingencies as provided in the
Escrow Agreement. To the extent not used for such purpose, such shares shall be
released as provided in the Escrow Agreement; and
(iv) Parent shall withhold from, and not deliver to Wesinger,
certificates representing an additional 1,000,000 shares of Parent Common Stock
out of the Net Share consideration, representing a reduction of 1,000,000 shares
from the number of shares of Parent Common Stock that Wesinger would have
otherwise been entitled to receive (the "Wesinger Escrow Shares"), which shall
be registered in the name of the Escrow Agent as nominee for Wesinger. Such
shares shall be beneficially owned by Wesinger, shall be held in escrow and
shall be available, following recourse to all of the Escrow Amount, to settle
certain contingencies as provided in the Escrow Agreement. To the extent not
used for such a purpose, such shares shall be released as provided in the Escrow
Agreement.
(c) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time of Merger I
shall be paid to a Holder holding an unsurrendered Company Stock Certificate
with respect to the shares of Parent Common Stock represented thereby, and no
cash payment in lieu of any fractional share shall be paid to any such Holder,
until such Holder surrenders such Company Stock Certificate in accordance with
this Section 1.8 (at which time such Holder shall be entitled to receive all
such dividends and distributions and such cash payment).
(d) No fractional shares of Parent Common Stock shall be issued in
connection with Merger I, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any Holder who would
otherwise be entitled to receive a fraction of a share of Parent Common Stock
(after aggregating all fractional shares of Parent Common Stock issuable to such
Holder) shall, upon surrender of such Holder's Company Stock Certificate(s), be
paid in cash the dollar amount (rounded to the nearest whole cent), without
6
interest, determined by multiplying such fraction by the closing price of the
Parent's Common Stock on the OTC-BB on the Closing Date (the "Parent Stock
Price").
(e) Parent, Surviving Entity I and the Surviving Entity shall be entitled
to deduct and withhold from any consideration payable or otherwise deliverable
to any Holder or former Holder pursuant to this Agreement such amounts as
Parent, Surviving Entity I or the Surviving Entity may be required to deduct or
withhold therefrom under the Code or under any provision of state, local or
foreign tax law. To the extent such amounts are so deducted or withheld, such
amounts shall be treated for all purposes under this Agreement as having been
paid to the Person to whom such amounts would otherwise have been paid.
(f) None of Parent, Surviving Entity I and the Surviving Entity shall be
liable to any Holder or former Holder for any shares of Parent Common Stock (or
dividends or distributions with respect thereto), or for any cash amounts,
delivered to any public official pursuant to any applicable abandoned property,
escheat or similar law.
1.9 Dissenting Shares.
(a) Notwithstanding anything to the contrary contained in this Agreement,
any shares of capital stock of the Company that, as of the Effective Time of
Merger I, are or may become "dissenting shares" within the meaning of Section
1300(b) of the CGCL shall not be converted into or represent the right to
receive Parent Common Stock in accordance with Section 1.5 (or cash in lieu of
fractional shares in accordance with Section 1.8(d)), and the holder or holders
of such shares shall be entitled only to such rights as may be granted to such
holder or holders in Chapter 13 of the CGCL; provided, however, that if the
status of any such shares as "dissenting shares" shall not be perfected, or if
any such shares shall lose their status as "dissenting shares," then, as of the
later of the Effective Time of Merger I or the time of the failure to perfect
such status or the loss of such status, such shares shall automatically be
converted into and shall represent only the right to receive (upon the surrender
of the certificate or certificates representing such shares) Parent Common Stock
in accordance with Section 1.5 (and cash in lieu of fractional shares in
accordance with Section 1.8(d)).
(b) The Company shall give Parent (i) prompt notice of any written demand
received by the Company prior to the Effective Time of Merger I to require the
Company to purchase shares of capital stock of the Company pursuant to Chapter
13 of the CGCL and of any other demand, notice or instrument delivered to the
Company prior to the Effective Time pursuant to the CGCL and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
any such demand, notice or instrument. The Company shall not make any payment or
settlement offer prior to the Effective Time with respect to any such demand
unless Parent shall have consented in writing to such payment or settlement
offer.
1.10 Issuance of Shares to Sierra Patent Group. Pursuant to a Contingency Fee
Agreement by and between the Company and Sierra Patent Group ("Sierra") dated
July 1, 2004 (the "Sierra Agreement"), at the Closing, Sierra shall be issued
the Sierra Shares.
1.11 Tax Consequences. For federal income tax purposes, the Transaction is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations. Each party to this Agreement acknowledges
7
that it is responsible for determining the tax consequences of the Transaction
for itself and for its shareholders, and that it has not relied on any other
party to this Agreement, or any Representative of any other such party, in
making such determination.
1.12 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest Surviving Entity I, the Surviving Entity
or Parent with full right, title and possession of and to all rights and
property of Merger Subs and the Company, the officers and directors of Surviving
Entity I, the Surviving Entity and Parent shall be fully authorized (in the name
of Merger Sub, in the name of the Company and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants, to and for the benefit of the
Indemnitees, as follows:
2.1 Due Organization; No Subsidiaries; Etc.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all necessary
power and authority: (i) to conduct its business in the manner in which its
business is currently being conducted; (ii) to own and use its assets in the
manner in which its assets are currently owned and used; and (iii) to perform
its obligations under all Company Contracts.
(b) The Company has not conducted any business under or otherwise used,
for any purpose or in any jurisdiction, any fictitious name, assumed name, trade
name or other name.
(c) The Company is not and has not been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation in
any jurisdiction.
(d) Wesinger and Berhorst are the only members of the Company's board of
directors and no committee of the Company's board of directors has ever been
formed. Wesinger, the Company's President and Secretary, is the Company's only
officer.
(e) The Company has never owned, beneficially or otherwise, any shares or
other securities of, or any direct or indirect equity interest in, any Entity.
The Company has not agreed and is not obligated to make any future investment in
or capital contribution to any Entity. The Company has not guaranteed and is not
responsible or liable for any obligation of any of the Entities in which it owns
or has owned any equity interest.
2.2 Articles of Incorporation and Bylaws; Records. The Company has delivered
to Parent accurate and complete copies of: (a) the Company's articles of
incorporation and bylaws, including all amendments thereto; (b) the stock
records of the Company; and (c) the minutes and other records of the meetings
and other proceedings (including any actions taken by written consent or
otherwise without a meeting) of the shareholders of the Company, the Company's
board of directors and all committees of the Company's board of directors. There
have been no formal meetings or other proceedings of the shareholders of the
Company, the Company's board of directors or any committee of the Company's
board of directors that are not fully reflected in such minutes or other
records. There has not been any violation of any of the provisions of the
8
Company's articles of incorporation or bylaws, and the Company has not taken any
action that is inconsistent in any material respect with any resolution adopted
by the Company's shareholders, the Company's board of directors or any committee
of the Company's board of directors. The books of account, stock records, minute
books and other records of the Company are accurate, up-to-date and complete in
all material respects, and have been maintained in accordance with prudent
business practices.
2.3 Capitalization, Etc.
(a) The authorized capital stock of the Company consists of: 100,000
shares of Common Stock (with no par value), of which 80,142 shares have been
issued and are outstanding as of the date of this Agreement. All of the
outstanding shares of Company Common Stock have been duly authorized and validly
issued, and are fully paid and non-assessable. No repurchase option exists in
favor of the Company with respect to any of such shares. No shares of preferred
stock have been issued or outstanding.
(b) There is no: (i) outstanding subscription, option, call, warrant or
right (whether or not currently exercisable) to acquire any shares of the
capital stock or other securities of the Company; (ii) outstanding security,
instrument or obligation that is or may become convertible into or exchangeable
for any shares of the capital stock or other securities of the Company; (iii)
Contract under which the Company is or may become obligated to sell or otherwise
issue any shares of its capital stock or any other securities; or (iv) to the
best of the knowledge of the Company, condition or circumstance that may give
rise to or provide a basis for the assertion of a claim by any Person to the
effect that such Person is entitled to acquire or receive any shares of capital
stock or other securities of the Company.
(c) All outstanding shares of Company Common Stock have been issued and
granted in compliance with (i) all applicable securities laws and other
applicable Legal Requirements and (ii) all requirements set forth in applicable
Contracts.
(d) The Company has never repurchased, redeemed or otherwise reacquired
any shares of capital stock or other securities of the Company. All securities
so reacquired by the Company were reacquired in compliance with (i) the
applicable provisions of the CGCL and all other applicable Legal Requirements
and (ii) all requirements set forth in applicable restricted stock purchase
agreements and other applicable Contracts.
(e) As of the date of the Information Statement (as defined in Section
5.3) and as of the date the Information Statement is delivered to the Company's
shareholders, each Holder is an "accredited investor" within the meaning of
Regulation D. Each Person that, immediately prior to the Closing, held shares of
Company Common Stock, is resident in the state set forth opposite such Person's
name on Schedule 2.3(e).
(f) The Company has no obligation to issue shares of NES capital stock to
Alan Butler, Douglas Burmingham, Christopher Coley, Catherine Wesinger or any
other Person, and no Person other than the Persons listed on Schedule 2.3(e) has
any claim to any shares of NES capital stock or other ownership interest in NES.
2.4 Financial Statements.
(a) The Company has delivered to Parent the balance sheets of the Company
as of October 31, 2001, 2002, 2003 and 2004, and the income statements,
9
statements of shareholders' equity and statements of cash flows of the Company
for the years ended October 31, 2002, 2003 and 2004, together with the notes
thereto and, if any, all auditors' reports and opinions relating thereto
(collectively, the "Company Financial Statements"):
(b) The Company Financial Statements are accurate and complete in all
material respects and present fairly the financial position of the Company as of
the respective dates thereof and the results of operations and cash flows of the
Company for the periods covered thereby. The Company Financial Statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods covered.
2.5 Absence of Changes. Except as set forth in Part 2.5 of the Disclosure
Schedule, since October 31, 2003:
(a) there has not been any material adverse change in the Company's
business, condition, assets, liabilities, operations, financial performance or
prospects, and, to the best of the knowledge of the Company, no event has
occurred that will, or could reasonably be expected to, have a Material Adverse
Effect on the Company;
(b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of the Company's assets;
(c) the Company has not declared, accrued, set aside or paid any dividend
or made any other distribution in respect of any shares of capital stock, and
has not repurchased, redeemed or otherwise reacquired any shares of capital
stock or other securities;
(d) the Company has not sold, issued or authorized the issuance of (i) any
capital stock or other security, (ii) any option or right to acquire any capital
stock or any other security or (iii) any instrument convertible into or
exchangeable for any capital stock or other security;
(e) there has been no amendment to the Company's articles of incorporation
or bylaws, and the Company has not effected or been a party to any Acquisition
Transaction, recapitalization, reclassification of shares, stock split, reverse
stock split or similar transaction;
(f) the Company has not formed any subsidiary or acquired any equity
interest or other interest in any other Entity;
(g) the Company has not made any capital expenditure which, when added to
all other capital expenditures made on behalf of the Company since October 31,
2003 exceeds $10,000;
(h) the Company has not (i) entered into or permitted any of the assets
owned or used by it to become bound by any Contract or (ii) amended or
prematurely terminated, or waived any material right or remedy under, any such
Contract;
(i) the Company has not (i) acquired, leased or licensed any right or
other asset from any other Person, (ii) sold or otherwise disposed of, or leased
or licensed, any right or other asset to any other Person or (iii) waived or
relinquished any right;
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(j) the Company has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or other
indebtedness;
(k) the Company has not made any pledge of any of its assets or otherwise
permitted any of its assets to become subject to any Encumbrance;
(l) the Company has not (i) lent money to any Person or (ii) incurred or
guaranteed any indebtedness for borrowed money;
(m) the Company has not (i) established or adopted any Employee Benefit
Plan, (ii) paid any bonus or made any profit-sharing or similar payment to, or
increased the amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees or (iii) hired any new employee;
(n) the Company has not changed any of its methods of accounting or
accounting practices in any respect;
(o) the Company has not made any Tax election;
(p) the Company has not commenced or settled any Legal Proceeding;
(q) the Company has not entered into any material transaction or taken any
other material action; and
(r) the Company has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(q)" above.
2.6 Title to Assets.
(a) The Company owns, and has good, valid and marketable title to, all
assets purported to be owned by it, including: (i) all assets reflected on the
Company's balance sheet as of October 31, 2004, which is part of the Company
Financial Statements; (ii) all assets referred to in Part 2.9 of the Disclosure
Schedule and all of the Company's rights under the Contracts identified in Part
2.10 of the Disclosure Schedule; and (iii) all other assets reflected in the
Company's books and records as being owned by the Company. Except as set forth
in Part 2.6(a) of the Disclosure Schedule, all of said assets are owned by the
Company free and clear of any liens or other Encumbrances.
(b) No assets are leased or licensed to the Company.
2.7 Bank Accounts; Receivables.
(a) There are no accounts maintained by or for the benefit of the Company
at any bank or other financial institution.
(b) As of October 31, 2004, the Company has no accounts receivable, notes
receivable or other receivables.
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2.8 Equipment; Leasehold.
(a) All material items of equipment and other tangible assets owned by or
leased to the Company are adequate for the uses to which they are being put, are
in good condition and repair (ordinary wear and tear excepted) and are adequate
for the conduct of the Company's business in the manner in which such business
is currently being conducted. Without limiting the foregoing, each server owned
by or in the possession of the Company is in good condition and repair, and, to
the best of the Company's knowledge, all data stored thereon with respect to the
Company and the Company Patents is complete, retrievable and has not been
modified or corrupted.
(b) The Company does not own any real property or any interest in real
property.
2.9 Intellectual Property.
(a) Part 2.9(a) of the Disclosure Schedule accurately identifies and
describes: (i) each proprietary product or service developed, manufactured,
marketed, or sold by the Company at any time since October 31, 1999 and any
product or service currently under development by the Company; (ii) each item of
Registered IP in which the Company has or purports to have an ownership interest
of any nature (whether exclusively, jointly with another Person or otherwise),
including all Company Patents (as defined in Section 2.9(d)); (iii) the
jurisdiction in which such item of Registered IP has been registered or filed
and the applicable registration or serial number; (iv) any other Person that has
an ownership interest in such item of Registered IP and the nature of such
ownership interest; and (v) each product or service identified in Part 2.9(a)
of the Disclosure Schedule that embodies, utilizes or is based upon or derived
from (or, with respect to products and services under development, that is
expected to embody, utilize or be based upon or derived from) such item of
Registered IP. No Intellectual Property Right or Intellectual Property is
currently, or has been, within the last five years, licensed to the
Company. Other than the eBay License, the Company is not, and within the
last five years has not been, a party to any Contract pursuant to which
any Person has been granted any license under, or otherwise has received
or acquired any right (whether or not currently exercisable) or interest
in, any Company IP.
(b) The Company has provided to Parent a complete and accurate copy of
each standard form of Company IP Contract used by the Company at any time,
including each standard form of: (i) employee agreement containing any
assignment or license of Intellectual Property or Intellectual Property Rights
or any confidentiality provision; (ii) consulting or independent contractor
agreement containing any assignment or license of Intellectual Property or
Intellectual Property Rights or any confidentiality provision; or (iii)
confidentiality or nondisclosure agreement. No Company IP Contract deviates in
any material respect from the corresponding standard form agreement provided to
Parent. The Company is not bound by, and no Company IP is subject to, any
Contract containing any covenant or other provision that in any way limits or
restricts the ability of the Company to use, exploit, assert, or enforce any
Company IP anywhere in the world.
(c) The Company exclusively owns good and valid title and all rights and
interest to and in the Company IP free and clear of any Encumbrances (other than
licenses set forth in Section 2.9(a)(iv)). Without limiting the generality of
the foregoing:
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(i) all documents, instruments and fees necessary to perfect and
maintain the rights of the Company in the Company IP have been validly executed,
delivered, paid and filed in a timely manner with the appropriate Governmental
Body;
(ii) each Person who is or was an employee or independent contractor
of the Company and who is or was involved in the creation or development of any
Company IP has signed a valid and enforceable agreement containing an
irrevocable assignment of Intellectual Property Rights to the Company and
confidentiality provisions protecting the Company IP;
(iii) no Company Employee has any claim, right (whether or not
currently exercisable) or interest to or in any Company IP;
(iv) Wesinger is not: (A) bound by or otherwise subject to any
Contract restricting him from performing his duties for the Company; or (B) in
breach of any Contract with any former employer or other Person concerning
Intellectual Property Rights or confidentiality;
(v) no funding, facilities or personnel of any Governmental Body were
used, directly or indirectly, to develop or create, in whole or in part, any
Company IP;
(vi) the Company holds no proprietary information as a trade secret,
and does not purport to hold any proprietary information as a trade secret;
(vii) the Company has never assigned or otherwise transferred
ownership of, or agreed to assign or otherwise transfer ownership of, any
Intellectual Property Right to any other Person;
(viii) the Company is not now nor has ever been a member or promoter
of, or a contributor to, any industry standards body or similar organization
that could require or obligate the Company to grant or offer to any other
Person any license or right to any Company IP; and
(ix) the Company (A) has not conveyed, assigned, or transferred to
any third party any interest in any Company Patent and has not entered into an
agreement to do so in the future, (B) has never licensed any Company Patent to
any Person (on an exclusive basis or otherwise), other than via the eBay
License, and (C) has never entered into any agreement limiting the Company's
ability to exploit or enforce any Company Patent or under which any Person has
the right to practice or license any Company Patent.
(d) With respect to Company IP:
(i) each patent application and patent in which the Company has or
purports to have an ownership interest (collectively, the "Company Patents") was
filed with the USPTO within one year of the first printed publication, public
use or offer for sale of each invention described in such Company Patent
application or Company Patent on which such application was based;
13
(ii) the Company does not have, or purport to have, any ownership
interest in any foreign patent application or foreign patent. The Company has
not made any filings relating to any foreign patents and does not claim priority
in any foreign patent or foreign patent application;
(iii) all material prior art of which the Company was aware during
the pendency of any application relating to any Company Patent was properly
filed with the patent authorities in the applicable jurisdiction in which such
application was pending;
(iv) all material prior art of which the Company is aware concerning
each pending application relating to any Company Patent as of the Effective
Date has been properly disclosed to the USPTO;
(v) to the knowledge of the Company, no trademark (whether registered
or unregistered, and whether rights are claimed in common law or otherwise) or
trade name owned, used, or applied for by the Company conflicts or interferes
with any trademark (whether registered or unregistered) or trade name owned,
used or applied for by any other Person;
(vi) none of the goodwill associated with or inherent in any
trademark (whether registered or unregistered) in which the Company has or
purports to have an ownership interest has been impaired;
(vii) each item of Company IP that is Registered IP, including each
Company Patent, is and at all times has been in compliance with all Legal
Requirements, and all filings, payments and other actions required to be
made or taken to maintain such item of Company IP in full force and effect
have been made by the applicable deadline and under the proper entity
status; provided, however, to the extent that the Company has become aware
of any inadvertent errors in the making of such filings or payments or the
taking of any other such actions, such errors have been corrected within a
reasonable time after discovery;
(viii) no application for a patent or for a copyright, mask work or
trademark registration or any other type of Registered IP filed by or on behalf
of the Company has been abandoned, allowed to lapse or rejected;
(ix) Part 2.9(d)(viii) of the Disclosure Schedule accurately
identifies and describes each filing, payment, and action that must be made or
taken on or before the date that is 120 days after the date of this Agreement in
order to maintain each such item of Company IP in full force and effect;
(x) the Company has provided to Parent complete and accurate copies
of all applications, correspondence and other material documents related to each
such item of Registered IP; and
(xi) no interference, opposition, reissue, reexamination or other
Proceeding of any nature is or has been pending or, to the best of the knowledge
of the Company, threatened, in which the scope, validity or enforceability of
any Company IP is being, has been or could reasonably be expected to be
contested or challenged.
14
(e) Neither the execution, delivery or performance of any of the
Transactional Agreements nor the consummation of any of the Transactions will,
with or without notice or the lapse of time, result in or give any other Person
the right or option to cause or declare: (i) a loss of, or Encumbrance on, any
Company IP; (ii) the release, disclosure or delivery of any Company IP by or to
any escrow agent or other Person; or (iii) the grant, assignment or transfer to
any other Person of any license or other right or interest under, to or in any
of the Company IP.
(f) Part 2.9(f) of the Disclosure Schedule accurately identifies (and the
Company has provided to Parent a complete and accurate copy of) each letter or
other written or electronic communication or correspondence that has been sent
or otherwise delivered by or to the Company or any Representative of the Company
regarding any actual, alleged or suspected infringement or misappropriation of
any Company IP and provides a brief description of the current status of the
matter referred to in such letter, communication or correspondence.
(g) The Company has never infringed (directly, contributorily, by
inducement or otherwise), misappropriated or otherwise violated any Intellectual
Property Right of any other Person. Without limiting the generality of the
foregoing:
(i) no product, information or service ever manufactured, produced,
distributed, published, used, provided or sold by or on behalf of the Company,
and no Intellectual Property ever owned, used or developed by the Company, has
ever infringed, misappropriated or otherwise violated any Intellectual Property
Right of any other Person;
(ii) no infringement, misappropriation or similar claim or Proceeding
is pending or has been threatened against the Company or against any other
Person who may be entitled to be indemnified, defended, held harmless or
reimbursed by the Company with respect to such claim or Proceeding;
(iii) the Company has never received any notice or other
communication (in writing or otherwise) relating to any actual, alleged or
suspected infringement, misappropriation or violation of any Intellectual
Property Right of another Person;
(iv) the Company is not bound by any Contract to indemnify, defend,
hold harmless or reimburse any other Person with respect to any intellectual
property infringement, misappropriation or similar claim;
(v) the Company has never assumed, or agreed to discharge or
otherwise take responsibility for, any existing or potential liability of
another Person for infringement, misappropriation or violation of any
Intellectual Property Right; and
(vi) no claim or Proceeding involving any Intellectual Property or
Intellectual Property Right licensed to the Company is pending or, to the best
of the knowledge of the Company, has been threatened.
(h) No source code for any Company Software has been delivered, licensed
or made available to any escrow agent or other Person who is not, as of the date
of this Agreement, an employee of the Company. The Company does nothave any duty
or obligation (whether present, contingent or otherwise) to deliver, license or
make available the source code for any Company Software to any escrow agent or
other Person who is not, as of the date of this Agreement, an employee of the
Company. No event has occurred, and no circumstance or condition exists, that
15
(with or without notice or lapse of time) will, or could reasonably be expected
to, result in the delivery, license or disclosure of any source code for any
Company Software to any other Person who is not, as of the date of this
Agreement, an employee of the Company.
2.10 Contracts.
(a) Part 2.10(a) of the Disclosure Schedule identifies each Company
Contract, including all Contracts relating to employees, consultants,
contractors, Intellectual Property, distribution and agency arrangements,
acquisitions, creation of Encumbrances, pledges, guarantees, joint ventures,
partnerships, sales of products, performance of services, Government Contracts
or Government Bids.
(b) The Company has delivered to Parent accurate and complete copies of
all written Contracts identified in Part 2.10(a) of the Disclosure Schedule,
including all amendments thereto. No Company Contract exists that is not in
written form. Each Company Contract is valid and in full force and effect, and,
to the best of the knowledge of the Company, is enforceable by the Company in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
(c) Except as set forth in Part 2.10(c) of the Disclosure Schedule:
(i) the Company has not violated or breached, or committed any
default under, any Company Contract, and, to the best of the knowledge of the
Company, no other Person has violated or breached, or committed any default
under, any Company Contract;
(ii) to the best of the knowledge of the Company, no event has
occurred, and no circumstance or condition exists, that (with or without notice
or lapse of time) will, or could reasonably be expected to, (A) result in a
violation or breach of any of the provisions of any Company Contract, (B) give
any Person the right to declare a default or exercise any remedy under any
Company Contract, (C) give any Person the right to accelerate the maturity or
performance of any Company Contract or (D) give any Person the right to cancel,
terminate or modify any Company Contract;
(iii) since October 31, 2001, the Company has not received any notice
or other communication regarding any actual or possible violation or breach of,
or default under, any Company Contract; and
(iv) the Company has not waived any of its material rights under any
Company Contract.
(d) No Person is renegotiating, or has a right pursuant to the terms of
any Company Contract to renegotiate, any amount paid or payable to the Company
under any Company Contract or any other material term or provision of any
Company Contract.
(e) The Company does not, and has never, entered into, bid for, had any
interest in or been determined to be noncompliant with any Government Contract.
The Company has not made, or participated in any way in, any Government Bid.
Neither the Company nor any of its employees has been debarred or suspended from
doing business with any Governmental Body, and, to the best of the knowledge of
16
the Company, no circumstances exist that would warrant the institution of
debarment or suspension proceedings against the Company or any employee of the
Company. The Company has complied with all applicable regulations and other
Legal Requirements and with all applicable contractual requirements relating to
the placement of legends or restrictive markings on technical data, computer
software and other Intellectual Property. The Company has not made any
disclosure to any Governmental Body pursuant to any voluntary disclosure
agreement.
(f) The Company's Agreement with Catalyst EBA, LLC ("Catalyst"), dated
November 16, 2003, terminated in accordance with its terms four months after the
date thereof and was not extended, either expressly or implicitly, by course of
conduct or otherwise. No transactions resulted from any services provided by
Catalyst, and the Company has no financial or other obligations of any kind to
Catalyst.
2.11 Liabilities. The Company has no accrued, contingent or other liabilities
of any nature, either matured or unmatured (whether or not required to be
reflected in financial statements in accordance with generally accepted
accounting principles, and whether due or to become due), except for: (a)
liabilities identified as such in the "liabilities" column of the balance sheet
dated as of October 31, 2004 that is included in the Company Financial
Statements; and (b) liabilities under the Company Contracts identified in Part
2.10 of the Disclosure Schedule, to the extent the nature and magnitude of such
liabilities can be specifically ascertained by reference to the text of the
disclosure contained in Part 2.10. There are no liabilities of any nature
relating to the Company Patents. Without limiting anything contained in this
Section all claims brought against the Company by Anthony Del Gaudio have been
dismissed with prejudice, and the Company has no liabilities to Mr. Del Gaudio
or otherwise relating to such claims or the settlement thereof.
2.12 Compliance with Legal Requirements. The Company is, and has at all times
since October 31, 1999 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company. Except
as set forth in Part 2.12 of the Disclosure Schedule, since October 31, 1999,
the Company has not received any notice or other communication from any
Governmental Body regarding any actual or possible violation of, or failure to
comply with, any Legal Requirement.
2.13 Governmental Authorizations. Part 2.13 of the Disclosure Schedule
identifies each material Governmental Authorization held by the Company, and the
Company has delivered to Parent accurate and complete copies of all Governmental
Authorizations identified in Part 2.13 of the Disclosure Schedule. The
Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule
are valid and in full force and effect. The Company is, and at all times since
October 31, 1999 has been, in substantial compliance with the terms and
requirements of the respective Governmental Authorizations identified in Part
2.13 of the Disclosure Schedule. Since October 31, 1999, the Company has not
received any notice or other communication from any Governmental Body regarding
(a) any actual or possible violation of or failure to comply with any term or
requirement of any Governmental Authorization or (b) any actual or possible
revocation, withdrawal, suspension, cancellation, termination or modification of
any Governmental Authorization.
17
2.14 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of the Company
with any Governmental Body with respect to any taxable period ending on or
before the Closing Date (the "Company Returns") (i) have been or will be filed
on or before the applicable due date (including any extensions of such due date)
and (ii) have been, or will be when filed, accurately and completely prepared in
compliance with all applicable Legal Requirements. All Taxes due on or before
the Closing Date have been or will be paid on or before the Closing Date. The
Company has delivered to Parent accurate and complete copies of all Company
Returns filed since October 31, 2001.
(b) The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the dates
thereof in accordance with generally accepted accounting principles. The Company
will establish, in the ordinary course of business and consistent with its past
practices, reserves adequate for the payment of all Taxes for the period from
October 31, 2003, through the Closing Date, and the Company will disclose the
dollar amount of such reserves to Parent on or prior to the Closing Date.
(c) No Company Return relating to income Taxes has ever been examined or
audited by any Governmental Body. There have been no examinations or audits of
any Company Return. The Company has delivered to Parent accurate and complete
copies of all audit reports and similar documents (to which the Company has
access) relating to the Company Returns. No extension or waiver of the
limitation period applicable to any of the Company Returns has been granted
(by the Company or any other Person), and no such extension or waiver has been
requested from the Company.
(d) No claim or Proceeding is pending or has been threatened against or
with respect to the Company in respect of any Tax. There are no unsatisfied
liabilities for Taxes (including liabilities for interest, additions to tax and
penalties thereon and related expenses) with respect to any notice of deficiency
or similar document received by the Company with respect to any Tax. There are
no liens for Taxes upon any of the assets of the Company except liens for
current Taxes not yet due and payable. The Company has not been, and the Company
will not be, required to include any adjustment in taxable income for any tax
period (or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of transactions
or events occurring, or accounting methods employed, prior to the Closing.
(e) There is no agreement, plan, arrangement or other Contract covering
any Company Employee that, considered individually or considered collectively
with any other such Contracts, will, or could reasonably be expected to, give
rise directly or indirectly to the payment of any amount that would not be
deductible pursuant to Section 280G or Section 162(m) of the Code. The Company
is not, and has never been, a party to or bound by any tax indemnity agreement,
tax sharing agreement, tax allocation agreement or similar Contract.
2.15 Employee and Labor Matters; Benefit Plans.
(a) Other than Wesinger, the Company has employed no Person since October
31, 1999. Wesinger has received no compensation of any kind (including wages,
salary, commissions, director's fees, fringe benefits, bonuses, profit-sharing
18
payments and other payments or benefits of any type) with respect to services
performed in 2003 and 2004. Wesinger does not participate, and is not eligible
to participate, in any Company Employee Plan, and Wesinger holds no Governmental
Authorization that relates to or is useful in connection with the Company's
business.
(b) No Company Employee is receiving or is scheduled to receive (and no
spouse or other dependent of a Company Employee is receiving or is scheduled to
receive) any benefits (whether from the Company or otherwise) relating to such
Company Employee's employment with the Company.
(c) Wesinger's employment is terminable by the Company at will. The
Company has delivered to Parent accurate and complete copies of all employee
manuals and handbooks, disclosure materials, policy statements and other
materials relating to the employment of Company Employees.
(d) To the best of the knowledge of the Company, Wesinger is not a party
to or bound by any confidentiality agreement, noncompetition agreement or other
Contract (with any Person) that may have an adverse effect on: (A) the
performance by Wesinger of any of his duties or responsibilities to the Company;
or (B) the Company's business or operations.
(e) The Company has not contracted with, or had any obligation to, any
independent contractor since October 31, 1999.
(f) The Company is not a party to or bound by, and the Company has never
been a party to or bound by, any employment agreement or any union contract,
collective bargaining agreement or similar Contract.
(g) The Company is not engaged, and the Company has never been engaged, in
any unfair labor practice of any nature. There has never been any slowdown, work
stoppage, labor dispute or union organizing activity, or any similar activity or
dispute, affecting the Company. There are no actions, suits, claims, labor
disputes or grievances pending or, to the best of the knowledge of the Company,
threatened or reasonably anticipated relating to any labor, safety or
discrimination matters involving any Company Employee, including, without
limitation, charges of unfair labor practices or discrimination complaints.
(h) Part 2.15(h) of the Disclosure Schedule contains an accurate and
complete list as of the date hereof of each Company Employee Plan and each
Company Employee Agreement. The Company does not intend nor has it committed to
establish or enter into any new Company Employee Plan or Company Employee
Agreement, or to modify any Company Employee Plan or Company Employee Agreement
(except to conform any such Company Employee Plan or Company Employee Agreement
to the requirements of any applicable Legal Requirements, in each case as
previously disclosed to Parent in writing or as required by this Agreement).
(i) The Company has delivered to Parent: (i) correct and complete copies
of all documents setting forth the terms of each Company Employee Plan and each
Company Employee Agreement, including all amendments thereto and all related
trust documents; (ii) the three most recent annual reports (Form Series 5500 and
all schedules and financial statements attached thereto), if any, required under
19
ERISA or the Code in connection with each Company Employee Plan; (iii) if the
Company Employee Plan is subject to the minimum funding standards of Section 302
of ERISA, the most recent annual and periodic accounting of Company Employee
Plan assets; (iv) the most recent summary plan description together with the
summaries of material modifications thereto, if any, required under ERISA with
respect to each Company Employee Plan; (v) all material written Contracts
relating to each Company Employee Plan, including administrative service
agreements and group insurance contracts; (vi) all written materials provided to
any Company Employee relating to any Company Employee Plan and any proposed
Company Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events that would result in any liability to the
Company or any Company Affiliate; (vii) all correspondence to or from any
Governmental Body relating to any Company Employee Plan; (viii) all COBRA forms
and related notices; (ix) all insurance policies in the possession of the
Company or any Company Affiliate pertaining to fiduciary liability insurance
covering the fiduciaries for each Company Employee Plan; (x) all discrimination
tests required under the Code for each Company Employee Plan intended to be
qualified under Section 401(a) of the Code for the three most recent plan years;
and (xi) the most recent IRS determination or opinion letter issued with respect
to each Company Employee Plan intended to be qualified under Section 401(a) of
the Code.
(j) The Company and each of the Company Affiliates have performed all
obligations required to be performed by them under each Company Employee Plan
and are not in default or violation of, and the Company has no knowledge of any
default or violation by any other party to, the terms of any Company Employee
Plan, and each Company Employee Plan has been established and maintained
substantially in accordance with its terms and in substantial compliance with
all applicable Legal Requirements, including ERISA and the Code. Any Company
Employee Plan intended to be qualified under Section 401(a) of the Code has
obtained a favorable determination letter (or opinion letter, if applicable) as
to its qualified status under the Code. No "prohibited transaction," within the
meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not
otherwise exempt under Section 408 of ERISA, has occurred with respect to any
Company Employee Plan. There are no claims or Proceedings pending, or, to the
best of the knowledge of the Company, threatened or reasonably anticipated
against any Company Employee Plan or against the assets of any Company Employee
Plan. Each Company Employee Plan can be amended, terminated or otherwise
discontinued after the Closing in accordance with its terms, without liability
to Parent, the Company or any Company Affiliate. There are no audits, inquiries
or Proceedings pending or, to the best of the knowledge of the Company,
threatened by the IRS, DOL, or any other Governmental Body with respect to any
Company Employee Plan. Neither the Company nor any Company Affiliate has ever
incurred any penalty or tax with respect to any Company Employee Plan under
Section 502(i) of ERISA or Sections 4975 through 4980 of the Code. The Company
and each Company Affiliates have made all contributions and other payments
required by and due under the terms of each Company Employee Plan.
(k) Neither the Company nor any Company Affiliate has ever maintained,
established, sponsored, participated in, or contributed to any: (i) Company
Pension Plan subject to Title IV of ERISA; or (ii) "multiemployer plan" within
the meaning of Section (3)(37) of ERISA. Neither the Company nor any Company
Affiliate has ever maintained, established, sponsored, participated in or
contributed to, any Company Pension Plan in which stock of the Company or any
Company Affiliate is or was held as a plan asset. The fair market value of the
assets of each funded Foreign Plan, the liability of each insurer for any
20
Foreign Plan funded through insurance, or the book reserve established for any
Foreign Plan, together with any accrued contributions, is sufficient to procure
or provide in full for the accrued benefit obligations, with respect to all
current and former participants in such Foreign Plan according to the actuarial
assumptions and valuations most recently used to determine employer
contributions to and obligations under such Foreign Plan, and no transaction
contemplated by this Agreement shall cause any such assets or insurance
obligations to be less than such benefit obligations.
(l) No Company Employee Plan provides, or reflects or represents any
liability of the Company or any Company Affiliate to provide, retiree life
insurance, retiree health benefits or other retiree employee welfare benefits to
any Person for any reason, except as may be required by COBRA or other
applicable Legal Requirements. Neither the Company nor any Company Affiliate has
ever represented, promised or contracted (whether in oral or written form) to
any Company Employee (either individually or to Company Employees as a group) or
any other Person that such Company Employee(s) or other person would be provided
with retiree life insurance, retiree health benefit or other retiree employee
welfare benefits, except to the extent required by applicable Legal
Requirements.
(m) Except as expressly required or provided by this Agreement, neither
the execution of this Agreement nor the consummation of the transactions
contemplated hereby will (either alone or upon the occurrence of any additional
or subsequent events) constitute an event under any Company Employee Plan,
Company Employee Agreement, trust or loan that will or may result (either alone
or in connection with any other circumstance or event) in any payment (whether
of severance pay or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in benefits or obligation to fund benefits with
respect to any Company Employee.
(n) The Company and each of the Company Affiliates: (i) are, and at all
times have been, in substantial compliance with all applicable Legal
Requirements respecting employment, employment practices, terms and conditions
of employment and wages and hours, in each case, with respect to Company
Employees, including the health care continuation requirements of COBRA, the
requirements of FMLA, the requirements of HIPAA and any similar provisions of
state law; (ii) have withheld and reported all amounts required by applicable
Legal Requirements or by Contract to be withheld and reported with respect to
wages, salaries and other payments to Company Employees; (iii) are not liable
for any arrears of wages or any taxes or any penalty for failure to comply with
the Legal Requirements applicable of the foregoing; and (iv) are not liable for
any payment to any trust or other fund governed by or maintained by or on behalf
of any Governmental Body with respect to unemployment compensation benefits,
social security or other benefits or obligations for Company Employees. There
are no pending or, to the best of the knowledge of the Company, threatened or
reasonably anticipated claims or Proceedings against the Company or any Company
Affiliate under any worker's compensation policy or long-term disability policy.
(o) To the best of the knowledge of the Company, no shareholder nor any
Company Employee is obligated under any Contract or subject to any judgment,
decree, or order of any court or other Governmental Body that would interfere
with such Person's efforts to promote the interests of the Company or that would
interfere with the business of the Company or any Company Affiliate. The
execution and delivery of this Agreement will not, to the best of the knowledge
21
of the Company, conflict with, result in a breach of the terms, conditions or
provisions of, or constitute a default under, any Contract under which any
shareholder or Company Employee is now bound.
2.16 Environmental Matters. The Company is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by the Company of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. The Company has not received any notice or other
communication (in writing or otherwise), whether from a Governmental Body,
citizens group, employee or otherwise, that alleges that the Company is not in
compliance with any Environmental Law, and, to the best of the knowledge of the
Company, there are no circumstances that may prevent or interfere with the
Company's compliance with any Environmental Law in the future. The Company
currently holds no Governmental Authorizations pursuant to Environmental Laws.
(For purposes of this Section 2.16: (i) "Environmental Law" means any federal,
state, local or foreign Legal Requirement relating to pollution or protection of
human health or the environment (including ambient air, surface water, ground
water, land surface or subsurface strata), including any law or regulation
relating to emissions, discharges, releases or threatened releases of Materials
of Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern; and (ii) "Materials of Environmental
Concern" include chemicals, pollutants, contaminants, wastes, toxic substances,
petroleum and petroleum products and any other substance that is now or
hereafter regulated by any Environmental Law or that is otherwise a danger to
health, reproduction or the environment.)
2.17 Insurance. Since October 31, 1999, no insurance policies of any kind
have been in effect for the benefit of the Company.
2.18 Related-Party Transactions. No Related Party (a) has, and no Related
Party has at any time since October 31, 1999 had, any direct or indirect
interest in any material asset used in or otherwise relating to the business of
the Company; (b) is, or has at any time since October 31, 1999 been, indebted to
the Company; (c) has since October 31, 1999, entered into, or has had any direct
or indirect financial interest in, any material Contract, transaction or
business dealing involving the Company; (d) is competing, or has at any time
since October 31, 1999 competed, directly or indirectly, with the Company; and
(e) has any claim or right against the Company (other than rights under company
Options and rights to receive compensation for services performed as an employee
of the Company). (For purposes of this Section 2.18 each of the following shall
be deemed to be a "Related Party": (i) each individual who is, or who has at any
time since October 31, 1999 been, an officer of the Company; (ii) each member of
the immediate family of each of the individuals referred to in clause "(i)"
above; and (iii) any trust or other Entity (other than the Company) in which any
one of the individuals referred to in clauses "(i)" and "(ii)" above holds (or
in which more than one of such individuals collectively hold), beneficially or
otherwise, a material voting, proprietary or equity interest.)
2.19 Legal Proceedings; Orders.
(a) Except as set forth in Part 2.19(a) of the Disclosure Schedule, there
is no pending Legal Proceeding and no Person has overtly threatened to commence
any Legal Proceeding (i) that involves the Company or any of the assets owned or
used by the Company or any Person whose liability the Company has or may have
retained or assumed, either contractually or by operation of law, or (ii) that
22
challenges, or that may have the effect of preventing, delaying, making illegal
or otherwise interfering with, the Merger, the benefits expected to be realized
by the Parent in the Merger or any of the other transactions contemplated by
this Agreement. To the best of the knowledge of the Company, no event has
occurred, and no claim, dispute or other condition or circumstance exists, that
will, or that could reasonably be expected to, give rise to or serve as a basis
for the commencement of any such Legal Proceeding.
(b) Except as set forth in Part 2.19(b) of the Disclosure Schedule, no
Legal Proceeding has ever been commenced by or has ever been pending against the
Company, including any Legal Proceeding that challenges or challenged the
legality, validity, enforceability or use by the Company of any Company Patent,
an no person has threatened to commence any such Legal Proceeding.
(c) There is no order, writ, injunction, judgment or decree to which the
Company, or any of the assets owned or used by the Company, is subject. No
officer or other employee of the Company is subject to any order, writ,
injunction, judgment or decree that prohibits such officer or other employee
from engaging in or continuing any conduct, activity or practice relating to the
Company's business.
2.20 Authority; Binding Nature of Agreement. The Company has the absolute and
unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement, including full right, power and authority to
convey, assign and transfer the Company Patents in the Transaction; and the
execution, delivery and performance by the Company of this Agreement have been
duly authorized by all necessary action on the part of the Company and its board
of directors. This Agreement constitutes the legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
2.21 Non-Contravention; Consents. Except as set forth in Part 2.21 of the
Disclosure Schedule, neither the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, nor the
consummation of the Merger or any of the other transactions contemplated by this
Agreement, will directly or indirectly (with or without notice or lapse of
time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the Company's articles of incorporation or bylaws or (ii) any
resolution adopted by the Company's shareholders, the Company's board of
directors or any committee of the Company's board of directors;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the transactions
contemplated by this Agreement or to exercise any remedy or obtain any relief
under, any Legal Requirement or any order, writ, injunction, judgment or decree
to which the Company, or any of the assets owned or used by the Company, is
subject;
(c) contravene, conflict with or result in a violation of any of the terms
or requirements of, or give any Governmental Body the right to revoke, withdraw,
suspend, cancel, terminate or modify, any Governmental Authorization that is
23
held by the Company or that otherwise relates to the Company's business or to
any of the assets owned or used by the Company;
(d) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any Company Contract that is or
would constitute a Material Contract, or give any Person the right to (i)
declare a default or exercise any remedy under any such Company Contract, (ii)
accelerate the maturity or performance of any such Company Contract or (iii)
cancel, terminate or modify any such Company Contract; or
(e) result in the imposition or creation of any lien or other Encumbrance
upon or with respect to any asset owned or used by the Company (except for minor
liens that will not, in any case or in the aggregate, materially detract from
the value of the assets subject thereto or materially impair the operations of
the Company).
Except as set forth in Part 2.21 of the Disclosure Schedule, the Company is not
and will not be required to make any filing with or give any notice to, or to
obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement or (y) the consummation of the Merger or any of
the other transactions contemplated by this Agreement.
2.22 Vote Required. The affirmative vote of the holders of a majority of the
shares of Company Common Stock outstanding on the record date for the Company
Shareholders' Approval (the "Required Company Shareholder Vote") is the only
vote of the holders of any class or series of the Company's capital stock
necessary to adopt this Agreement and approve the Merger and the other
transactions contemplated by this Agreement.
2.23 Information Statement. The Information Statement will not, as of the date
of the Information Statement, (a) contain any statement that is inaccurate or
misleading with respect to any material fact or (b) omit to state any material
fact necessary in order to make such information (in the light of the
circumstances under which it is provided) not false or misleading.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Subs represent and warrant to the Company as
follows:
3.1 SEC Filings; Financial Statements.
(a) Parent has made available to the Company, by directing the Company to
the SEC's online EDGAR database, each report, registration statement and
definitive proxy statement filed by Parent with the SEC between January 1, 2002
and the date of this Agreement (the "Parent SEC Documents"). As of the time it
was filed with the SEC (or, if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing): (i) each of the Parent
SEC Documents complied in all material respects with the applicable requirements
of the Securities Act or the Exchange Act (as the case may be); and (ii) none of
the Parent SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) The consolidated financial statements contained in the Parent SEC
Documents: (i) complied as to form in all material respects with the published
24
rules and regulations of the SEC applicable thereto; (ii) were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered, except as may be indicated in the notes to
such financial statements and (in the case of unaudited statements) as permitted
by Form 10-Q of the SEC, and except that unaudited financial statements may not
contain footnotes and are subject to year-end audit adjustments; and (iii)
fairly present the consolidated financial position of Parent and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations of Parent and its subsidiaries for the periods covered thereby.
3.2 Authority; Binding Nature of Agreement. Parent and Merger Subs have the
absolute and unrestricted right, power and authority to perform their
obligations under this Agreement; and the execution, delivery and performance by
Parent and Merger Subs of this Agreement (including the contemplated issuance of
Parent Common Stock in Merger I in accordance with this Agreement) have been
duly authorized by all necessary action on the part of Parent and Merger Subs
and their respective boards of directors or sole member, as applicable. No vote
of Parent's stockholders is needed to approve the Merger. This Agreement
constitutes the legal, valid and binding obligation of Parent, LLC Sub and
Merger Sub, enforceable against them in accordance with its terms, subject to
(i) laws of general application relating to bankruptcy, insolvency and the
relief of debtors and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
3.3 Valid Issuance. Subject to Section 1.5(b), the Parent Common Stock to be
issued in Merger I will, when issued in accordance with the provisions of this
Agreement, be validly issued, fully paid and nonassessable.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY
4.1 Access and Investigation; Cooperation.
(a) During the period from the date of this Agreement through the
Effective Time (the "Pre-Closing Period"), and for an a period of 18 months
following the Effective Time (the "Post-Closing Period"), the Company shall,
and shall cause its Representatives to: (i) provide Parent and Parent's
Representatives with full access to the Company's Representatives, personnel and
assets and to all existing books, records, Tax Returns, work papers and other
documents and information relating to the Company; and (ii) provide Parent and
Parent's Representatives with copies of such existing books, records, Tax
Returns, work papers and other documents and information relating to the
Company, and with such additional financial, operating and other data and
information regarding the Company, as Parent may reasonably request. During the
Pre-Closing Period the Company shall, and shall cause its Representatives and
Affiliates to, use best efforts to provide full cooperation in (I) the
conducting of an audit of the Company by Parent and Parent's Representatives,
and (II) prosecuting and enforcing the Company Patents. Wesinger shall use his
best efforts to provide full cooperation in prosecuting and enforcing the
Company Patents. Neither the Company nor Wesinger shall voluntarily undertake
any course of action that interferes in any way with the rights obtained by
Parent or the Surviving Entity hereunder or otherwise constitutes a violation of
Company's or Wesinger's obligations under this Agreement. Without limiting the
generality of the foregoing, neither the Company nor Wesinger shall contest
Parent's or the Surviving Entity's ownership of or title to the Company Patents.
25
4.2 Operation of the Company's Business. During the Pre-Closing Period:
(a) the Company shall conduct its business and operations in the ordinary
course and in substantially the same manner as such business and operations have
been conducted prior to the date of this Agreement;
(b) the Company shall use reasonable efforts to preserve intact its
current business organization, keep available the services of its current
officers and employees and maintain its relations and good will with all
suppliers, customers, landlords, creditors, employees and other Persons having
business relationships with the Company;
(c) the Company shall keep in full force all insurance policies identified
in Part 2.17 of the Disclosure Schedule;
(d) the Company shall not declare, accrue, set aside or pay any dividend
or make any other distribution in respect of any shares of capital stock, and
shall not repurchase, redeem or otherwise reacquire any shares of capital stock
or other securities (except for shares reacquired from Wesinger at no cost to
the Company);
(e) the Company shall not sell, issue or authorize the issuance of (i) any
capital stock or other security, (ii) any option or right to acquire any capital
stock or other security or (iii) any instrument convertible into or exchangeable
for any capital stock or other security;
(f) the Company shall not amend or permit the adoption of any amendment to
the Company's articles of incorporation or bylaws, or effect or permit the
Company to become a party to any Acquisition Transaction, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(g) the Company shall not form any subsidiary or acquire any equity
interest or other interest in any other Entity;
(h) the Company shall not make any capital expenditure, except for capital
expenditures that, when added to all other capital expenditures made on behalf
of the Company during the Pre-Closing Period, do not exceed $2,000 per month;
(i) the Company shall not (i) enter into, or permit any of the assets
owned or used by it to become bound by, any Contract that is or would constitute
a Material Contract or (ii) amend or prematurely terminate, or waive any
material right or remedy under, any such Contract;
(j) the Company shall not (i) acquire, lease or license any right or other
asset from any other Person, (ii) sell or otherwise dispose of, or lease or
license, any right or other asset to any other Person or (iii) waive or
relinquish any right, except for assets acquired, leased, licensed or disposed
of by the Company pursuant to Contracts that are not Material Contracts;
(k) the Company shall not (i) lend money to any Person or (ii) incur or
guarantee any indebtedness for borrowed money;
26
(l) the Company shall not (i) establish, adopt or amend any Employee
Benefit Plan (except for the sole purpose of eliminating any deferred
compensation arrangement with Wesinger), (ii) pay any bonus or make any
profit-sharing payment, cash incentive payment or similar payment to, or
increase the amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees or (iii) hire any new employee;
(m) the Company shall not change any of its methods of accounting or
accounting practices in any material respect;
(n) the Company shall not make any Tax election;
(o) the Company shall not commence or settle any material Legal
Proceeding;
(p) the Company shall not agree or commit to take any of the actions
described in clauses "(d)" through "(o)" above.
Notwithstanding the foregoing, the Company may take any action described in
clauses "(d)" through "(p)" above if Parent gives its prior written consent to
the taking of such action by the Company, which consent will not be unreasonably
withheld (it being understood that Parent's withholding of consent to any action
will not be deemed unreasonable if Parent determines in good faith that the
taking of such action would not be in the best interests of Parent or would not
be in the best interests of the Company).
4.3 Notification; Updates to Disclosure Schedule.
(a) During the Pre-Closing Period, the Company shall promptly notify
Parent in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this Agreement
and that caused or constitutes an inaccuracy in or breach of any representation
or warranty made by the Company in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises
or exists after the date of this Agreement and that would cause or constitute an
inaccuracy in or breach of any representation or warranty made by the Company in
this Agreement if (A) such representation or warranty had been made as of the
time of the occurrence, existence or discovery of such event, condition, fact or
circumstance or (B) such event, condition, fact or circumstance had occurred,
arisen or existed on or prior to the date of this Agreement;
(iii) any breach of any covenant or obligation of the Company; and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 6 or Section 7
impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(a) requires any change in the Disclosure
Schedule, or if any such event, condition, fact or circumstance would require
27
such a change assuming the Disclosure Schedule were dated as of the date of the
occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company shall promptly deliver to Parent an update to the
Disclosure Schedule specifying such change. No such update shall be deemed to
supplement or amend the Disclosure Schedule for the purpose of (i) determining
the accuracy of any of the representations and warranties made by the Company in
this Agreement or (ii) determining whether any of the conditions set forth in
Section 6 has been satisfied.
4.4 No Negotiation. During the Pre-Closing Period and until the date that is
120 days after the date of this Agreement the Company shall not, and shall
ensure that no Company Representative will directly or indirectly, (i) solicit,
initiate, encourage, induce or facilitate the making, submission or announcement
of any Acquisition Proposal or Acquisition Inquiry or take any action that could
reasonably be expected to lead to an Acquisition Proposal, (ii) furnish any
information regarding the Company to any Person in connection with or in
response to an Acquisition Proposal or Acquisition Inquiry, (iii) engage in
discussions or negotiations with any Person (other than Parent) with respect to
any Acquisition Proposal or Acquisition Inquiry, (iv) approve, endorse or
recommend any Acquisition Proposal or (v) enter into any letter of intent or
similar document or any Contract with any Person (other than Parent)
contemplating or otherwise relating to any Acquisition Transaction. Without
limiting the generality of the foregoing, the Company acknowledges and agrees
that any action inconsistent with any of the provisions set forth in the
preceding sentence taken by any Representative of the Company, whether or not
such Representative is purporting to act on behalf of the Company, shall be
deemed to constitute a breach of this Section 4.4 by the Company.
(a) The Company shall promptly (and in no event later than 24 hours after
receipt of any Acquisition Proposal, Acquisition Inquiry or request for
information) advise Parent orally and in writing of any Acquisition Proposal,
Acquisition Inquiry or request for information relating to the Company
(including the identity of the Person making or submitting such Acquisition
Proposal, Acquisition Inquiry or request, and the terms thereof) that is made or
submitted by any Person during the Pre-Closing Period. The Company shall keep
Parent fully informed with respect to the status of any such Acquisition
Proposal, Acquisition Inquiry or request and any modification or proposed
modification thereto.
(b) The Company shall, and shall cause each of its Representatives to,
immediately cease and cause to be terminated any existing discussions with any
Person (other than discussions with Parent) that relate to any Acquisition
Proposal or Acquisition Inquiry.
(c) The Company agrees not to release or permit the release of any Person
from, and not to waive or permit the waiver of any provision of, any
confidentiality or similar agreement to which the Company is a party or under
which the Company has any rights or that relates in any way to the Company or to
any confidential information of or regarding the Company. The Company shall
cause each such agreement to be enforced, to the extent requested by Parent. The
Company also shall promptly request each Person that has executed, on or after
October 31, 1999, a confidentiality agreement under which the Company has any
rights to return all confidential information ever furnished to such Person with
respect to the Company.
4.5 No Interference. The Company shall not undertake, and shall take all
necessary actions to prevent its Representatives from undertaking, any course of
action that, to the knowledge of the Company, interferes in any way with the
28
rights to be obtained by Parent, Surviving Entity I and the Surviving Entity to
the Company Patents hereunder or otherwise constitutes a violation of the
Company's obligations under this Agreement; without limiting the generality of
the foregoing, the Company shall not contest Parent's, Surviving Entity I's or
the Surviving Entity's ownership of or title to the Company Patents.
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 Filings and Consents. As promptly as practicable after the execution of
this Agreement, each party to this Agreement (a) shall make all filings (if any)
and give all notices (if any) required to be made and given by such party in
connection with the Transaction and the other transactions contemplated by this
Agreement and (b) shall use all commercially reasonable efforts to obtain all
Consents (if any) required to be obtained (pursuant to any applicable Legal
Requirement or Contract, or otherwise) by such party in connection with the
Transaction and the other transactions contemplated by this Agreement. The
Company shall (upon request) promptly deliver to Parent a copy of each such
filing made, each such notice given and each such Consent obtained by the
Company during the Pre-Closing Period.
5.2 Securities Compliance; Blue Sky. Assuming the accuracy of the Company's
representation in Section 2.3(e) and provided that the condition set forth in
Section 6.6(a)(ii) is satisfied, the Parent Company Shares will be issued to the
Holders in compliance with Regulation D. Parent agrees to file a Form D with
respect to the Parent Common Stock to be issued in connection with Merger I, as
required under Regulation D. Parent shall take such action as Parent shall
reasonably determine to be necessary in order to obtain an exemption for or to
qualify the Parent Common Stock to be issued in connection with Merger I under
applicable securities or "Blue Sky" laws of the states of the United States;
provided, however, that Parent shall not for any such purpose be required to
qualify to transact business as a foreign corporation in any jurisdiction where
it is not so qualified or to consent to general service of process in any such
jurisdiction.
5.3 Company Shareholders' Approval. The Company shall, in accordance with its
articles of incorporation and bylaws and the applicable requirements of the
CGCL, call and hold a special meeting of its shareholders (or alternatively,
solicit in writing the written consent of its shareholders in lieu of such
special meeting) as promptly as practicable for the purpose of permitting them
to consider and to vote upon and approve Merger I, this Agreement and the other
transactions contemplated by this Agreement (the "Company Shareholders'
Approval"). As promptly as practicable, the Company shall cause a copy of a
proxy statement or information statement or other disclosure document that
describes the material terms of the Agreement and related transactions (the
"Information Statement") to be delivered to each shareholder of the Company who
is entitled to vote (or provide a written consent) in connection with the
Company Shareholders' Approval. Parent shall have a reasonable opportunity to
review and comment on the proposed form of Information Statement prior to its
distribution to the Company's shareholders. The Company shall include, with the
Information Statement, copies of Parent's most recent Annual Report on Form
10-K, Parent's Quarterly Reports on Form 10-Q for the first three quarters of
2004 and Parent's definitive proxy statement, filed with the SEC on From 14A,
relating to the last annual meeting of Parent's stockholders.
5.4 Public Announcements. The Company shall not (and shall not permit any of
its Representatives to) issue any press release or make any public statement
29
regarding this Agreement or the Transaction, or regarding any of the other
transactions contemplated by this Agreement, without Parent's prior written
consent.
5.5 Best Efforts. During the Pre-Closing Period, (a) the Company shall use its
best efforts to cause the conditions set forth in Section 6 to be satisfied on a
timely basis and (b) Parent and Merger Subs shall use their best efforts to
cause the conditions set forth in Section 7 to be satisfied on a timely basis.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUBS
The obligations of Parent and Merger Subs to effect the Transaction and
otherwise consummate the transactions contemplated by this Agreement are subject
to the satisfaction, at or prior to the Closing, of each of the following
conditions:
6.1 Accuracy of Representations. Each of the representations and warranties
made by the Company in this Agreement and in each of the other agreements and
instruments delivered to Parent in connection with the transactions contemplated
by this Agreement shall have been accurate in all material respects as of the
date of this Agreement (without giving effect to any "Material Adverse Effect"
or other materiality qualifications, or any similar qualifications, contained or
incorporated directly or indirectly in such representations and warranties), and
shall be accurate in all material respects as of the Scheduled Closing Time as
if made at the Scheduled Closing Time (without giving effect to any update to
the Disclosure Schedule, and without giving effect to any "Material Adverse
Effect" or other materiality qualifications, or any similar qualifications,
contained or incorporated directly or indirectly in such representations and
warranties).
6.2 Performance of Covenants. All of the covenants and obligations that the
Company is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all respects.
6.3 Shareholder Approval. This Agreement and Merger I shall have been duly
adopted by the Required Company Shareholder Vote, and, if applicable, the notice
requirements set forth in Section 603 of the CGCL shall have been complied with
in all respects.
6.4 Dissenters' Rights. At the Effective Time of Merger I, no more than 10% of
the Company Common Stock outstanding as of the Effective Time of Merger I are
eligible to be "dissenting shares" within the meaning of Section 1300(b) of the
CGCL.
6.5 Consents. All Consents required to be obtained in connection with the
Transaction and the other transactions contemplated by this Agreement (including
the Consents identified in Part 2.21 of the Disclosure Schedule) shall have been
obtained and shall be in full force and effect.
6.6 Agreements and Documents.
(a) Parent shall have received the following agreements and documents,
each of which shall be in full force and effect:
(i) the Escrow Agreement, in the form of Exhibit C, executed by the
Shareholders' Representative and the Escrow Agent;
30
(ii) the Holder Agreement, in the form of Exhibit D, relating to
registration rights and indemnification obligations, signed by Sierra and each
shareholder of the Company;
(iii) a release agreement from Wesinger, evidencing Wesinger's
agreement (A) to forego certain deferred compensation, (B) to release all rights
and claims to, and surrender for cancellation certain shares of Company Common
Stock, (C) to forgive the repayment of any and all loans made by Wesinger to the
Company and (D) to release any and all claims against NES or Parent;
(iv) a release agreement from Berhorst, evidencing Berhorst's
Agreement to release any and all claims against NES or Parent;
(v) a certificate executed on behalf of the Company by its President
and Chief Executive Officer confirming that the conditions set forth in Sections
6.1, 6.2, 6.3, 6.4, 6.7 and 6.8 have been duly satisfied;
(vi) written resignations of all directors of the Company, effective
as of the Effective Time of Merger I; and
(vii) a certificate executed by Wesinger in his individual capacity,
confirming the accuracy and completeness, as of the date of this Agreement and
as of the Closing Date as if made on the Closing Date, of the representations
and warranties contained in Sections 2.1, 2.3, 2.20 and 2.21.
(b) An employment offer letter, in form and substance satisfactory to
Parent, accepted and agreed to in writing by Wesinger.
(c) The CBC Release, which was executed contemporaneously with this
Agreement,
(d) shall not have been rescinded in any manner adverse to Parent and
shall be delivered and become effective as of the Closing.
6.7 Resolution of Legal Proceedings and Disputes; Removal of Liens.
(a) The Temporary Protective Order instituted in connection with the CBC
Action shall have been removed and be terminated.
(b) CBC shall not have obtained a default judgment against Wesinger in
connection with the CBC Action.
(c) Parent, the Company and the Cardinal Law Group ("Cardinal") shall have
entered into a Settlement Agreement and Mutual General Release (the "Cardinal
Agreement") relating to amounts purportedly owed by the Company to Cardinal, and
no additional amounts shall be payable to, outstanding with or owed by the
Company to Cardinal.
(d) The Company and Golf U.S.A., Inc. ("Golf U.S.A.") shall have entered
into an agreement (the "Golf U.S.A. Agreement") relating to amounts owed by the
Company to Golf U.S.A., and no additional amounts shall be payable to,
31
outstanding with or owed by the Company to Golf U.S.A., whether evidenced by UCC
Filing #200218960032 (on which "Golf U.S.A., Inc." is listed as the Secured
Party) or otherwise.
(e) Parent shall have received written assurances, in form and substance
satisfactory to Parent, that (i) receipt by Sierra of the Sierra Shares
satisfies all obligations the Company may have to Sierra under the Sierra
Agreement and that (ii) Sierra agrees to participate in the escrow arrangement
set forth in Section 1.8.
(f) Parent shall have received written assurances, in form and substance
satisfactory to Parent, that Wesinger's dispute with William Kennedy has been
resolved and that Kennedy has no claims against the Company.
(g) Parent shall have received written assurances, in form and substance
satisfactory to Parent, that (i) the Company has paid in full all amounts owing
under the Horton Note and (ii) that the Company has been released from any and
all claims against it for any additional amounts owed to Horton, whether
pursuant to the Horton Note or otherwise.
6.8 Financing. An equity financing, in which Parent shall have received at
least $3,240,000 in aggregate proceeds, shall have been completed.
6.9 Questionnaires. Parent shall have received an Investment Suitability
Questionnaire from Sierra and each Holder.
6.10 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Transaction shall
have been issued by any court of competent jurisdiction and remain in effect,
and there shall not be any Legal Requirement enacted or deemed applicable to the
Transaction that makes consummation of the Transaction illegal.
6.11 No Legal Proceedings. No Person shall have commenced or threatened to
commence any Legal Proceeding (a) challenging or seeking the recovery of a
material amount of Damages in connection with the Transaction, (b) seeking to
prohibit or limit the exercise by Parent of any material right pertaining to its
ownership of stock of Surviving Entity I or the Surviving Entity, (c) seeking to
obtain from the Company any Damages or other relief that may be material to the
Company, Surviving Entity I, the Surviving Entity or Parent or (d) that could
have a Material Adverse Effect on the Company, Surviving Entity I, the Surviving
Entity or Parent.
6.12 No Material Adverse Effect. There shall have been no Material Adverse
Effect on the Company, and no event shall have occurred or circumstances exist
that, in combination with any other events or circumstances, could reasonably be
expected to have or result in a Material Adverse Effect on the Company.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to effect Merger I and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions:
32
7.1 Accuracy of Representations. Each of the representations and warranties
made by Parent and Merger Subs in this Agreement shall have been accurate in all
material respects as of the date of this Agreement (without giving effect to any
materiality or similar qualifications contained in such representations and
warranties), and shall be accurate in all material respects as of the Scheduled
Closing Time as if made at the Scheduled Closing Time (without giving effect to
any materiality or similar qualifications contained in such representations and
warranties).
7.2 Performance of Covenants. All of the covenants and obligations that Parent
and Merger Subs are required to comply with or to perform at or prior to the
Closing shall have been complied with and performed in all respects.
7.3 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of Merger I shall have
been issued by any court of competent jurisdiction and remain in effect, and
there shall not be any Legal Requirement enacted or deemed applicable to Merger
I that makes consummation of Merger I illegal.
SECTION 8. TERMINATION
8.1 Termination Events. This Agreement may be terminated prior to the
Closing:
(a) by the mutual consent of Parent and the Company;
(b) by Parent if the Closing has not taken place before December 9, 2004
(other than as a result of any failure on the part of Parent to comply with or
perform any covenant or obligation of Parent set forth in this Agreement);
(c) by Parent if Parent reasonably determines that the timely satisfaction
of any condition set forth in Section 6 has become impossible (other than as a
result of any failure on the part of Parent or Merger Subs to comply with or
perform any covenant or obligation of Parent or Merger Subs set forth in this
Agreement);
(d) by the Company if the Company reasonably determines that the timely
satisfaction of any condition set forth in Section 7 has become impossible
(other than as a result of any failure on the part of the Company to comply with
or perform any covenant or obligation set forth in this Agreement or in any
other agreement or instrument delivered to Parent);
(e) by Parent at or after the Scheduled Closing Time if any condition set
forth in Section 6 has not been satisfied by the Scheduled Closing Time;
(f) by the Company at or after the Scheduled Closing Time if any condition
set forth in Section 7 has not been satisfied by the Scheduled Closing Time;
(g) by Parent if there shall have been a material breach by the Company of
any provision of the Confidentiality Agreement or the LOI (each as defined in
Section 10.15); or
(h) by Parent if a Material Adverse Effect shall have occurred with
respect to the Company or an event shall have occurred or circumstance shall
exist that, in combination with any other events or circumstances, could
reasonably be expected to have or result in a Material Adverse Effect with
respect to the Company
33
8.2 Termination Procedures. If Parent wishes to terminate this Agreement
pursuant to Section 8.1(b), Section 8.1(c), Section 8.1(e), Section 8.1(g) or
Section 8.1(h), Parent shall deliver to the Company a written notice stating
that Parent is terminating this Agreement and setting forth a brief description
of the basis on which Parent is terminating this Agreement. If the Company
wishes to terminate this Agreement pursuant to Section 8.1(d) or Section 8.1(f),
the Company shall deliver to Parent a written notice stating that the Company is
terminating this Agreement and setting forth a brief description of the basis on
which the Company is terminating this Agreement.
8.3 Effect of Termination. If this Agreement is terminated pursuant to Section
8.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that: (a) neither the Company nor Parent shall be
relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement; (b) the parties shall, in all events,
remain bound by and continue to be subject to the provisions set forth in
Section 10; and (c) the Company shall, in all events, remain bound by and
continue to be subject to Section 5.4.
SECTION 9. INDEMNIFICATION, ETC.
9.1 Survival of Representations, Etc.
(a) The representations and warranties made by the Company (including the
representations and warranties set forth in Section 2) shall survive the Closing
and shall expire on the eighteen-month anniversary of the Closing Date (the
"Initial Termination Date"), except for the representations and warranties set
forth in Section 2.14, which shall expire on the later of (i) the thirty-six
month anniversary of the Closing Date and (ii) the expiration of every statute
of limitations applicable to the matters referenced in Section 2.14 (the later
of such two dates, the "Extended Termination Date"). If, at any time prior to
the eighteen-month anniversary of the Closing Date (or, with respect to the
representations and warranties contained in Section 2.14, the Extended
Termination Date), any Indemnitee (acting in good faith) delivers to the
Shareholders' Representative (as defined in Section 2.2 of the Holder Agreement)
a written notice alleging the existence of an inaccuracy in or a breach of any
of the representations and warranties made by the Company (and setting forth in
reasonable detail the basis for such Indemnitee's belief that such an inaccuracy
or breach may exist) and asserting a claim for recovery under Section 9.2 based
on such alleged inaccuracy or breach, then the claim asserted in such notice
shall survive the Initial Termination Date (or, with respect to the
representations and warranties contained in Section 2.14, the Extended
Termination Date) until such time as such claim is fully and finally resolved.
All representations and warranties made by Parent and Merger Subs shall
terminate and expire as of the Effective Time of Merger I, and any liability of
Parent or Merger Subs with respect to such representations and warranties shall
thereupon cease.
(b) The representations, warranties, covenants and obligations of the
Company, and the rights and remedies that may be exercised by the Indemnitees,
shall not be limited or otherwise affected by or as a result of any information
furnished to, or any investigation made by or knowledge of, any of the
Indemnitees or any of their Representatives.
(c) For purposes of this Agreement, each statement or other item of
information set forth in the Disclosure Schedule or in any update to the
Disclosure Schedule shall be deemed to be a representation and warranty made by
the Company in this Agreement.
34
9.2 Indemnification.
(a) From and after the Effective Time of Merger I (but subject to Section
9.1(a)), the Holders shall hold harmless and indemnify each of the Indemnitees
from and against, and shall compensate and reimburse each of the Indemnitees
for, any Damages that are directly or indirectly suffered or incurred by any of
the Indemnitees or to which any of the Indemnitees may otherwise become subject
(regardless of whether or not such Damages relate to any third-party claim) and
that arise from or as a result of, or are directly or indirectly connected with:
(i) any inaccuracy in or breach of any representation or warranty set forth in
Section 2 as of the date of this Agreement (without giving effect to any
"Material Adverse Effect" or other materiality qualification or any similar
qualification contained or incorporated directly or indirectly in such
representation or warranty, and without giving effect to any update to the
Disclosure Schedule); (ii) any inaccuracy in or breach of any representation or
warranty set forth in Section 2 as if such representation and warranty had been
made on and as of the Closing Date (without giving effect to any "Material
Adverse Effect" or other materiality qualification or any similar qualification
contained or incorporated directly or indirectly in such representation or
warranty, and without giving effect to any update to the Disclosure Schedule);
(iii) any breach of or failure to comply with any covenant, obligation or other
agreement of the Company (including the covenants set forth in the Shareholders
Agreement); (iv) any Legal Proceeding relating to any inaccuracy or breach of
the type referred to in clause "(i)," "(ii)" or "(iii)" above (including any
Legal Proceeding commenced by any Indemnitee for the purpose of enforcing any of
its rights under this Section 9).
(b) If Surviving Entity I or the Surviving Entity suffers, incurs or
otherwise becomes subject to any Damages as a result of or in connection with
any inaccuracy in or breach of any representation, warranty, covenant or
obligation, then (without limiting any of the rights of Surviving Entity I or
the Surviving Entity as an Indemnitee) Parent shall also be deemed, by virtue of
its ownership of the stock of Surviving Entity I and the Surviving Entity, to
have incurred Damages as a result of and in connection with such inaccuracy or
breach.
(c) No Holder's indemnification obligation to any Indemnitee under this
Section 9.2 shall exceed such Holder's share of the Escrow Amount; provided,
however, that Wesinger's indemnification obligation shall be unlimited with
respect to inaccuracies in the representations and warranties set forth in
Sections 2.1, 2.3, 2.20 and 2.21 (and Parent need not exhaust the security of
the Escrow Amount prior to seeking indemnification directly from Wesinger); and,
provided further, that Wesinger's indemnification obligation for all other
purposes shall be limited to Wesinger's share of the Deposited Shares plus the
entirety of the Wesinger Escrow Shares.
9.3 Escrow Fund. Each Holder receiving Parent Common Stock in Merger I will be
deemed to have received and deposited with the Escrow Agent (as defined below)
the Deposited Shares (plus any additional shares as may be issued upon any stock
split, stock dividend or recapitalization effected by Company after the
Effective Time of Merger I with respect to the Escrow Amount). The Deposited
Shares, together with the Wesinger Escrow Shares, will be deposited with and
will be held by an institution mutually acceptable to Company and the
Shareholders' Representatives as Escrow Agent (the "Escrow Agent"), such deposit
to constitute an escrow fund to be governed by the terms set forth in the Escrow
Agreement. Payment of any amounts from the Deposited Shares shall be taken from
the Escrow Shares as set forth in the Escrow Agreement.
35
SECTION 10. MISCELLANEOUS PROVISIONS
10.1 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
10.2 Fees and Expenses. Each party to this Agreement shall bear and pay all
fees, costs and expenses (including legal fees and accounting fees) that have
been incurred or that are incurred by or on behalf of such party in connection
with the transactions contemplated by this Agreement, including all fees, costs
and expenses incurred by such party in connection with or by virtue of (a) the
investigation and review conducted by Parent and its Representatives with
respect to the Company's business (and the furnishing of information to Parent
and its Representatives in connection with such investigation and review), (b)
the negotiation, preparation and review of the Letter of Intent dated October 6,
2004, including all negotiations, the Confidentiality Agreement (as defined in
Section 10.15) appearances and actions related to document access matters,
including fees and costs related to the CBC Action, Company borrowing and
security interest arrangements, and this Agreement (including the Disclosure
Schedule) and all agreements, certificates, opinions and other instruments and
documents delivered or to be delivered in connection with the transactions
contemplated by this Agreement, (c) the preparation and audit of the Company's
financial statements conducted by Parent, and Representatives of Parent, (d) the
preparation and submission of any filing or notice required to be made or given
in connection with any of the transactions contemplated by this Agreement, and
the obtaining of any Consent required to be obtained in connection with any of
such transactions and (e) the consummation of the Transaction (collectively,
"Transaction-Related Expenses").
10.3 Attorneys' Fees. If any action or proceeding relating to this Agreement
or the enforcement of any provision of this Agreement is brought against any
party hereto, the prevailing party shall be entitled to recover reasonable
attorneys' fees, costs and disbursements (in addition to any other relief to
which the prevailing party may be entitled).
10.4 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent: GraphOn Corporation
3130 Winkle Avenue
Santa Cruz, California 95065
Fax: (831) 475-3017
Attn: William Swain
36
if to the Company: Network Engineering Software, Inc.
c/o Jay Margulies
Thelen Reid & Priest LLP
225 West Santa Clara Street
San Jose, CA 95113
Fax: (408) 287-8040
if to Merger Sub II: GraphOn NESSub, LLC
c/o GraphOn Corporation
3130 Winkle Avenue
Santa Cruz, California 95065
Fax: (831) 475-3017
Attn: William Swain
if to Merger Sub III: GraphOn via Sub III Inc.
c/o GraphOn Corporation
3130 Winkle Avenue
Santa Cruz, California 95065
Fax: (831) 475-3017
Attn: William Swain
if to the Network Engineering Software, Inc.
Surviving Entity: c/o GraphOn Corporation
3130 Winkle Avenue
Santa Cruz, California 95065
Fax: (831) 475-3017
Attn: William Swain
if to the P.O. Box 612406
Shareholders' San Jose, CA 95161-2406.
Representative: Fax: (408) 907-2070
Attn: Ralph Wesinger
if to Wesinger: Ralph Wesinger
P.O. Box 612406
San Jose, CA 95161-2406
Fax: (408) 907-2070
10.5 Time of the Essence. Time is of the essence of this Agreement.
10.6 Headings. The bold-faced headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
10.7 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
10.8 Governing Law. This Agreement shall be construed in accordance with, and
governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
37
10.9 Successors and Assigns. This Agreement shall be binding upon: the Company
and its successors and assigns (if any); Parent and its successors and assigns
(if any); Merger Sub II and its successors and assigns (if any); and Merger Sub
I and its successors and assigns (if any). This Agreement shall inure to the
benefit of: the Company; the Holders (to the extent set forth in Section 1.5);
Parent; Merger Subs; the other Indemnitees (subject to Section 9.7); and the
respective successors and assigns (if any) of the foregoing. Parent may freely
assign any or all of its rights under this Agreement (including its
indemnification rights under Section 9), in whole or in part, to any other
Person without obtaining the consent or approval of any other party hereto or of
any other Person.
10.10 Remedies Cumulative; Specific Performance. The rights and remedies of
the parties hereto shall be cumulative (and not alternative). The parties to
this Agreement agree that, in the event of any breach or threatened breach by
any party to this Agreement of any covenant, obligation or other provision set
forth in this Agreement for the benefit of any other party to this Agreement,
such other party shall be entitled (in addition to any other remedy that may be
available to it) to (a) a decree or order of specific performance or mandamus to
enforce the observance and performance of such covenant, obligation or other
provision and (b) an injunction restraining such breach or threatened breach.
10.11 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any Person
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
10.12 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
10.13 Severability. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction. If the final judgment of a court of competent
jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making such determination
shall have the power to limit the term or provision, to delete specific words or
phrases, or to replace any invalid or unenforceable term or provision with 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, and
this Agreement shall be enforceable as so modified. In the event such court does
not exercise the power granted to it in the prior sentence, the parties hereto
agree to replace such invalid or unenforceable term or provision with a valid
38
and enforceable term or provision that will achieve, to the extent possible, the
economic, business and other purposes of such invalid or unenforceable term.
10.14 Parties in Interest. Except for the provisions of Sections 1.5 and 9,
none of the provisions of this Agreement is intended to provide any rights or
remedies to any Person other than the parties hereto and their respective
successors and assigns (if any).
10.15 Entire Agreement. This Agreement set forth the entire understanding of
the parties hereto relating to the subject matter hereof and thereof and
supersede all prior agreements and understandings among or between any of the
parties relating to the subject matter hereof and thereof; provided, however,
that (a) the Confidentiality Agreement executed on behalf of Parent and the
Company on August 20, 2004 (the "Confidentiality Agreement") shall not be
superseded by this Agreement and shall remain in effect until the date on which
such Confidentiality Agreement is terminated in accordance with its terms and
(b) the "Binding Provisions" set forth in Part 2 of the Letter of Intent dated
as of October 6, 2004 (the "LOI") shall remain in effect until such provisions
terminate in accordance with the terms of the LOI.
10.16 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
[SIGNATURE PAGE FOLLOWS]
39
The parties hereto have caused this Agreement and Plan of Merger and
Reorganization to be executed and delivered as of December 3, 2004.
GRAPHON CORPORATION,
a Delaware corporation
By: /s/ Robert Dilworth
---------------------------
GRAPHON NES SUB, LLC,
a California limited liability corporation
By: /s/ Robert Dilworth
---------------------------
GRAPHON VIA SUB III INC.,
a Delaware corporation
By: /s/ Robert Dilworth
---------------------------
NETWORK ENGINEERING SOFTWARE, INC.,
a California corporation
By: /s/ Ralph Wesinger
---------------------------
/s/ Ralph Wesinger
---------------------------
RALPH WESINGER
EXHIBITS
Exhibit A..- Certain definitions
Exhibit B..- Directors and officers of Surviving Entity I
Exhibit C..- Form of Escrow Agreement
Exhibit D..- Form of Holder Agreement
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquisition Inquiry. "Acquisition Inquiry" shall mean any inquiry,
indication of interest or request for information (other than an inquiry,
indication of interest or request for information made or submitted by Parent)
that could reasonably be expected to lead to an Acquisition Proposal.
Acquisition Proposal. "Acquisition Proposal" shall mean any offer or
proposal (other than an offer or proposal made or submitted by Parent)
contemplating or otherwise relating to any Acquisition Transaction.
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction involving:
(a) the sale, license, disposition or acquisition of all or a material
portion of the business or assets, including the Company IP, of the
Company or any direct or indirect subsidiary or division of the Company;
(b) the issuance, grant, disposition or acquisition of (i) any capital
stock or other equity security of the Company or any direct or indirect
subsidiary of the Company, (ii) any option, call, warrant or right
(whether or not immediately exercisable) to acquire any capital stock or
other equity security of the Company or any direct or indirect subsidiary
or division of the Company, or (iii) any security, instrument or
obligation that is or may become convertible into or exchangeable for any
capital stock or other equity security of the Company; or
(c) any merger, consolidation, business combination, share exchange,
reorganization or similar transaction involving the Company or any direct
or indirect subsidiary or division of the Company.
COBRA. "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended.
Company Affiliate. "Company Affiliate" shall mean any Person under common
control with the Company within the meaning of Sections 414(b), (c), (m) and (o)
of the Code, and the regulations issued thereunder.
Company Contract. "Company Contract" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any of its assets is or may
become bound or under which the Company has, or may become subject to, any
obligation; or (c) under which the Company has or may acquire any right or
interest.
Company Employee. "Company Employee" shall mean any current or former
employee, independent contractor or director of the Company or any Company
Affiliate.
1
Company Employee Agreement. "Company Employee Agreement" shall mean each
management, employment, severance, consulting, relocation, repatriation or
expatriation agreement or other Contract between the Company or any Company
Affiliate and any Company Employee, other than any such management, employment,
severance, consulting, relocation, repatriation or expatriation agreement or
other Contract with a Company Employee which is terminable "at will" without any
obligation on the part of the Company or any Company Affiliate to make any
payments or provide any benefits in connection with such termination.
Company Employee Plan. "Company Employee Plan" shall mean any plan,
program, policy, practice, Contract or other arrangement providing for
compensation, severance, termination pay, deferred compensation, performance
awards, stock or stock-related awards, fringe benefits or other employee
benefits or remuneration of any kind, whether written, unwritten or otherwise,
funded or unfunded, including each "employee benefit plan," within the meaning
of Section 3(3) of ERISA (whether or not ERISA is applicable to such plan), that
is or has been maintained, contributed to, or required to be contributed to, by
the Company or any Company Affiliate for the benefit of any Company Employee, or
with respect to which the Company or any Company Affiliate has or may have any
liability or obligation, except such definition shall not include any Company
Employee Agreement.
Company IP. "Company IP" shall mean all Intellectual Property Rights and
Intellectual Property in which the Company has (or purports to have) an
ownership interest or an exclusive license or similar exclusive right, including
the Company Patents.
Company IP Contract. "Company IP Contract" shall mean any Contract to
which the Company is or was a party or by which the Company is or was bound,
that contains any assignment or license of, or any covenant not to assert or
enforce, any Intellectual Property Right or that otherwise relates to any
Company IP or any Intellectual Property developed by, with or for the Company.
Company Pension Plan. "Company Pension Plan" shall mean each Company
Employee Plan that is an "employee pension benefit plan," within the meaning of
Section 3(2) of ERISA.
Company Software. "Company Software" shall mean any software (including
firmware and other software embedded in hardware devices) owned, developed (or
currently being developed), used, marketed, distributed, licensed or sold by the
Company at any time (other than non-customized third-party software licensed to
the Company for internal use on a non-exclusive basis).
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.
Damages. "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
2
Disclosure Schedule. "Disclosure Schedule" shall mean the schedule (dated
as of the date of the Agreement) delivered to Parent on behalf of the Company.
DOL. "DOL" means the United States Department of Labor.
eBay License. "eBay License" means that certain Settlement and License
Agreement by and between Parent and eBay Inc. dated as of January 14, 1999,
relating to United States Patent No. 5,778,367 and related applications.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
FMLA. "FMLA" shall mean the Family Medical Leave Act of 1993, as amended.
Foreign Plan. "Foreign Plan" shall mean: (i) any plan, program, policy,
practice, Contract or other arrangement mandated by a Governmental Body other
than the United States; (ii) any Company Employee Plan maintained or contributed
to by the Company or any Company Affiliate that is not subject to United States
law; and (iii) any Company Employee Plan that covers or has covered Company
Employees whose services are performed primarily outside of the United States.
Government Bid. "Government Bid" shall mean any quotation, bid or proposal
submitted to any Governmental Body or any proposed prime contractor or
higher-tier subcontractor of any Governmental Body.
Government Contract. "Government Contract" shall mean any prime contract,
subcontract, letter contract, purchase order or delivery order executed or
submitted to or on behalf of any Governmental Body or any prime contractor or
higher-tier subcontractor, or under which any Governmental Body or any such
prime contractor or subcontractor otherwise has or may acquire any right or
interest.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
3
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
HIPAA. "HIPAA" shall mean the Health Insurance Portability and
Accountability Act of 1996, as amended.
Indemnitees. "Indemnitees" shall mean the following Persons: (a) Parent;
(b) Parent's current and future affiliates (including Merger Subs, Surviving
Entity I and the Surviving Entity); (c) the respective Representatives of the
Persons referred to in clauses "(a)" and "(b)" above; and (d) the respective
successors and assigns of the Persons referred to in clauses "(a)," "(b)" and
"(c)" above.
Intellectual Property. "Intellectual Property" shall mean algorithms,
APIs, apparatus, circuit designs and assemblies, gate arrays, IP cores, net
lists, photomasks, semiconductor devices, test vectors, databases, data
collections, diagrams, formulae, inventions (whether or not patentable),
know-how, logos, marks (including brand names, product names, logos, and
slogans), methods, network configurations and architectures, processes,
proprietary information, protocols, schematics, specifications, software,
software code (in any form, including source code and executable or object
code), subroutines, techniques, user interfaces, URLs, web sites, works of
authorship and other forms of technology (whether or not embodied in any
tangible form and including all tangible embodiments of the foregoing, such as
instruction manuals, laboratory notebooks, prototypes, samples, studies and
summaries).
Intellectual Property Rights. "Intellectual Property Rights" shall mean
all past, present, and future rights of the following types, which may exist or
be created under the laws of any jurisdiction in the world: (A) rights
associated with works of authorship, including exclusive exploitation rights,
copyrights, moral rights and mask works; (B) trademark and trade name rights and
similar rights; (C) trade secret rights; (D) patent and industrial property
rights; (E) other proprietary rights in Intellectual Property; and (F) rights in
or relating to registrations, renewals, extensions, combinations, divisions, and
reissues of, and applications for, any of the rights referred to in clauses
"(A)" through "(E)" above.
IRS. "IRS" shall mean the United States Internal Revenue Service.
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
4
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. A violation or other matter will be deemed to
have a "Material Adverse Effect" on the Company if such violation or other
matter (considered together with all other matters that would constitute
exceptions to the representations and warranties set forth in the Agreement but
for the presence of "Material Adverse Effect" or other materiality
qualifications, or any similar qualifications, in such representations and
warranties) would have a material adverse effect on the Company's business,
condition, assets, liabilities, operations, financial performance, intellectual
property or prospects.
Person. "Person" shall mean any individual, Entity or Governmental Body.
Registered IP. "Registered IP" shall mean all Intellectual Property Rights
that are registered, filed, or issued under the authority of, with or by any
Governmental Body, including all patents, registered copyrights, registered mask
works and registered trademarks and all applications for any of the foregoing.
Regulation D. "Regulation D" shall mean Regulation D promulgated under the
Securities Act.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933,
as amended.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
USPTO. "USPTO" shall mean the United States Patent and Trademark Office.
5
EXHIBIT B
DIRECTORS AND OFFICERS OF SURVIVING ENTITY I
Robert Dilworth - Chairman and Chief Executive Officer
William Swain - Chief Financial Officer and Secretary
1
EXHIBIT C
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is made and entered into as of December __, 2004, by
and among: GRAPHON CORPORATION, a Delaware corporation ("GraphOn"); RALPH
WESINGER, as representative (the "Shareholders' Representative") of the
shareholders of NETWORK ENGINEERING SOFTWARE, INC., a California corporation
("NES"), identified on Schedule A (the "Merger Shareholders"); and AMERICAN
STOCK TRANSFER AND TRUST COMPANY, a New York corporation (the "Escrow Agent").
RECITALS
A. Pursuant to an Agreement and Plan of Merger and Reorganization dated as
of December 3, 2004, among GraphOn, GraphOn via Sub III Inc., a Delaware
corporation and a wholly owned subsidiary of GraphOn ("Merger Sub"), GraphOn NES
Sub, LLC, a California limited liability company and a wholly owned subsidiary
of GraphOn ("Merger Sub II"), Network Engineering Software, Inc., a California
corporation ("NES"), and Ralph Wesinger (the "Reorganization Agreement"), it is
contemplated that (i) Merger Sub will merge with and into NES (the merger of
Merger Sub with and into NES being referred to in this Holder Agreement as the
"Merger") with NES being the surviving corporation in the Merger, (ii) following
the Merger, NES will merge with and into Merger Sub II and (iii) NES's
stockholders will receive shares of common stock, $0.0001 par value per share,
of GraphOn ("GraphOn Common Stock") in exchange for their shares of common stock
of NES ("NES Common Stock").
B. The Reorganization Agreement contemplates the establishment of an
escrow arrangement to secure rights to indemnification, compensation and
reimbursement of GraphOn and the other Indemnitees under the Reorganization
Agreement.
C. Pursuant to Section 9.3 of the Reorganization Agreement, Section 2.2 of
the Holder Agreement and Section 10 of this Escrow Agreement, the Shareholders'
Representative has been irrevocably appointed to serve for, among other things,
administration of the provisions of Section 9.2 and Section 9.3 of the
Reorganization Agreement and Section 2.2 of the Holder Agreement.
D. Capitalized terms used but not defined herein are defined in the
Reorganization Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
Section 1. Defined Terms.
1.1 As used in this Escrow Agreement, the term "Merger Shareholders" shall
refer initially to Sierra and all Persons who were shareholders of NES
immediately prior to the Effective Time ("NES Shareholders") and who prior to
the Effective Time either (a) voted in favor of or consented in writing to the
adoption of the Reorganization Agreement or (b) failed to take any action
required by Section 1300 of the California General Corporation Law (the
1
"California Law") to have been taken prior to such time in order to perfect or
otherwise preserve their dissenters' rights thereunder. In the event that
following the Effective Time, any NES Shareholder who was not initially a Merger
Shareholder either (i) votes in favor of or consents in writing to the adoption
of the Reorganization Agreement or (ii) otherwise takes (or omits to take) any
action that results in the failure of such NES Shareholder to perfect or
preserve his dissenters' rights under Section 1300 of the California Law, such
NES Shareholder shall automatically and without the requirement of any action on
the part of such NES Shareholder or any party to this Escrow Agreement be deemed
to be a Merger Shareholder hereunder. GraphOn shall cause Schedule A to be
revised from time to time to reflect any such additional Merger Shareholders.
Section 2. Escrow and Indemnification.
2.1 Shares and Stock Powers Placed in Escrow. At or following the Effective
Time, in accordance with the Reorganization Agreement, (a) GraphOn shall issue
certificates for shares of GraphOn Common Stock registered in the names of each
of the Merger Shareholders, evidencing the shares of GraphOn Common Stock to be
held in escrow on behalf of the Merger Shareholders as set forth on Schedule A,
in accordance with this Escrow Agreement, and (b) each of the Merger
Shareholders shall deliver to GraphOn five "assignments separate from
certificate" ("Stock Powers") endorsed by each such Merger Shareholder in blank.
The shares of GraphOn Common Stock being held in escrow pursuant to this Escrow
Agreement (the "Escrow Shares"), including the Deposited Shares and the Wesinger
Escrow Shares, shall collectively constitute an escrow fund (the "Escrow Fund")
with respect to the indemnification, compensation and reimbursement rights of
GraphOn and the other Indemnitees under the Reorganization Agreement. The Escrow
Agent agrees to accept delivery of the Escrow Fund and to hold the Escrow Fund
in an escrow account (the "Escrow Account"), subject to the terms and conditions
of this Escrow Agreement.
2.2 Voting of Escrow Shares. The record owner of the Escrow Shares shall be
entitled to exercise all voting rights with respect to such Escrow Shares. The
Escrow Agent is not obligated to distribute to the Merger Shareholders or to the
Shareholders' Representative proxy materials and other documents relating to the
Escrow Shares received by the Escrow Agent from GraphOn.
2.3 Security Interest. To the extent and so long as Escrow Shares are held in
the Escrow Account hereunder, GraphOn shall have, and the Merger Shareholders
(through the Shareholders' Representative) hereby grant, as of and from the date
of this Escrow Agreement, a perfected, first-priority security interest in such
Escrow Shares to secure payment of amounts, if any, payable to GraphOn and other
Indemnitees in respect of Section 9 of the Reorganization Agreement. In
connection therewith, each Merger Shareholder (through the Shareholders'
Representative) expressly agrees (i) that the Escrow Agent is acting solely as
GraphOn's agent to the extent necessary to perfect GraphOn's first-priority
security interest in the Escrow Shares, and (ii) to execute and deliver such
instruments as GraphOn may from time to time reasonably request for the purpose
of evidencing and perfecting such security interest.
2.4 Dividends, Etc. GraphOn and the Shareholders' Representative (on behalf of
each of the Merger Shareholders) agree among themselves, for the benefit of
GraphOn and the Escrow Agent, that any shares of GraphOn Stock or other property
(other than ordinary cash dividends) distributable or issuable (whether by way
2
of dividend, stock split or otherwise) in respect of or in exchange for any
Escrow Shares (including pursuant to or as a part of a merger, consolidation,
acquisition of property or stock, reorganization or liquidation involving
GraphOn) shall not be distributed or issued to the beneficial owners of such
Escrow Shares, but rather shall be distributed or issued to and held by the
Escrow Agent in the Escrow Account as part of the Escrow Fund. Ordinary cash
dividends payable in respect of the Escrow Shares will be paid by GraphOn
directly to the applicable Merger Shareholders and not to the Escrow Agent. Any
securities or other property received by the Escrow Agent in respect of any
Escrow Shares held in escrow as a result of any stock split or combination of
shares of GraphOn Common Stock, payment of a stock dividend or other stock
distribution in or on shares of GraphOn Common Stock, or change of GraphOn
Common Stock into any other securities pursuant to or as a part of a merger,
consolidation, acquisition of property or stock, reorganization or liquidation
involving GraphOn, or otherwise, shall be held by the Escrow Agent as, and shall
be included within the definition of, Escrow Shares.
2.5 Transferability. The interests of the Merger Shareholders in the Escrow
Account and in the Escrow Shares shall not be assignable or transferable, other
than by operation of law. No assignment or transfer of any of such interests by
operation of law shall be recognized or given effect until GraphOn and the
Escrow Agent shall have received written notice of such assignment or transfer.
2.6 Fractional Shares. No fractional shares of GraphOn Common Stock or other
securities shall be retained in or released from the Escrow Account pursuant to
this Escrow Agreement. In connection with any release of Escrow Shares from the
Escrow Account, GraphOn and the Escrow Agent shall be permitted to "round down"
or to follow such other rounding procedures as GraphOn reasonably determines to
be appropriate in order to avoid retaining any fractional shares in the Escrow
Account and in order to avoid releasing any fractional shares from the Escrow
Account.
2.7 Trust Fund. The Escrow Fund shall be held as a trust fund and shall not be
subject to any lien, attachment, trustee process or any other judicial process
of any creditor of any Merger Shareholder or of any party hereto. The Escrow
Agent shall hold and safeguard the Escrow Fund until any remaining Escrow Shares
are distributed at the Initial Termination Date or the Extended Termination
Date, as applicable, provided that if the Escrow Agent has received from any
Indemnitee a Claim Notice setting forth a claim that has not been resolved by
the Initial Termination Date or the Extended Termination Date, as applicable,
then the Escrow Agent shall hold and safeguard all or a portion of the Escrow
Fund, as set forth in greater detail in Section 4.1, until the claim has been
resolved and the Escrow Fund released in accordance with this Escrow Agreement.
Section 3. Administration of Escrow Account. Except as otherwise provided
herein, the Escrow Agent shall administer the Escrow Account as follows:
3.1 If any Indemnitee has or claims to have incurred or suffered Damages for
which it is or may be entitled to indemnification, compensation or reimbursement
under Section 9 of the Reorganization Agreement, such Indemnitee may, on or
prior to (a) the Initial Termination Date, with respect to all claims other than
Extended Period Claims, and (b) the Extended Termination Date, with respect to
Extended Period Claims deliver a claim notice (a "Claim Notice") to the
3
Shareholders' Representative and to the Escrow Agent. Each Claim Notice shall
state that such Indemnitee believes that there is or has been a breach of a
representation, warranty or covenant contained in the Reorganization Agreement
or that such Indemnitee is otherwise entitled to indemnification, compensation
or reimbursement under Section 9 of the Reorganization Agreement, and contain a
brief description of the circumstances supporting such Indemnitee's belief that
there is or has been such a breach or that such Indemnitee is so entitled to
indemnification, compensation or reimbursement and shall, to the extent
possible, contain a good faith, non-binding, preliminary estimate of the amount
of Damages such Indemnitee claims to have so incurred or suffered (the "Claimed
Amount").
3.2 Within 30 days after receipt by the Shareholders' Representative of a
Claim Notice, the Shareholders' Representative may deliver, both to the
Indemnitee who delivered the Claim Notice and to the Escrow Agent, a written
response (the "Response Notice") in which the Shareholders' Representative: (i)
agrees that Escrow Shares (or cash, as described further in Section 5)
collectively having a "Stipulated Value" (as defined below) equal to the full
Claimed Amount (the "Full Amount") may be released from the Escrow Account to
the Indemnitee; (ii) agrees that Escrow Shares (or cash, as described further in
Section 5) collectively having a Stipulated Value equal to part, but not all, of
the Claimed Amount (the "Agreed Amount") may be released from the Escrow Account
to the Indemnitee; or (iii) indicate that no part of the Escrow Fund may be
released from the Escrow Account to the Indemnitee in respect of the Claimed
Amount. Any part of the Claimed Amount that is not agreed to be released to the
Indemnitee pursuant to the Response Notice shall be the "Contested Amount." If a
Response Notice is not received by the Escrow Agent within such 30-day period,
then the Shareholders' Representative shall be conclusively deemed to have
agreed that Escrow Shares (or cash, as described further in Section 5)
collectively having a Stipulated Value equal to the Full Amount may be released
to the Indemnitee from the Escrow Account.
3.3 If the Shareholders' Representative delivers a Response Notice agreeing
that Escrow Shares (or cash, as described further in Section 5) collectively
having a Stipulated Value equal to the full Claimed Amount may be released from
the Escrow Account to the Indemnitee, or if the Shareholders' Representative
does not deliver a Response Notice on a timely basis in accordance with Section
3.2, the Escrow Agent shall within five business days following the receipt of
such Response Notice (or, if the Escrow Agent has not received a Response
Notice, within five business days following the expiration of the 30-day period
referred to in Section 3.2), deliver to such Indemnitee such Escrow Shares (or
cash, as described further in Section 5).
3.4 If the Shareholders' Representative delivers a Response Notice agreeing
that Escrow Shares (or cash, as described further in Section 5) collectively
having a Stipulated Value equal to less than the Full Amount may be released
from the Escrow Account to the Indemnitee, the Escrow Agent shall, within five
business days following the receipt of such Response Notice, deliver to such
Indemnitee Escrow Shares (or cash, as described further in Section 5)
collectively having a Stipulated Value equal to the Agreed Amount. Such payment
shall not be deemed to be made in full satisfaction of the claim described in
such Claim Notice, but shall count toward the satisfaction of the claim
described in such Claim Notice.
3.5 If the Shareholders' Representative delivers a Response Notice indicating
that there is a Contested Amount, the Shareholders' Representative and the
Indemnitee shall attempt in good faith to resolve the dispute related to the
4
Contested Amount. If the Indemnitee and the Shareholders' Representative
resolves such dispute, such resolution shall be binding on all of the Merger
Shareholders and such Indemnitee and a settlement agreement shall be signed by
such Indemnitee and the Shareholders' Representative and sent to the Escrow
Agent, which shall, upon receipt thereof, if applicable, release Escrow Shares
(or cash, as described further in Section 5) collectively having a Stipulated
Value equal to the additional amount as listed in the settlement agreement (the
"Settlement Amount"). Unless and until the Escrow Agent shall receive written
notice that any such dispute has been resolved by the Indemnitee and the
Shareholders' Representative, the Escrow Agent may assume without inquiry that
such dispute has not been resolved.
3.6 If the Shareholders' Representative and the Indemnitee are unable to
resolve the dispute relating to any Contested Amount within 60 days after the
delivery of the Claim Notice ("Initial Resolution Period"), then the claim
described in the Claim Notice shall be settled by binding arbitration in the
County of Santa Clara in the State of California in accordance with the
Commercial Arbitration Rules then in effect of the American Arbitration
Association (the "AAA Rules"). Arbitration will be conducted by one arbitrator,
mutually selected by GraphOn and the Shareholders' Representative. If GraphOn
and the Shareholders' Representative fail to mutually select an arbitrator
within three business days following the expiration of the Initial Resolution
Period, then arbitration will be conducted by three arbitrators: one selected by
GraphOn; one selected by the Shareholders' Representative; and the third
selected by the first two arbitrators. If GraphOn or the Shareholders'
Representative fails to select an arbitrator within 10 days following the
expiration of the Initial Resolution Period, then the other shall be entitled to
select the second arbitrator. The parties agree to use all reasonable efforts to
cause the arbitration hearing to be conducted within 75 days after the
appointment of the mutually-selected arbitrator or the last of the three
arbitrators, as the case may be, and to use all reasonable efforts to cause the
decision of the arbitrator(s) to be furnished within 95 days after the
appointment of the mutually-selected arbitrator or the last of the three
arbitrators, as the case may be. The parties further agree that discovery shall
be completed at least 10 days prior to the date of the arbitration hearing. The
decision of the arbitrator(s) shall relate solely to: (a) whether the Indemnitee
is entitled to receive the Contested Amount (or a portion thereof), and the
portion of such Contested Amount the Indemnitee is entitled to receive; and (b)
the determination of the non-prevailing party as provided below. The final
decision of the arbitrator(s) shall be furnished to the Shareholders'
Representative, the Indemnitee and the Escrow Agent in writing and shall
constitute a conclusive determination of the issue(s) in question, binding upon
the Shareholders' Representative, the Merger Shareholders, the Indemnitee and
the Escrow Agent and shall not be contested by any of them. The non-prevailing
party in any arbitration shall pay the reasonable expenses (including attorneys'
fees) of the prevailing party, any additional reasonable fees and expenses
(including reasonable attorneys' fees) of the Escrow Agent, and the fees and
expenses associated with the arbitration (including the arbitrators' fees and
expenses). For purposes of this Section 3.6, the non-prevailing party shall be
determined solely by the arbitrator(s). Any amounts payable by the Merger
Shareholders shall be paid out of Escrow Shares (or cash, as described further
in Section 5) pursuant to the written decision of the arbitrator(s).
3.7 The Escrow Agent shall have delivered to it: (a) a copy of a settlement
agreement executed by the Indemnitee and the Shareholders' Representative
setting forth instructions to the Escrow Agent as to the release of Escrow
Shares (or cash, as described further in Section 5); or (b) a copy of the award
of the arbitrator(s) referred to and as provided in Section 3.6 setting forth
5
instructions to the Escrow Agent as to the release of Escrow Shares (or cash, as
described further in Section 5). Within five (5) days of receipt of such
settlement agreement or arbitration award, the Escrow Agent shall release Escrow
Shares (or cash, as described further in Section 5) collectively having a
Stipulated Value equal to the additional amount as listed in the settlement
agreement or arbitration award (the "Arbitration Amount")
3.8 Any Escrow Shares released from the Escrow Account shall be deemed to
reduce the Escrow Shares pro rata with respect to each applicable Merger
Shareholder in accordance with each Merger Shareholder's percentage interest in
the Escrow Fund as set forth on Schedule A. All Deposited Shares shall have been
released in accordance with this Section 3 before any of the Wesinger Escrow
Shares are released.
Section 4. Release of Escrow Shares.
4.1 Within five business days after the Initial Termination Date, the Escrow
Agent shall, upon receipt of written notice from the Shareholders'
Representative, distribute or cause to be distributed to each of the Merger
Shareholders at such Merger Shareholder's address set forth on Schedule A such
Merger Shareholder's pro-rata portion of the Deposited Shares (or other property
held in the Escrow Account), if any, then held in escrow based on the percentage
interests set forth on Schedule A and shall distribute or cause to be
distributed to Wesinger all Wesinger Escrow Shares, if any, then held in escrow
in excess of 250,000 shares; provided, however, that if prior to the Initial
Termination Date, any Indemnitee has given a Claim Notice containing a claim
that has not been resolved prior to the Initial Termination Date in accordance
with Section 3, the Escrow Agent shall retain in the Escrow Account after the
Initial Termination Date. Within five business days after the Extended
Termination Date, the Escrow Agent shall, upon receipt of written notice from
the Shareholders' Representative, distribute or cause to be distributed to
Wesinger all Wesinger Escrow Shares, if any, then held in escrow; provided,
however, that if prior to the Extended Termination Date any Indemnitee has given
a claim Notice containing an Extended Period Claim that has not been resolved
prior to the Extended Termination Date in accordance with Section 3, the Escrow
Agent shall retain in the Escrow Account after the Extended Termination Date
Escrow Shares collectively having a Stipulated Value equal to 120% of the
Claimed Amount or Contested Amount, as the case may be, with respect to all
claims that have not then been resolved. (The parties acknowledge that it is
appropriate to retain more than 100% of the Claimed Amount in the Escrow Account
in recognition of the fact that the Indemnitee may have underestimated the
aggregate amount of the actual and potential Damages arising from a particular
breach or other matter.)
4.2 Distributions of GraphOn Common Stock shall be made to GraphOn or the
Merger Shareholders, as appropriate, at the addresses set forth on Schedule A.
Whenever a distribution is to be made to the Merger Shareholders, pro rata
distributions shall be made to each of them based on the percentage interests in
the Escrow Fund and at their addresses set forth on Schedule A.
Section 5. Sale of Escrow Shares; Valuation of Escrow Shares, Etc.
5.1 Required Sale of Escrow Shares to Satisfy Claims. Any time the Escrow
Agent is directed to release Escrow Shares from the Escrow Account equal to the
Full Amount, the Agreed Amount, the Settlement Amount or the Arbitration Amount,
if such Escrow Shares can be sold, using best efforts to attain the highest
6
possible per share price in connection with such sale, at an average per share
price equal to or exceeding $0.338 (the "80% Threshold"), the Shareholders'
Representative shall provide written notice to the Escrow Agent to release to
the Shareholders' Representative a number of shares out of the Escrow Account,
in accordance with the priority established in Section 3.8, to be sold by the
Shareholders' Representative such that 80% of the gross proceeds from such sale
or sales equals the applicable Full Amount, Agreed Amount, Settlement Amount or
Arbitration Amount. Any shares that are not sold by the Shareholders'
Representative, and any cash proceeds from the sale of Escrow Shares that did
not need to be sold in order for 80% of the gross proceeds from such sale or
sales to equal the applicable Full Amount, shall promptly be returned to the
Escrow Account. The remaining proceeds from any such sale, net of commissions,
costs and fees relating to such sale, shall be distributed to the Merger
Shareholders (with respect to Deposited Shares sold in such sale) and to
Wesinger (with respect to Wesinger Escrow Shares sold in such sale).
5.2 Stipulated Value. The "Stipulated Value" shall be the higher of (a) $0.27
per Escrow Share and (b) if the 80% Threshold is met or exceeded, cash equal to
the Full Amount, the Agreed Amount, the Settlement Amount or the Arbitration
Amount, as applicable.
5.3 Stock Splits. All numbers contained in, and all calculations required to
be made pursuant to, this Escrow Agreement with respect to the Escrow Shares
shall be adjusted as appropriate to reflect any stock split, reverse stock
split, stock dividend or similar transaction effected by GraphOn after the date
hereof; provided, however, that the Escrow Agent shall have received notice of
such stock split or other action and shall have received the appropriate number
of additional shares of GraphOn Common Stock or other property pursuant to
Section 2.4. In the event of any such stock split or other similar occurrence,
GraphOn shall deliver to the Shareholders' Representative and the Escrow Agent a
revised version of Schedule A setting forth the new number of Escrow Shares held
in the Escrow Fund. Unless and until the Escrow Agent receives the certificates
representing additional shares of GraphOn Common Stock or other property
pursuant to Section 2.4, the Escrow Agent may assume without inquiry that no
such stock or other property has been or is required to be issued with respect
to Escrow Shares.
Section 6. Fees and Expenses. The Escrow Agent shall be entitled to
receive from time to time fees in accordance with Schedule B. In accordance with
Schedule B, the Escrow Agent will also be entitled to reimbursement for
reasonable and documented out-of-pocket expenses incurred by the Escrow Agent in
the performance of its duties hereunder and the execution and delivery of this
Escrow Agreement. All such fees and expenses shall be paid by GraphOn, and any
such amounts paid by GraphOn will be Damages for which GraphOn may seek
reimbursement pursuant to the procedures set forth in this Escrow Agreement.
Section 7. Limitation of Escrow Agent's Liability.
7.1 The Escrow Agent undertakes to perform such duties as are specifically set
forth in this Escrow Agreement only and shall have no duty under any other
agreement or document, and no implied covenants or obligations shall be read
into this Escrow Agreement against the Escrow Agent. The Escrow Agent shall
incur no liability with respect to any action taken by it or for any inaction on
its part in reliance upon any notice, direction, instruction, consent, statement
or other document believed by it in good faith to be genuine and duly
authorized, nor for any other action or inaction except for its own negligence
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or willful misconduct. In all questions arising under this Escrow Agreement, the
Escrow Agent may rely on the advice of counsel, and for anything done, omitted
or suffered in good faith by the Escrow Agent based upon such advice the Escrow
Agent shall not be liable to anyone. In no event shall the Escrow Agent be
liable for incidental, punitive or consequential damages.
7.2 GraphOn and the Shareholders' Representative jointly and severally hereby
agree to indemnify the Escrow Agent and its officers, directors, employees and
agents for, and hold it and them harmless against, any loss, liability or
expense incurred without negligence or willful misconduct on the part of Escrow
Agent, arising out of or in connection with the Escrow Agent carrying out its
duties hereunder. This right of indemnification, compensation and reimbursement
shall survive the termination of this Escrow Agreement, and the resignation of
the Escrow Agent.
Section 8. Termination. This Escrow Agreement shall terminate on the
Extended Termination Date or, if earlier, upon the release by the Escrow Agent
of the entire Escrow Fund in accordance with this Escrow Agreement; provided,
however, that if the Escrow Agent has received from any Indemnitee a Claim
Notice setting forth a claim that has not been resolved by the Extended
Termination Date, then this Escrow Agreement shall continue in full force and
effect until the claim has been resolved and the Escrow Fund released in
accordance with this Escrow Agreement.
Section 9. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue as escrow agent under this Escrow
Agreement, the Escrow Agent may resign and be discharged from its duties and
obligations hereunder by giving its written resignation to the parties to this
Escrow Agreement. Such resignation shall take effect not less than 30 days after
it is given to all parties hereto. In such event, GraphOn may appoint a
successor Escrow Agent. If GraphOn fails to appoint a successor Escrow Agent
within 15 days after receiving the Escrow Agent's written resignation, the
Escrow Agent shall have the right to apply to a court of competent jurisdiction
for the appointment of a successor Escrow Agent. The successor Escrow Agent
shall execute and deliver to the Escrow Agent an instrument accepting such
appointment, and the successor Escrow Agent shall, without further acts, be
vested with all the estates, property rights, powers and duties of the
predecessor Escrow Agent as if originally named as Escrow Agent herein. The
Escrow Agent shall act in accordance with written instructions from GraphOn as
to the transfer of the Escrow Fund to a successor escrow agent.
Section 10. Shareholders' Representative.
10.1 As provided in the Reorganization Agreement and the Holder Agreement
attached as Exhibit D to the Reorganization Agreement, by virtue of the adoption
of the Reorganization Agreement and the entry into the Holder Agreement, the
Merger Shareholders shall be deemed to have approved the indemnification,
compensation, reimbursement and escrow terms set forth in the Reorganization
Agreement and this Escrow Agreement and the appointment of Ralph Wesinger as the
Shareholders' Representative, to give and receive notices and communications, to
authorize delivery to GraphOn of GraphOn Common Stock, cash or other property
from the Escrow Fund, to object to such deliveries, to agree to, negotiate,
enter into settlements and compromises of, and demand dispute resolution
pursuant to Section 3 and comply with orders of courts and awards of
arbitrator(s) with respect to claims of Indemnitees hereunder, and to take all
actions necessary or appropriate in the reasonable judgment of the Shareholders'
Representative for the accomplishment of the foregoing.
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10.2 Unless and until GraphOn and the Escrow Agent shall have received written
notice otherwise, GraphOn and the Escrow Agent shall be entitled to rely on, and
shall be fully protected relying on, the power and authority of the
Shareholders' Representative to act on behalf of the Merger Shareholders.
Section 11. Miscellaneous.
11.1 Attorneys' Fees. In any action at law or suit in equity to enforce or
interpret this Escrow Agreement or the rights of any of the parties hereunder,
the prevailing party in such action or suit shall be entitled to receive a
reasonable sum for its attorneys' fees and all other reasonable costs and
expenses incurred in such action or suit.
11.2 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Escrow Agreement shall be in writing and shall
be deemed properly delivered, given and received (a) when delivered by hand, or
(b) two business days after sent by registered mail or, by courier or express
delivery service, or by facsimile, to the address or facsimile telephone number
set forth below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other parties
hereto):
if to GraphOn:
GraphOn Corporation
3130 Winkle Avenue
Santa Cruz, California 95065
Fax: (831) 475-3017
Attn: William Swain
if to the Shareholders' Representative:
Ralph Wesinger
P.O. Box 612406
San Jose, CA 95161-2406.
Fax: (408) 907-2070
if to the Escrow Agent:
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 11219
Telephone: (718) 921-8380
Fax: (718) 765-8718
The Escrow Agent may assume that any Claim Notice, Response Notice or
other notice of any kind required to be delivered to the Escrow Agent and any
other Person has been received by such other Person on the date it has been
received by the Escrow Agent, but the Escrow Agent need not inquire into or
verify such receipt.
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11.3 Headings. The bold-faced headings contained in this Escrow Agreement are
for convenience of reference only, shall not be deemed to be a part of this
Escrow Agreement and shall not be referred to in connection with the
construction or interpretation of this Escrow Agreement.
11.4 Counterparts. This Escrow Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
11.5 Applicable Law; Jurisdiction. This Escrow Agreement shall be governed by,
and construed in accordance with, the laws of the State of California regardless
of the laws that might otherwise govern under applicable principles of conflicts
of laws thereof. In any action between the parties arising out of or relating to
this Escrow Agreement or any of the transactions contemplated by this Escrow
Agreement: (a) each of the parties irrevocably and unconditionally consents and
submits to the exclusive jurisdiction and venue of the state and federal courts
located in the State of California; (b) if any such action is commenced in a
state court, then, subject to applicable law, no party shall object to the
removal of such action to any federal court located in the Northern District of
California; (c) each of the parties irrevocably waives the right to trial by
jury; and (d) each of the parties irrevocably consents to service of process by
first class certified mail, return receipt requested, postage prepaid, to the
address at which such party is to receive notice in accordance with Section
11.2.
11.6 Successors and Assigns. This Escrow Agreement shall be binding upon and
shall inure to the benefit of each of the parties hereto and each of their
respective permitted successors and assigns, if any. No Merger Shareholder may
assign such Merger Shareholder's rights under this Escrow Agreement without the
express prior written consent of GraphOn, and any attempted assignment of this
Escrow Agreement or any of such rights by a Merger Shareholder without such
consent shall be void and of no effect; provided, however, that upon the death
of a Merger Shareholder, such Merger Shareholder's rights under this Escrow
Agreement shall be transferred to the person(s) who receive such Merger
Shareholder's GraphOn Common Stock under the laws of descent and distribution.
11.7 Waiver. No failure on the part of any Person to exercise any power,
right, privilege or remedy under this Escrow Agreement, and no delay on the part
of any Person in exercising any power, right, privilege or remedy under this
Escrow Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege or
remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy. No Person shall be deemed to have waived any
claim arising out of this Escrow Agreement, or any power, right, privilege or
remedy under this Escrow Agreement, unless the waiver of such claim, power,
right, privilege or remedy is expressly set forth in a written instrument duly
executed and delivered on behalf of such Person; and any such waiver shall not
be applicable or have any effect except in the specific instance in which it is
given.
11.8 Amendment. This Escrow Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto; provided, however, that any
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amendment executed and delivered by the Shareholders' Representative shall be
deemed to have been approved by and duly executed and delivered by all of the
Merger Shareholders.
11.9 Severability. Any term or provision of this Escrow Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making such determination
shall have the power to limit the term or provision, to delete specific words or
phrases, or to replace any invalid or unenforceable term or provision with 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, and
this Escrow Agreement shall be enforceable as so modified. In the event such
court does not exercise the power granted to it in the prior sentence, the
parties hereto agree to replace such invalid or unenforceable term or provision
with a valid and enforceable term or provision that will achieve, to the extent
possible, the economic, business and other purposes of such invalid or
unenforceable term.
11.10 Parties in Interest. Except as expressly provided herein, none of the
provisions of this Escrow Agreement, express or implied, is intended to provide
any rights or remedies to any Person other than the parties hereto and their
respective successors and assigns, if any.
11.11 Entire Agreement. This Escrow Agreement and the other agreements
referred to herein set forth the entire understanding of the parties hereto
relating to the subject matter hereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof.
11.12 Tax Reporting Information and Certification of Tax Identification
Numbers.
(a) The parties hereto agree that, for tax reporting purposes, all
interest on or other income, if any, attributable to the Escrow Fund or any
other amount held in escrow by the Escrow Agent pursuant to this Escrow
Agreement shall be allocable to the Merger Shareholders in accordance with their
percentage interests in the Escrow Fund set forth on Schedule A; provided,
however, that if GraphOn or NES shall have repurchased any Escrow Shares in
accordance with Section 3.8, then all interest on or other income, if any,
attributable to the Escrow Shares or any other amount held in escrow by the
Escrow Agent pursuant to this Escrow Agreement received after such repurchase
shall be allocable to the Merger Shareholders based on the number of Escrow
Shares held on behalf of each such Merger Shareholder at the time of the receipt
of such interest or other income (it being understood that, for purposes of
permitting the Escrow Agent to make such allocations, GraphOn and the
Shareholders' Representative shall jointly (i) calculate revised percentage
interests for the Merger Shareholders based on such number of Escrow Shares and
(ii) submit such calculations in writing to the Escrow Agent).
(b) GraphOn and each of the Merger Shareholders agree to provide the
Escrow Agent with certified tax identification numbers for each of them by
furnishing appropriate forms W-9 (or Forms W-8, in the case of non-U.S. persons)
and any other forms and documents that the Escrow Agent may reasonably request
(collectively, "Tax Reporting Documentation") to the Escrow Agent within 30 days
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after the date hereof. The parties hereto understand that, if such Tax Reporting
Documentation is not so furnished to the Escrow Agent, the Escrow Agent shall be
required by the Code to withhold a portion of any interest or other income
earned on the investment of monies or other property held by the Escrow Agent
pursuant to this Escrow Agreement, and to immediately remit such withholding to
the Internal Revenue Service.
11.13 Cooperation. The Shareholders' Representative agrees to cooperate fully
with GraphOn and the Escrow Agent and to execute and deliver such further
documents, certificates, agreements and instruments and to take such other
actions as may be reasonably requested by GraphOn or the Escrow Agent to
evidence or reflect the transactions contemplated by this Escrow Agreement and
to carry out the intent and purposes of this Escrow Agreement.
11.14 Construction.
(a) For purposes of this Escrow Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Escrow Agreement.
(c) As used in this Escrow Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this Escrow
Agreement to "Sections" and "Schedules" are intended to refer to Sections of
this Escrow Agreement and Schedules to this Escrow Agreement.
[Signature page follows]
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[SIGNATURE PAGE TO ESCROW AGREEMENT]
IN WITNESS WHEREOF, the parties have duly caused this Escrow Agreement to
be executed as of the day and year first above written.
GRAPHON CORPORATION,
a Delaware corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
SHAREHOLDERS' REPRESENTATIVE:
------------------------------------
Ralph Wesinger
ESCROW AGENT:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
By:
---------------------------
Name:
-------------------------
Title:
------------------------
SCHEDULE A
MERGER SHAREHOLDERS
SCHEDULE B
ESCROW AGENT'S FEES AND EXPENSES
EXHIBIT D
HOLDER AGREEMENT
THIS HOLDER AGREEMENT is entered into as of December ___, 2004, by and
among GRAPHON CORPORATION, a Delaware corporation ("GraphOn"), and the Persons
listed on Exhibit A hereto, referred to hereinafter as the "Holders" and each
individually as a "Holder."
RECITALS
A. Pursuant to an Agreement and Plan of Merger and Reorganization dated as of
December 3, 2004, among GraphOn, GraphOn via Sub III Inc., a Delaware
corporation and a wholly owned subsidiary of GraphOn ("Merger Sub"), GraphOn NES
Sub, LLC, a California limited liability company and a wholly owned subsidiary
of GraphOn ("Merger Sub II"), Network Engineering Software, Inc., a California
corporation ("NES"), and Ralph Wesinger (the "Reorganization Agreement"), it is
contemplated that (i) Merger Sub will merge with and into NES (the merger of
Merger Sub with and into NES being referred to in this Holder Agreement as the
"Merger") with NES being the surviving corporation in the Merger, (ii) following
the Merger, NES will merge with and into Merger Sub II and (iii) NES's
stockholders will receive shares of common stock, $0.0001 par value per share,
of GraphOn ("GraphOn Common Stock") in exchange for their shares of common stock
of NES ("NES Common Stock").
B. GraphOn's obligations in the Reorganization Agreement are conditioned upon
the execution and delivery of this Holder Agreement by each Holder.
C. Capitalized terms used but not defined herein are defined in the
Reorganization Agreement.
AGREEMENT
GraphOn and the Holders, intending to be legally bound, agree as follows:
Section 1. REGISTRATION RIGHTS.
1.1 Definitions. For the purpose of this Section 1:
(a) the term "Registration Statement" shall mean any registration
statement required to be filed by Section 1.2 and shall include any preliminary
prospectus, final prospectus, exhibit or amendment included in or relating to
such registration statements; and
(b) the term "Registrable Shares" shall mean all shares of GraphOn Common
Stock issued to the Holders in connection with the Merger.
1.2 Registration Procedures and Expenses. GraphOn shall:
(a) use its best efforts to file a Registration Statement with the SEC
within ninety (90) days following the Closing Date to register the Registrable
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Shares on Form S-1 and Rule 415 under the Securities Act or on such other
appropriate form that GraphOn may be permitted to use to register such
Registrable Shares for resale from time to time by the Holders;
(b) use commercially reasonable efforts, subject to receipt of necessary
information from the Holders, to cause any such Registration Statement filed
pursuant to Section 1.2(a) above to become effective as promptly after filing of
such Registration Statement as practicable;
(c) prepare and file with the SEC such amendments and supplements to such
Registration Statement and the prospectus used in connection therewith as may be
necessary to keep such Registration Statement continuously effective until
termination of such obligation as provided in Section 1.4, subject to GraphOn's
right to suspend pursuant to Section 1.3;
(d) furnish to each Holder who received Registrable Shares (and to each
underwriter, if any, of such Registrable Shares) such number of copies of
prospectuses in conformity with the requirements of the Securities Act and such
other documents as the Holders may reasonably request, in order to facilitate
the public sale or other disposition of all or any of the Registrable Shares by
the Holders;
(e) file such documents as may be required of GraphOn for normal
securities law clearance for the resale of the Registrable Shares in such states
of the United States as may be reasonably requested by each Holder; provided,
however, that GraphOn shall not be required in connection with this paragraph
"(e)" to qualify as a foreign corporation or execute a general consent to
service of process in any jurisdiction; and
(f) advise each Holder who received Registrable Shares promptly:
(i) of the effectiveness of the Registration Statement or any
post-effective amendments thereto;
(ii) of any request by the SEC for amendments to the Registration
Statement or amendments to the prospectus or for additional information relating
thereto;
(iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement under the Securities Act or of the
suspension by any state securities commission of the qualification of the
Registrable Shares for offering or sale in any jurisdiction, or the initiation
of any proceeding for any of the preceding purposes;
(iv) of the suspension by GraphOn of the use of the prospectus
forming a part of the Registration Statement; and
(v) of the existence of any fact and the happening of any event that
makes any statement of a material fact made in the Registration Statement, the
prospectus and amendment or supplement thereto, or any document incorporated by
reference therein, untrue, or that requires the making of any additions to or
changes in the Registration Statement or the prospectus in order to make the
statements therein not misleading; and
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(g) use commercially reasonable efforts to cause all Registrable Shares to
be listed on each securities exchange, if any, on which equity securities of
GraphOn are then listed.
1.3 Delay and Suspension of Prospectus. At GraphOn's reasonable discretion,
GraphOn may delay the effectiveness of, and may suspend the use of, the
prospectus forming a part of the Registration Statement, including to the extent
necessary to file any post-effective amendment to the Registration Statement. In
addition, notwithstanding any other provision of this Agreement, the Holders
understand that there may be periods during which GraphOn's Board of Directors
may determine, in good faith, that it is in the best interest of GraphOn and its
stockholders to defer disclosure of non-public information until such
information has reached a more advanced stage and that during such periods sales
of Registrable Securities and the effectiveness of any registration statement
covering Registrable Securities may be suspended or delayed. The Holders agree
that upon receipt of any notice from GraphOn of the development of any
non-public information, such Holders will forthwith discontinue such Holders'
disposition of Registrable Securities pursuant to the registration statement
relating to such Registrable Securities until such Holders' receipt of copies of
an appropriately supplemented or amended prospectus and, if so directed by
GraphOn, such Holders will use their best efforts to deliver to GraphOn (at
GraphOn's expense) all copies, other than permanent file copies then in such
Holders' possession, of the prospectus relating to such Registrable Securities
current at the time of receipt of such notice. In the event GraphOn shall give
any such notice, the applicable time period during which a Registration
Statement is to remain effective shall be extended by the number of days during
the period from and including the date of the giving of such notice to and
including the date when each seller of a Registrable Share covered by such
registration statement shall have received the copies of the appropriate
supplemented or amended prospectus.
1.4 Termination of Obligations. The obligations of the Company pursuant to
Section 1.2 hereof shall cease and terminate upon the earlier to occur of (a)
such time as all of the Registrable Shares have been resold, (b) such time as
all of the Registrable Shares may be resold in a three-month period pursuant to
Rule 144 or (c) the second anniversary of the Closing Date.
1.5 Rights Upon Transfer. No Transferee of Registrable Shares shall be
entitled to have the shares transferred to it covered by the Registration
Statement unless such Transferee agrees in writing to be bound by all of the
provisions of this Holder Agreement applicable to such Holder and to return a
properly completed and executed Registration Statement Questionnaire and
Investment Suitability Questionnaire (the "Questionnaires") furnished by
GraphOn.
Section 2. INDEMNIFICATION OBLIGATIONS; APPOINTMENT OF SHAREHOLDERS'
REPRESENTATIVE
2.1 Acknowledgement of Obligation. Each Holder acknowledges such Holders'
obligation, pursuant to Section 9 of the Reorganization Agreement, and subject
to any limitations contained therein, to hold harmless and indemnify each of the
Indemnitees from and against any, and to compensate and reimburse each of the
Indemnitees for any Damages directly or indirectly suffered or incurred by any
Indemnitee or to which any Indemnitee may otherwise be subject; provided,
3
however, that, except as otherwise set forth in Section 9 of the Reorganization
Agreement, each Holder's obligation pursuant to Section 9 of the Reorganization
Agreement shall be limited to such Holder's share of the Escrow Amount. Each
Holder hereby expressly agrees to be bound by the provisions of Section 9 of the
Reorganization Agreement.
2.2 Shareholders' Representatives.
(a) Appointment. The Holders hereby appoint Ralph Wesinger as agent and
attorney-in-fact (the "Shareholders' Representative") for and on behalf of the
Holders. The Shareholders' Representative shall have full power and authority to
represent all Holders and their successors with respect to all matters arising
under this Holder Agreement, the Reorganization Agreement and the Escrow
Agreement and all actions taken by the Shareholders' Representative hereunder
and thereunder shall be binding upon all such Holders and their successors as if
expressly confirmed and ratified in writing by each of them and no Holder shall
have the right to object, dissent, protest or otherwise contest the same. The
Shareholders' Representative may take any and all actions that it believes to be
necessary or appropriate under this Holder Agreement, the Reorganization
Agreement and the Escrow Agreement for and on behalf of the Holders, as fully as
if the Holders were acting on their own behalf, including, without limitation,
executing the Escrow Agreement as Shareholders' Representative, giving and
receiving any notice or instruction permitted or required under this Holder
Agreement, the Reorganization Agreement or the Escrow Agreement by the
Shareholders' Representative or any Holder, interpreting all of the terms and
provisions of this Holder Agreement, the Reorganization Agreement and the Escrow
Agreement, authorizing payments to be made with respect hereto or thereto,
obtaining reimbursement as provided for herein for all out-of-pocket fees and
expenses and other obligations of or incurred by the Shareholders'
Representative in connection with this Holder Agreement, the Reorganization
Agreement and the Escrow Agreement, defending all indemnity claims against the
Holders pursuant to Section 9.2 of the Reorganization Agreement (each an
"Indemnity Claim"), consenting to, compromising or settling all Indemnity
Claims, conducting negotiations with GraphOn and its agents regarding such
claims, dealing with GraphOn and the Escrow Agent under this Holder Agreement,
the Reorganization Agreement and the Escrow Agreement with respect to all
matters arising under this Holder Agreement, the Reorganization Agreement and
the Escrow Agreement, taking any and all other actions specified in or
contemplated by this Agreement and the Escrow Agreement, and engaging counsel,
accountants or other Representatives in connection with the foregoing matters.
Without limiting the generality of the foregoing, the Shareholders'
Representative shall have full power and authority to interpret all the terms
and provisions of this Holder Agreement, the Reorganization Agreement and the
Escrow Agreement and to consent to any amendment hereof or thereof on behalf of
all such Holders and such successors. Notwithstanding the foregoing, each
Shareholder shall have the right to exercise any voting rights appertaining to
the Escrow Shares and the Reimbursement Shares.
(b) Authorization. The Holders hereby authorize the Shareholders'
Representative, on behalf of each Holder, to:
(i) receive all notices or documents given or to be given to any of
the Holders by GraphOn pursuant hereto or to the Reorganization Agreement or
Escrow Agreement or in connection herewith or therewith and to receive and
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accept service of legal process in connection with any suit or proceeding
arising under this Holder Agreement, the Reorganization Agreement or the
Escrow Agreement;
(ii) deliver to GraphOn at the Closing all certificates and documents
to be delivered to GraphOn by any Holder pursuant to this Holder Agreement or
the Reorganization Agreement, together with any other certificates and documents
executed by any Holder and deposited with the Shareholders' Representative for
such purpose;
(iii) engage counsel, and such accountants and other advisors for any
of the Holders and incur such other expenses on behalf of any of the Holders in
connection with this Holder Agreement, the Reorganization Agreement or the
Escrow Agreement and the transactions contemplated hereby or thereby as the
Shareholders' Representative may in its sole discretion deem appropriate; and
(iv) take such action on behalf of any of the Holders as the
Shareholders' Representative may in its sole discretion deem appropriate in
respect of:
(A) waiving any inaccuracies in the representations or warranties
of GraphOn contained in the Reorganization Agreement or in any document
delivered by GraphOn pursuant hereto or pursuant to the Reorganization
Agreement;
(B) waiving the fulfillment of any of the conditions precedent to
GraphOn's obligations hereunder or pursuant to the Escrow Agreement;
(C) taking such other action as the Shareholders' Representative
or any of the Holders are authorized to take under this Holder Agreement, the
Reorganization Agreement or the Escrow Agreement;
(D) receiving all documents or certificates and making all
determinations, on behalf of any of the Holders, required under this Holder
Agreement, the Reorganization Agreement or the Escrow Agreement;
(E) all such other matters as the Shareholders' Representative may
in its sole discretion deem necessary or appropriate to consummate this Holder
Agreement, the Reorganization Agreement or the Escrow Agreement and the
transactions contemplated hereby and thereby; and
(F) all such action as may be necessary after the Closing Date to
carry out any of the transactions contemplated by this Holder Agreement, the
Reorganization Agreement and the Escrow Agreement, including, without
limitation, the defense and/or settlement of any claims for which
indemnification is sought pursuant to Section 9 of the Reorganization Agreement
and any waiver of any obligation of GraphOn, Surviving Entity I or the Surviving
Entity.
All actions, decisions and instructions of the Shareholders' Representative
shall be conclusive and binding upon all of the Holders and no Holder nor any
other Person shall have any claim or cause of action against the Shareholders'
Representative, and the Shareholders' Representative shall have no liability to
5
any Holders or any other Person, for any action taken, decision made or
instruction given by the Shareholders' Representative in connection with the
Escrow Agreement, this Holder Agreement or the Reorganization Agreement, except
in the case of its own willful misconduct.
(c) Indemnification of Shareholders' Representative. The Shareholders'
Representative shall incur no liability to the Holders or the Escrow Agent or
any other person with respect to any action taken or suffered by it in reliance
upon any note, direction, instruction, consent, statement or other documents
reasonably believed by the Shareholders' Representative to be genuinely and duly
authorized by a majority in interest of the Holders (or the successors or
assigns thereto), nor for other action or inaction taken or omitted in good
faith in connection herewith or with the Escrow Agreement, in any case except
for liability to the Holders for its own willful misconduct. The Shareholders'
Representative shall be indemnified by the Holders out of the Reimbursement Fund
for and shall be held harmless against any loss, liability or expense incurred
by the Shareholders' Representative or any of its Affiliates and any of its
partners, directors, officers, employees, agents, Holders, consultants,
attorneys, accountants, advisors, brokers, representatives or controlling
persons, in each case relating to the Shareholders' Representative's conduct as
Shareholders' Representative, other than such losses, liabilities or expenses
resulting from the Shareholders' Representative's willful misconduct in
connection with their performance under this Holder Agreement, the
Reorganization Agreement and the Escrow Agreement. This indemnification shall
survive the termination of this Agreement. The costs of such indemnification
(including the costs and expenses of enforcing this right of indemnification)
shall be paid from the principal portion of the Reimbursement Fund. For all
purposes hereunder, a majority-in-interest of the Holders shall be determined on
the basis of each such Holder's ownership of GraphOn Common Stock received upon
conversion of the Holder's shares of NES Common Stock in connection with the
Merger immediately following the Effective Time of Merger I. The Escrow Agent
shall from time to time sell such amount of the Reimbursement Shares as
necessary to pay the Shareholders' Representative's costs and expenses, to the
extent required by this Section 2.2(c).
(d) Reasonable Reliance. In the performance of its duties hereunder, the
Shareholders' Representative shall be entitled to rely upon any document or
instrument reasonably believed by it to be genuine, accurate as to content and
signed by any Holders or GraphOn. The Shareholders' Representative may assume
that any person purporting to give any notice in accordance with the provisions
hereof has been duly authorized to do so.
(e) Attorney-in-Fact.
(i) The Shareholders' Representative is hereby appointed and
constituted the true and lawful attorney-in-fact of each Holder, with full power
in his, her or its name and on his, her or its behalf to act according to the
terms of this Holder Agreement, the Reorganization Agreement and the Escrow
Agreement in the absolute discretion of the Shareholders' Representative; and in
general to do all things and to perform all acts including, without limitation,
executing and delivering the Escrow Agreement and any other agreements,
certificates, receipts, instructions, notices or instruments contemplated by or
deemed advisable in connection with the Escrow Agreement.
6
(ii) This power of attorney and all authority hereby conferred is
granted and shall be irrevocable and shall not be terminated by any act of any
Holders, by operation of law, whether by such Holder's death, disability,
protective supervision or any other event. Without limiting the foregoing, this
power of attorney is to ensure the performance of a special obligation and,
accordingly, each Holder hereby renounces its, his or her right to renounce this
power of attorney unilaterally any time before the end of the Escrow Period (as
such term is defined in the Escrow Agreement).
(iii) Each Holder hereby waives any and all defenses which may be
available to contest, negate or disaffirm the action of the Shareholders'
Representative taken in good faith under the Escrow Agreement.
(iv) Notwithstanding the power of attorney granted in this Section
2.2, no agreement, instrument, acknowledgement or other act or document shall be
ineffective by reason only of a Holder having signed or given such directly
instead of the Shareholders' Representative.
(f) Liability. If the Shareholders' Representative is required by the
terms of the Escrow Agreement to determine the occurrence of any event or
contingency, the Shareholders' Representative shall, in making such
determination, be liable to the Holders only for its proven willful misconduct
as determined in light of all the circumstances, including the time and
facilities available to it in the ordinary conduct of business. In determining
the occurrence of any such event or contingency, the Shareholders'
Representative may request from any of the Holders or any other person such
reasonable additional evidence as the Shareholders' Representative in its sole
discretion may deem necessary to determine any fact relating to the occurrence
of such event or contingency, and may at any time inquire of and consult with
others, including any of the Holders, and the Shareholders' Representative shall
not be liable to any Holder for any Damages resulting from its delay in acting
hereunder pending receipt and examination of additional evidence requested by
it.
(g) Orders. The Shareholders' Representative is authorized, in its sole
discretion, to comply with final, nonappealable orders or decisions issued or
process entered by any court of competent jurisdiction or arbitrator with
respect to the Escrow Fund or the Reimbursement Fund. If any portion of the
Reimbursement Fund is disbursed to the Shareholders' Representative and is at
any time attached, garnished or levied upon under any court order, or in case
the payment, assignment, transfer, conveyance or delivery of any such property
shall be stayed or enjoined by any court order, or in case any order, judgment
or decree shall be made or entered by any court affecting such property or any
part thereof, then and in any such event, the Shareholders' Representative is
authorized, in its sole discretion, but in good faith, to rely upon and comply
with any such order, writ, judgment or decree that it is advised by legal
counsel selected by it is binding upon it without the need for appeal or other
action; and if the Shareholders' Representative complies with any such order,
writ, judgment or decree, it shall not be liable to any Holder or to any other
Person by reason of such compliance even though such order, writ, judgment or
decree may be subsequently reversed, modified, annulled, set aside or vacated.
7
(h) Removal of a Shareholders' Representative; Authority of Successor
Shareholders' Representative. Holders who in the aggregate hold a majority of
the shares in the Escrow Fund shall have the right at any time during the term
of the Escrow Agreement to remove the then-acting Shareholders' Representative
and to appoint a successor Shareholders' Representative; provided, however, that
neither such removal of any then acting Shareholders' Representative nor such
appointment of the successor Shareholders' Representative shall be effective
until the delivery to the Escrow Agent of executed counterparts of a writing
signed by each such Holder with respect to such removal and appointment,
together with an acknowledgment signed by the successor Shareholders'
Representative appointed in such writing that he or she accepts the
responsibility of being the successor Shareholders' Representative and agrees to
perform and be bound by all of the provisions of this Agreement applicable to
the Shareholders' Representative. Each successor Shareholders' Representative
shall have all of the power, authority, rights and privileges conferred by this
Agreement upon the original Shareholders' Representative, and the term
"Shareholders' Representative" as used herein and in the Escrow Agreement shall
be deemed to include any interim or successor Shareholders' Representative.
(i) Expenses of the Shareholders' Representative. The Holders (i) shall
have no claim or cause of action against, may not assert any claim against, and
shall indemnify and hold harmless the Shareholders' Representative and its
Affiliates and any of their respective partners, directors, officers, employees,
agents, Holders, consultants, attorneys, accountants, advisors, brokers,
representatives or controlling persons, as provided for in Section 2.2(c) above
and (ii) shall pay to the Shareholders' Representative, promptly upon request,
such Holder's pro rata share of any amounts paid by the Shareholders'
Representative on behalf of the Holders and all costs and expenses (including
legal, accounting and other advisors' fees and expenses, if applicable)
reasonably incurred by the Shareholders' Representative in connection with the
protection, defense or enforcement of any rights under this Holder Agreement or
the Escrow Agreement.
(j) Irrevocable Appointment. Subject to Section 2.2(i), the appointment of
the Shareholders' Representative hereunder is irrevocable and any action taken
by the Shareholders' Representative pursuant to the authority granted in this
Section 2.2 shall be effective and absolutely binding on each Holder thereof
notwithstanding any contrary action of, or direction from any Holder, except for
actions taken by the Shareholders' Representative that constitute willful
misconduct.
2.3 Defense of Third-Party Claims. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against
Surviving Entity I, against the Surviving Entity, against GraphOn or against any
other Person) with respect to which an Indemnitee may seek indemnification
pursuant to Section 9 of the Reorganization Agreement, GraphOn shall have the
right, at its election, to proceed with the defense of such claim or Legal
Proceeding on its own. If GraphOn so proceeds with the defense of any such claim
or Legal Proceeding:
(a) all reasonable expenses relating to the defense of such claim or Legal
Proceeding shall be borne and paid by the Holders;
8
(b) each Holder shall make available to GraphOn any documents and
materials in his possession or control that may be necessary to the defense of
such claim or Legal Proceeding; and
(c) GraphOn shall have the right to settle, adjust or compromise such
claim or Legal Proceeding with the consent of the Shareholders' Representative;
provided, however, that such consent shall not be unreasonably withheld.
GraphOn shall give the Shareholders' Representative prompt notice of the
commencement of any such Legal Proceeding against GraphOn, against Surviving
Entity I or against the Surviving Entity; provided, however, that any failure on
the part of GraphOn to so notify the Shareholders' Representative shall not
limit any indemnification obligations under Section 9 of the Reorganization
Agreement (except to the extent such failure materially prejudices the defense
of such Legal Proceeding).
2.4 Exercise of Remedies by Indemnitees Other Than GraphOn. No Indemnitee
(other than GraphOn or any successor thereto or assign thereof) shall be
permitted to assert any indemnification claim or exercise any other remedy under
the Reorganization Agreement or this Holder Agreement unless GraphOn (or any
successor thereto or assign thereof) shall have consented to the assertion of
such indemnification claim or the exercise of such other remedy.
Section 3. CERTIFICATION
3.1 Representations, Warranties and Certification of the Holders. Each
Holder represents, warrants and certifies to GraphOn as follows.
(a) Before giving effect to the Merger: (i) each Holder is the beneficial
owner of the number of shares of NES Common Stock set forth opposite the
Holder's name on the Schedule of Holders attached hereto as Exhibit A (the
"Shares"); (ii) each Holder has good and valid title to the Shares free and
clear of any Encumbrances; (iii) the Shares are the only outstanding shares of
the capital stock of NES beneficially owned by the Holder; and (iv) the Holder
has the sole power to vote all of the Shares at any meeting of the stockholders
of NES and the sole power to act by written consent with respect to the Shares
in lieu of any such meeting. The Holder has not appointed or granted any proxy
or entered into any agreement, contract, commitment or understanding with
respect to any of the Shares.
(b) The Holder has the absolute and unrestricted right, power, authority
and capacity to enter into, execute, deliver and perform all of his obligations
under this Holder Agreement and under each other agreement, document or
instrument referred to in or contemplated by this Holder Agreement to which the
Holder is or is to become a party (each such other agreement, document or
instrument being referred to herein as an "Other Applicable Document").
(c) This Holder Agreement and each Other Applicable Document (i) has been
(or will when executed by the Holder be) duly and validly executed by the Holder
and (ii) constitutes (or will when executed by the Holder constitute) a valid
and binding obligation of the Holder, enforceable against the Holder in
9
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors, and to general equitable
principles.
(d) Neither the execution, delivery or performance of this Holder
Agreement or of any Other Applicable Document, nor the consummation of the
Merger or any of the other transactions contemplated by this Holder Agreement,
the Reorganization Agreement or by any Other Applicable Document, will directly
or indirectly: (i) result in any violation or breach of any agreement or other
instrument to which the Holder is a party or by which the Holder or any of the
Shares is bound or affected; or (ii) result in a violation of any Legal
Requirement or order to which the Holder or any of the Shares is subject. No
authorization, consent or approval of, or notice to, any Person is required to
be obtained or given by the Holder in connection with the execution, delivery or
performance of the Reorganization Agreement or of any Other Applicable Document.
(e) There is no Legal Proceeding by or before any Governmental Body
pending or, to the knowledge of the Holder, threatened against the Holder that
challenges or would challenge the execution, delivery or performance of this
Holder Agreement or of any Other Applicable Document or the taking of any of the
actions required to be taken under this Holder Agreement or under any Other
Applicable Document.
(f) The Holder is aware that (i) the GraphOn Common Stock to be issued to
the Holder in the Merger will not be issued pursuant to a registration statement
under the Securities Act, but will instead be issued in reliance on the
exemption from registration set forth in Regulation D under the Act and (ii)
neither the Transaction nor the issuance of such GraphOn Common Stock has been
approved or reviewed by the SEC or by any other Governmental Body.
(g) The Holder is aware that the GraphOn Common Stock to be issued in the
Merger cannot be offered, sold or otherwise transferred, assigned, pledged or
hypothecated unless such GraphOn Common Stock is registered under the Securities
Act or unless an exemption from registration is available.
(h) The GraphOn Common Stock to be issued to the Holder in the Merger will
be acquired by the Holder for investment purposes only and for the Holder's own
account, and not with a view to, or for resale in connection with, any
unregistered distribution thereof.
(i) The Holder is knowledgeable, sophisticated and experienced in making,
and is qualified to make, decisions with respect to investments in securities
presenting investment decisions like that involved in the Holder's contemplated
investment in the GraphOn Common Stock to be issued in connection with the
Merger.
(j) The Holder is an "accredited investor," as that term is defined in
Rule 501 under the Securities Act.
(k) The Holder understands that stop transfer instructions will be given
to GraphOn's transfer agent with respect to the GraphOn Common Stock to be
issued to the Holder in the Merger, and that there will be placed on the
certificate or certificates representing such GraphOn Common Stock a legend
identical or similar in effect to the following legend (together with any other
legend or legends required by applicable state securities laws or otherwise):
10
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED
UNLESS REGISTERED UNDER THE ACT OR UNLESS AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE."
3.2 Reliance. The Holder acknowledges that GraphOn will rely on the Holder's
representations, warranties and certification set forth in Section 3.1 above for
purposes of determining the Holder's suitability as an investor in GraphOn
Common Stock and for purposes of confirming the availability of an exemption
from the registration requirements of the Securities Act for the issuance of
shares of GraphOn Common Stock in the Merger.
3.3 Prohibitions Against Transfer. The Holder understands and acknowledges
that it shall not effect any sale, transfer or other disposition, or any
assignment, pledge or hypothecation, of any shares of GraphOn Common Stock that
he is to receive in the Merger unless:
(i) such sale, transfer, disposition, assignment, pledge or hypothecation
has been registered under the Securities Act;
(ii) counsel reasonably satisfactory to GraphOn shall have advised GraphOn
in a written opinion letter (satisfactory in form and content to GraphOn), upon
which GraphOn may rely, that such sale, transfer, disposition, assignment,
pledge or hypothecation will be exempt from registration under the Securities
Act; or
(iii) an authorized representative of the SEC shall have rendered written
advice to the Holder to the effect that the SEC would take no action, or that
the staff of the SEC would not recommend that the SEC take action, with respect
to such sale, transfer, disposition, assignment, pledge or hypothecation and a
copy of such written advice and all other related communications with the SEC
shall have been delivered to GraphOn.
3.4 No "Net Short" Position. For so long as Holder owns any Shares, such
Holder shall not maintain a Net Short Position. For purposes of this Section, a
"Net Short Position" by a person means a position whereby such person has
executed one or more sales of GraphOn Common Stock that is marked as a short
sale and that is executed at a time when such Holder has no equivalent
offsetting long position in the GraphOn Common Stock. For purposes of
determining whether a Holder has an equivalent offsetting long position in the
GraphOn Common Stock, all GraphOn Common Stock that is owned by such Holder
shall be deemed to be held long by such Holder.
3.5 Questionnaires. Holder has completed or caused to be completed and
delivered to GraphOn the Questionnaires, and the answers to the questions in the
Questionnaires are true and correct as of the date of this Agreement; provided,
that the Holders shall be entitled to update such information by providing
written notice thereof to GraphOn before the effective date of the Registration
Statement.
11
Section 4. MISCELLANEOUS PROVISIONS
4.1 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the date of this Holder Agreement) for the purpose of carrying
out or evidencing any of the transactions contemplated by this Holder Agreement.
4.2 Fees and Expenses. Except as explicitly contained in this Holder
Agreement, each party to this Holder Agreement shall bear and pay all fees,
costs and expenses (including legal fees and accounting fees) that have been
incurred or that are incurred by or on behalf of such party in connection with
the transactions contemplated by this Holder Agreement.
4.3 Attorneys' Fees. If any action or proceeding relating to this Holder
Agreement or the enforcement of any provision of this Holder Agreement is
brought against any party hereto, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to any
other relief to which the prevailing party may be entitled).
4.4 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Holder Agreement shall be in writing and shall
be deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile number set forth on the signature pages to this Holder
Agreement (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto).
4.5 Time of the Essence. Time is of the essence of this Holder Agreement.
4.6 Headings. The underlined headings contained in this Holder Agreement are
for convenience of reference only, shall not be deemed to be a part of this
Holder Agreement and shall not be referred to in connection with the
construction or interpretation of this Holder Agreement.
4.7 Counterparts. This Holder Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
4.8 Governing Law. This Holder Agreement shall be construed in accordance
with, and governed in all respects by, the internal laws of the State of
California (without giving effect to principles of conflicts of laws).
4.9 Successors and Assigns. This Holder Agreement shall be binding upon: each
Holder and its successors and assigns (if any); and GraphOn and its successors
and assigns (if any). This Agreement shall inure to the benefit of each Holder,
GraphOn and the respective successors and assigns (if any) of the foregoing. No
Holder may assign any rights under this Holder Agreement to any Person unless
such Person agrees in writing to be bound by the terms and provisions of this
Holder Agreement, and such transfer is in compliance with the terms and
provisions of this Holder Agreement and permitted by federal and state
securities law. GraphOn may freely assign any or all of its rights under this
12
Holder Agreement, in whole or in part, to any other Person without obtaining the
consent or approval of any other party hereto or of any other Person.
4.10 Remedies Cumulative. The rights and remedies of the parties hereto
shall be cumulative (and not alternative).
4.11 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Holder Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this Holder
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Holder Agreement, or any power, right, privilege or remedy under this Holder
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such Person; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
4.12 Amendments. This Holder Agreement may not be amended, modified, altered
or supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
4.13 Severability. Any term or provision of this Holder Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making such determination
shall have the power to limit the term or provision, to delete specific words or
phrases, or to replace any invalid or unenforceable term or provision with 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, and
this Holder Agreement shall be enforceable as so modified. In the event such
court does not exercise the power granted to it in the prior sentence, the
parties hereto agree to replace such invalid or unenforceable term or provision
with a valid and enforceable term or provision that will achieve, to the extent
possible, the economic, business and other purposes of such invalid or
unenforceable term.
4.14 Parties in Interest. Except for the provisions of Section 2, none of the
provisions of this Holder Agreement is intended to provide any rights or
remedies to any Person other than the parties hereto and their respective
successors and assigns (if any).
4.15 Entire Agreement. This Holder Agreement and the Reorganization Agreement
set forth the entire understanding of the parties hereto relating to the subject
matter hereof and thereof and supersede all prior agreements and understandings
among or between any of the parties relating to the subject matter hereof and
13
thereof; provided, however, that (a) the Confidentiality Agreement executed on
behalf of GraphOn and the Company on August 20, 2004 (the "Confidentiality
Agreement") shall not be superseded by this Holder Agreement and shall remain in
effect until the date on which such Confidentiality Agreement is terminated in
accordance with its terms and (b) the "Binding Provisions" set forth in Part 2
of the Letter of Intent dated as of October 6, 2004 (the "LOI") shall remain in
effect until such provisions terminate in accordance with the terms of the LOI.
4.16 Construction.
(a) For purposes of this Holder Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Holder Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Holder Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Holder
Agreement and Exhibits to this Holder Agreement.
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this HOLDER AGREEMENT
as of the date set forth in the first paragraph hereof.
COMPANY: HOLDERS:
GRAPHON CORPORATION
By: By:
--------------------------- -------------------------------
Address: 3130 Winkle Avenue Printed Name: --------------------
Santa Cruz, California 95065 Entity Name (if applicable): -----
Fax: (831) 475-3017 ----------------------------------
Attn: William Swain Title (if applicable): -----------
Address: -------------------------
Facsimile: -----------------------
SCHEDULE A
SCHEDULE OF HOLDERS
SHARES OF NES
HOLDER COMMON STOCK
Ralph Wesinger 53,480
Crystal Bay Company 19,905
Oso Partners 2,004
William Kennedy 1,810
Forrest R. and Judith A. Romas 1,544
Clark Reams 575
Neil Ison 312
Steven Levy 312
William Sanders 200
Sierra Patent Group 0
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Total: 80,142
------