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Search Agreement and Plan of Merger by:
AGREEMENT AND
PLAN OF MERGER
by and
among
HEALTHWAYS, INC.,
a Delaware corporation,
LIME
ACQUISITION CORP.,
a California
corporation,
and
LIFEMASTERS
SUPPORTED SELFCARE, INC.,
a California
corporation
Dated as of
May 30, 2006.
<PAGE>
TABLE OF
CONTENTS
ARTICLE I. THE
MERGER...............................................2
1.1 The
Merger...................................................2
1.2 Effective Time;
Closing......................................2
1.3 Effect of the
Merger.........................................2
1.4
Organization of Surviving Corporation........................2
1.5 Effect on Company
Securities.................................3
1.6 Capital Stock of the Merger
Sub..............................6
1.7 Cancellation of Stock Owned by the Parent
and the Merger Sub.6
1.8 Payment of Merger Consideration; Series E
Liquidation
Payments.....................................................6
1.9 Exchange Procedure...........................................8
1.10 Dissenting Shares and Dissenters'
Rights.....................9
1.11 Working Capital
Adjustment..................................10
ARTICLE II. REPRESENTATIONS AND
WARRANTIES OF THE COMPANY...........14
2.1 Organization and Good
Standing..............................14
2.2
Subsidiaries................................................14
2.3 Company Capital
Structure...................................15
2.4 Obligations With Respect to Capital
Stock...................16
2.5
Authority...................................................16
2.6 Corporate
Records...........................................17
2.7 Financial
Statements........................................17
2.8 No Undisclosed Liabilities; Trade
Payables..................18
2.9 Absence of Certain
Changes..................................18
2.10 Property;
Encumbrances......................................20
2.11 Condition of Real
Property..................................21
2.12
Subleases...................................................21
2.13 Intellectual
Property.......................................21
2.14
Insurance...................................................23
2.15 Receivables and
Payables....................................23
2.16 Judgments; Litigation.......................................24
2.17
Taxes.......................................................24
2.18 Compliance with Law;
Authorizations.........................25
2.19 Environmental...............................................26
2.20 Bank Accounts, Letters of Credit and
Powers of Attorney.....27
2.21
Contracts...................................................27
2.22 Employees and Independent
Contractors.......................29
2.23 Employee
Benefits...........................................30
2.24
Customers...................................................32
2.25 Government
Investigation....................................32
2.26 Compliance with Applicable Privacy and
Security Laws........32
2.27 Brokers' and Finders'
Fees..................................33
2.28 Transactions with Related
Persons...........................33
2.29
Certain Payments............................................33
2.30 Board
Approvals.............................................33
2.31 Required Shareholder
Approval...............................33
2.32 Insolvency
Proceedings.....................................34
2.33 Approvals and
Consents......................................34
ARTICLE III. REPRESENTATIONS AND
WARRANTIES OF THE PARENT AND THE
MERGER SUB..............................................34
3.1 Organization and Good
Standing..............................34
3.2
Authority...................................................35
3.3 Brokers' and Finders' Fees..................................35
3.4
Financing...................................................36
ARTICLE IV. CONDUCT PRIOR TO
THE EFFECTIVE TIME.....................36
4.1 Ordinary Course.............................................36
4.2 Amendment of Organizational
Documents.......................36
4.3
Liens.......................................................36
4.4 Maintenance of
Assets.......................................36
4.5 Accounting and
Tax..........................................36
4.6 Compliance with Legal
Requirements..........................36
4.7 Disposition of
Assets.......................................37
4.8
Compensation................................................37
4.9 Modification or Breach of Agreements; New
Agreements........37
4.10 Capital
Expenditures........................................37
4.11 Discharge...................................................37
4.12 Issuance or Sale of
Securities..............................37
4.13
Dividends...................................................37
4.14 Indebtedness................................................38
4.15 Benefit
Plans...............................................38
4.16 Books and
Records...........................................38
4.17 Acquisitions................................................38
4.18 Key
Employees...............................................38
4.19 Restrictive
Covenants.......................................38
4.20 Other Actions...............................................38
4.21
Commitments.................................................38
4.22 Permitted
Expenditures......................................38
ARTICLE V. ADDITIONAL
AGREEMENTS...................................39
5.1 Shareholder
Approval........................................39
5.2 Access to Information;
Confidentiality......................40
5.3 No
Solicitation.............................................41
5.4 Public
Disclosure...........................................43
5.5 Legal
Requirements..........................................43
5.6 Commercially Reasonably
Efforts.............................44
5.7
Notification................................................44
5.8 Further
Assurances..........................................46
5.9
Expenses....................................................46
5.10 Employee
Benefits...........................................47
5.11 Indemnification of Former Directors and
Officers............47
ARTICLE VI. CONDITIONS TO THE
MERGER................................49
6.1 Conditions to Obligations of Each Party
to Effect the
Merger......................................................49
6.2 Additional Conditions to Obligations of
the Company.........49
6.3 Additional Conditions to the Obligations
of the Parent and
the Merger
Sub..............................................50
ARTICLE VII. TERMINATION,
AMENDMENT AND WAIVER.......................52
7.1
Termination.................................................52
7.2 Effect of
Termination.......................................53
7.3
Amendment...................................................53
7.4
Waiver......................................................53
ARTICLE VIII.
INDEMNIFICATION.........................................54
8.1 Recovery from Escrow
Fund...................................54
8.2 Indemnification and Reimbursement by the
Parent and the
Merger
Sub..................................................54
8.3 Limitations on Recovery from the Escrow
Fund................55
8.4 Limitations on Indemnification by the
Parent and the
Merger Sub..................................................56
8.5 Time
Limitations............................................57
8.6 Procedure for Indemnification - Third
Party Claims..........58
8.7 Procedure For Indemnification - Other
Claims................60
8.8 Treatment of Indemnity
Payments.............................60
8.9 Exclusive
Remedy............................................60
8.10 Shareholder
Representative..................................60
ARTICLE IX. GENERAL
PROVISIONS......................................62
9.1
Notices.....................................................62
9.2 Interpretation;
Knowledge...................................64
9.3
Counterparts................................................64
9.4 Entire
Agreement............................................64
9.5
Severability................................................64
9.6
Other Remedies; Specific Performance........................65
9.7 Governing Law; Waiver of Jury
Trial.........................65
9.8 Entire Understanding; No Third Party
Beneficiaries..........65
9.9 Assignment..................................................66
9.10 Incorporation of Exhibits and
Schedules.....................66
Annex A -- Schedule of Shareholders to Execute Voting
Agreements
Annex B -- Schedule of Employees to Execute Employment,
Retention Agreements
and Signing Bonus Agreements
Annex C -- Schedule of Material Consents
Exhibit A -- Form of Articles of Incorporation
Exhibit B -- Form of Bylaws
Exhibit C -- Proprietary Information Agreement
Exhibit D -- Form of Voting Agreement
Exhibit E -- Employment Agreements
Exhibit F -- Form of Escrow Agreement
Exhibit G -- Form of Opinion
Exhibit H -- Form of Letter of Transmittal
<PAGE>
AGREEMENT AND
PLAN OF MERGER
THIS AGREEMENT AND PLAN OF
MERGER (this "Agreement") is made and
entered into as of May 30, 2006 (the "Agreement Date") by and among
Healthways,
Inc., a Delaware corporation (the "Parent"), Lime Acquisition Corp.,
a
California corporation and a wholly-owned subsidiary of the Parent (the
"Merger
Sub"), LifeMasters Supported SelfCare, Inc., a California corporation (the
"Company") and the Shareholder Representative (as defined below), for
purposes
of Sections 1.8, 1.11 8.5, 8.6 and 8.10 hereof only.
RECITALS
A........The Company is in the
business of providing certain disease
management programs and services for health plans, employers, governmental
agencies and others (the "Business").
B........Upon the terms and
subject to the conditions of this
Agreement, and in accordance with the California General Corporation Law, as
amended (the "CGCL"), the Parent, the Merger Sub and the Company
desire to enter
into a transaction pursuant to which the Merger Sub will merge with and into
the
Company (the "Merger").
C........The respective boards
of directors of the Parent, the Merger
Sub and the Company have approved, and declared it advisable and in the best
interests of their respective shareholders to consummate, the Merger, upon the
terms and subject to the conditions set forth herein.
D........As a condition of the
Parent's entering, and inducement to the
Parent to enter, into this Agreement and incur the obligations set forth
herein,
concurrently with the execution and delivery of this Agreement the shareholders
of the Company listed on Annex A hereto are entering into Voting Agreements in
the form attached hereto as Exhibit D (the "Voting Agreements"),
pursuant to
which each such shareholder agrees to vote (including by executing a written
consent) the shares of Company Stock (as defined below) held by such
shareholder
in favor of approval of this Agreement and the transactions contemplated
hereby,
including the Merger.
E........As a condition and
inducement to the Parent to enter into this
Agreement and incur the obligations set forth herein, concurrently with the
execution and delivery of this Agreement the employees of the Company
identified
in Annex B hereto are entering into Employment Agreements, Retention Agreements
and Signing Bonus Agreements in the forms attached hereto as Exhibits E1-9 (the
"Employment Agreements"), which agreements will replace such
employees' existing
employment agreements with the Company (or one of its subsidiaries) and will
become effective upon consummation of the Merger.
NOW, THEREFORE, in consideration
of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto
agree as follows:
ARTICLE I.........
THE
MERGER
1.1 The Merger. At the Effective Time (as defined below) and subject to and
upon
the terms and conditions of this Agreement and the applicable provisions of the
CGCL, the Merger Sub shall be merged with and into the Company, the separate
corporate existence of the Merger Sub shall cease and the Company shall
continue
as the surviving corporation. The Company as the surviving corporation after
the
Merger is hereinafter sometimes referred to as the "Surviving
Corporation."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement, the
parties hereto shall cause the Merger to be consummated by filing an Agreement
of Merger (the "Agreement of Merger") or other instrument having
similar effect
with the Secretary of State of the State of California in accordance with the
relevant provisions of the CGCL, and any other necessary agreement of merger or
other instrument having similar effect with each other applicable Governmental
Entity (as defined below) having jurisdiction over the transactions
contemplated
hereby, on the Closing Date (as defined below). The closing of the Merger (the
"Closing") shall take place at the offices of Morrison & Foerster
LLP in Irvine,
California, commencing at 10:00 a.m. (Pacific Time) on the later of (i)
September 1, 2006, or (ii) the third Business Day following the satisfaction or
waiver of the conditions precedent set forth in Article VI hereof, or at such
other place and time as the parties hereto may agree (the "Closing
Date"). The
Merger shall be effective upon the filing on the Closing Date of a properly
executed Agreement of Merger or other instrument having similar effect with the
Secretary of State of the State of California, or at such later time as agreed
to by the parties and set forth in the Agreement of Merger (such time of
effectiveness being referred to herein as the "Effective Time"). For
purposes of
this Agreement, "Business Day" means any day other than Saturday or
Sunday or
any other day on which banks in New York are permitted or required to be
closed.
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall
be as provided in this Agreement and the applicable provisions of the CGCL.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
the Company and the Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and the Merger Sub shall become
the
debts, liabilities and duties of the Surviving Corporation.
1.4 Organization of Surviving
Corporation. At the Effective Time:
(a) The Articles of Incorporation of the Company shall be amended and restated
in their entirety to read as set forth in Exhibit A hereto, which shall become
the Articles of Incorporation of the Surviving Corporation until thereafter
amended.
(b) The Bylaws of the Company shall be amended and restated in their entirety
to
read as set forth in Exhibit B hereto, which shall become the Bylaws of the
Surviving Corporation until thereafter amended.
(c) The directors of the Merger Sub immediately prior to the Effective Time
shall become the directors of the Surviving Corporation, each to hold office
until their respective successors are duly elected or appointed and qualified,
in accordance with the Bylaws of the Surviving Corporation. The officers of the
Merger Sub immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, each to hold office until their respective successors
are
duly appointed, in accordance with the Bylaws of the Surviving Corporation.
1.5 Effect on Company Securities. In the Merger, at the Effective Time, (A) the
Company's Series E Preferred Stock shall be converted into the right to
receive,
in the aggregate, the Series E Liquidation Payments as set forth herein, and
(B)
the Company Stock (excluding the Company's Series E Preferred Stock), the
Options and the Warrants shall be converted into the right to receive, in the
aggregate and as set forth herein (the "Merger Consideration"), cash
in the
amount of Three Hundred Seven Million Five Hundred Thousand Dollars
($307,500,000) (u) plus/less the Working Capital Adjustment Amount, (v) plus
the
Excess Amount or minus the Working Capital Shortfall, as applicable, (w) plus
the Closing Cash Amount, (x) minus Company Indebtedness, (y) minus Transaction
Expenses, and (z) minus the Series E Liquidation Payments (the sum of (u), (v),
(w), (x), (y) and (z) shall be referred to as the "Adjustment
Amount"). The
Merger Consideration shall be paid as follows: (i) Two Hundred Eighty Three
Million Three Hundred and Seventy-Five Thousand Dollars ($283,375,000)
plus/less
the Adjustment Amount as estimated pursuant to Section 1.11, shall be payable
in
cash at the Effective Time in accordance with Sections 1.5(a), (b), (c) and (d)
hereof, (ii) any Excess Amount shall be payable in cash at the time and in the
manner set forth in Section 1.11(f) hereof (the sum of clauses (i) and (ii) the
"Cash Consideration") and (iii) Twenty-Four Million One Hundred
Twenty-Five
Thousand Dollars ($24,125,000) (the "Escrow Deposit") shall be
payable in cash
at the Effective Time by the Parent into the Escrow Fund (as defined below)
(the
Escrow Deposit, together with any net profit from, or interest or income
produced by, any Permitted Investments pursuant to this Agreement, as such
amounts may be reduced pursuant to the terms of this Agreement, collectively
the
"Escrow Consideration") in accordance with Section 1.8(b) hereof.
Subject to the terms
and conditions of this Agreement, by
virtue of and in connection with the Merger and without any action on the part
of the Merger Sub, the Company or the holders of any of the following
securities, the following shall occur:
(a) Conversion of Company Preferred Stock. Under and in accordance with Article
III, Section 2(g) of the Company's Articles of Incorporation as in effect on
the
date hereof, (i) each share of the Company's Series A, B, C, F and G Preferred
Stock outstanding immediately prior to the Effective Time (collectively, with
the Company's Series D and Series E Preferred Stock, the "Company Preferred
Stock") shall be converted into one share of Company Common Stock (as
defined
below) immediately prior to the Effective Time and (ii) each share of the
Company's Series D Preferred Stock outstanding immediately prior to the
Effective Time shall be converted into 1.4409 shares of Company Common Stock
immediately prior to the Effective Time, in each case other than shares owned
by
the Parent, the Merger Sub, the Company or any of their respective direct or
indirect wholly-owned subsidiaries. At the Effective Time, each share of the
Company's Series E Preferred Stock outstanding immediately prior to the
Effective Time (other than shares of the Company's Series E Preferred Stock
held
by the Parent, the Merger Sub, the Company or any of their respective
wholly-owned subsidiaries) will be canceled, extinguished and automatically
converted into the right to receive, under and in accordance with Article III,
Section 2(b) of the Company's Articles of Incorporation as in effect on the
date
hereof, the per share payment payable thereon pursuant to such Article III,
Section 2(b) (the "Per-Share Series E Consideration," and
collectively, the
"Series E Liquidation Payments"). The Series E Liquidation Payments
shall be
made prior and in preference to any payments of Merger Consideration to holders
of any other class or series of Company equity securities outstanding
immediately prior to the Effective Time. For the avoidance of doubt, none of
the
Series E Liquidation Payments shall be included as Escrow Consideration.
(b) Conversion of Company Common Stock. At the Effective Time, each share of
common stock (including any fractions thereof) of the Company (the
"Company
Common Stock") (including those shares of Company Common Stock resulting
from
the conversion of Company Preferred Stock as set forth in Section 1.5(a)
hereof)
outstanding immediately prior to the Effective Time, but excluding any
Dissenting Shares and shares held by the Parent, the Merger Sub, the Company or
any of their respective wholly-owned subsidiaries, will be canceled,
extinguished and automatically converted into the right to receive (A) an
amount
in cash, without interest, equal to the amount obtained by dividing (x) the sum
of (1) the Cash Consideration plus (2) the aggregate amount of the exercise
price with respect to all Options (excluding any Out-of-the-Money Options) and
Warrants (excluding any Out-of-the-Money Warrants) as of immediately prior to
the Effective Time by (y) the Fully Diluted Shares Outstanding (the
"Common
Per-Share Cash Consideration"), and (B) an interest in the Escrow
Consideration
equal to the amount obtained by dividing (x) the Escrow Consideration, by (y)
the total number of Fully Diluted Shares Outstanding (the "Per-Share
Escrow
Consideration", and together with the Common Per-Share Cash Consideration,
the
"Common Per-Share Merger Consideration"). For purposes of this
Agreement, "Fully
Diluted Shares Outstanding" shall mean the sum of (A) the number of shares
of
Company Common Stock issued and outstanding immediately prior to the Effective
Time, plus (B) the number of shares of Company Common Stock issuable upon
conversion of the Company Preferred Stock (excluding the shares of Company
Common Stock issuable upon conversion of the Company's Series E Preferred
Stock)
issued and outstanding immediately prior to the Effective Time, plus (C) the
number of shares of Company Common Stock issuable upon exercise of all Options
(excluding any Out-of-the-Money Options) and Warrants (excluding any
Out-of-the-Money Warrants) outstanding immediately prior to the Effective Time
(including Warrants to purchase Preferred Stock on an as-converted to Company
Common Stock basis). Each share of Company Common Stock and Company Preferred
Stock (collectively, the "Company Stock") held in the Company's
treasury at the
Effective Time will be cancelled and retired and all rights in respect thereof
will cease to exist, without any conversion thereof or payment of any
consideration in respect thereof.
(c) Treatment of Stock Options.
(i) At the Effective Time, each option to purchase Company Common Stock
outstanding immediately prior to the Effective Time, whether vested or unvested
(each an "Option"), shall be automatically converted into and
thereafter shall
solely represent the right to receive in settlement and cancellation thereof
for
each share of Company Common Stock issuable under such Option (A) an amount in
cash (the "Option Cash Amount") equal to the difference between (i)
and (ii),
where (i) equals the Common Per-Share Cash Consideration and where (ii) equals
the exercise price of such Option, and (B) an interest in the Escrow
Consideration equal to the Per-Share Escrow Consideration (together with the
Option Cash Amount, the "Option Consideration"). All such payments
made pursuant
to this Section 1.5(c) shall be less applicable Taxes (as defined below)
required to be withheld with respect thereto.
(ii) From and after the Effective Time, holders of Options shall have no rights
with respect to their Options other than as specifically provided in this
Section 1.5(c). At the Effective Time, the Company agrees to effect the
termination of its 2004 Stock Incentive Plan, and 1997 Stock Incentive Plan and
any other stock option plans, agreements and arrangements (together with the
1994 Stock Incentive Plan, collectively, the "Option Plans").
(iii) Prior to the Effective Time, the Company shall provide notice to each
holder of an outstanding Option describing the treatment of such Option in
accordance with this Section 1.5(c).
(iv) In the event the Option Consideration for any Option shall be equal to or
less than zero, such Option shall be cancelled at the Effective Time without
any
consideration payable therefor (each an "Out-of-the-Money Option").
In the event
a holder of Options exercises any Options prior to the Effective Time, the
holder of Company Common Stock issuable upon exercise of such Options shall be
entitled to receive the Common Per-Share Merger Consideration as set forth in
Section 1.5(b) hereof in lieu of the Option Consideration.
(v) The Company shall take all actions necessary and appropriate to effectuate
the provisions of this Section 1.5(c), including such action as shall be
necessary to accelerate the vesting of any unvested Option immediately prior to
the Effective Time, and to ensure that, from and following the Effective Time,
no Person shall have any right under the Options Plans, the Options or any
other
plan, program, agreement or arrangement with respect to equity securities of
the
Company, the Surviving Corporation or any subsidiary thereof. The term
"Person"
as used in this Agreement shall mean any individual, corporation, limited
liability corporation, joint venture, partnership, unincorporated association,
country, state or political subdivision thereof, trust or other entity.
(d) Treatment of Warrants. At the Effective Time, each warrant to purchase
Company Common Stock or Company Preferred Stock outstanding immediately prior
to
the Effective Time pursuant to any warrant agreement (the "Warrants")
shall be
automatically converted into the right to receive in settlement and
cancellation
thereof for each share of Company Common Stock (on an as-converted to Company
Common Stock basis) issuable under such Warrant (A) an amount in cash (the
"Warrant Cash Amount") equal to the difference between (i) and (ii),
where (i)
equals the Common Per-Share Cash Consideration and where (ii) equals the
exercise price per share (on an as-converted to Company Common Stock basis) of
such Warrant, and (B) an interest in the Escrow Consideration equal to the
Per-Share Escrow Consideration (the "Warrant Consideration"). In the
event the
Warrant Consideration for any Warrant shall be equal to or less than zero, such
Warrant shall be cancelled at the Effective Time without any consideration
payable therefor (each an "Out-of-the-Money Warrant"). In the event a
holder of
Warrants exercises any Warrants prior to the Effective Time, the holder of
Company Common Stock issuable upon exercise of such Warrants or Company Common
Stock issuable upon conversion of Preferred Stock received upon exercise of
Warrants, as applicable, shall be entitled to receive the Common Per-Share
Merger Consideration with respect thereto as set forth in Section 1.5(b) hereof
in lieu of the Warrant Consideration. From and after the Effective Time,
holders
of Warrants shall have no rights with respect to their Warrants other than as
specifically provided in this Section 1.5(d).
1.6 Capital Stock of the Merger Sub. Each share of common stock of the Merger
Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
non-assessable share of common stock of the Surviving Corporation. Each stock
certificate of the Merger Sub evidencing ownership of any such shares shall
continue to evidence ownership of such shares of capital stock of the Surviving
Corporation.
1.7 Cancellation of Stock Owned by the Parent and the Merger Sub. At the
Effective Time, all shares of Company Stock that are owned by the Parent or the
Merger Sub, or by any direct or indirect wholly-owned subsidiary of either of
them, shall automatically be cancelled and cease to exist and no consideration
shall be delivered in exchange therefor.
1.8 Payment of Merger Consideration;
Series E Liquidation Payments.
(a) At or before the Closing, the Parent shall deliver cash equal to the sum of
the Series E Liquidation Payments and the Cash Consideration (except for any
Excess Amount paid in cash at the time and in the manner set forth in Section
1.11(f) hereof), by wire transfer of immediately available funds, to a bank or
trust company designated as the exchange and paying agent in connection with
the
Merger by the Company and reasonably satisfactory to the Parent (the
"Payment
Agent"), and such funds shall be held in escrow by the Payment Agent for
the
benefit of the Parent until the Effective Time. From and after the Effective
Time, all funds deposited by the Parent with the Payment Agent shall be for the
sole benefit of the holders of Company Stock, Options and Warrants immediately
prior to the Effective Time (collectively, the "Company Securities")
for payment
pursuant to the terms hereof and may not be withdrawn by or paid to the Parent
other than (i) as provided in Section 1.9(c) hereof, or (ii) in order to pay
any
holders of Dissenting Shares (pursuant to which the Parent may withdraw up to
an
amount equal to, but in no event exceeding, the Common Per-Share Cash
Consideration for each Dissenting Share). Subject to Section 1.9 hereof, the
Payment Agent shall, as directed by the Surviving Corporation and consistent
herewith, disburse all funds received pursuant to this Section 1.8 as soon as
reasonably practicable following the Effective Time to the holders of Company
Securities entitled to receive such funds pursuant hereto in accordance with
Section 1.5 hereof and as set forth on Schedule 1.8(a), which Schedule 1.8(a)
shall be delivered to the Parent no later than seven (7) days prior to the
Closing Date, and will be updated, as necessary, as of the Closing Date. The
Company shall be solely responsible for the fees and expenses of the Payment
Agent, and the fees and expenses paid to the Payment Agent for its services as
contemplated by this Agreement, shall be included in Transaction Expenses.
(b) To secure the indemnification obligations contained in Article VIII hereof,
to make any payments that are due pursuant to Section 1.11, and to provide for
payments of certain expenses of the Shareholder Representative under Section
8.10 hereof, at the Closing the Parent and the Shareholder Representative shall
enter into an escrow agreement with an escrow agent (the "Escrow
Agent")
mutually acceptable to the Parent and the Shareholder Representative
substantially in the form of Exhibit F hereto (the "Escrow
Agreement"). The
Escrow Agent may be the same Person as the Payment Agent; provided, however,
that each shall be an entity which meets the custodian requirements contained
in
Section 17(f) of the Investment Company Act of 1940, as amended. At the
Closing,
the Parent shall deposit the Escrow Deposit into an escrow fund (the
"Escrow
Fund") maintained by the Escrow Agent. The Escrow Agent shall invest the
amounts
in the Escrow Fund as the Parent directs; provided, however, that such
investments shall be solely in (i) obligations of or guaranteed by the United
States of America or any agency thereof with maturity dates of ninety (90) days
or less, (ii) commercial paper obligations receiving the highest rating from
either Moody's Investors Service, Inc. or Standard & Poor's ratings group
or
(iii) certificates of deposit with maturity dates of ninety (90) days or less
issued by commercial banks incorporated under the laws of the United States of
America or any states in the United States of America or any domestic branch of
a foreign commercial bank, subject to supervision and examination by federal or
state banking or depository institution authorities with combined capital,
surplus and undivided profits exceeding $1,000,000,000 (collectively,
"Permitted
Investments") or in money market funds which are invested solely in
Permitted
Investments; provided further, however, that the maturities of Permitted
Investments shall be such as to permit the Escrow Agent to make withdrawals
from
the Escrow Fund on no more than two (2) Business Days' notice. Any net profit
from, or interest or income produced by, Permitted Investments in the Escrow
Fund shall remain in and be a part of such Escrow Fund. The Escrow Fund shall
be
administered in accordance with the terms and provisions of the Escrow
Agreement
for a term ending twelve (12) months following the Closing Date (the
"Escrow
Termination Date"), subject to the resolution of any claims under Article
VIII,
Sections 1.11 and 8.5(c) hereof and the terms of the Escrow Agreement. The
Shareholder Representative shall determine the Tax treatment of the earnings on
the Escrow Consideration, including any net profit from, or interest or income
produced by, Permitted Investments in the Escrow Fund, and the parties hereto
shall, for Tax reporting purposes, report in a manner consistent with the
Shareholder Representative's determination thereof. The Parent shall be solely
responsible for the fees and expenses of the Escrow Agent.
(c) Notwithstanding anything herein to the contrary, pursuant to the terms of
the Escrow Agreement, upon deposit of the Escrow Deposit into the Escrow Fund,
the Escrow Agent shall deduct and segregate Five Hundred Thousand Dollars
($500,000) from the Escrow Deposit and deposit such amount in a separate escrow
account (the "Shareholder Representative Escrow Fund"). Amounts in
the
Shareholder Representative Escrow Fund shall be reserved solely for the payment
of any fees, costs or expenses incurred by or payable to the Shareholder
Representative in performing its obligations hereunder ("Shareholder
Representative Expenses") and shall not be available for any obligations
under
Section 1.11 or any indemnification obligations contained in Article VIII. Any
amounts in the Shareholder Representative Escrow Fund that have not been
disbursed to the Shareholder Representative to pay or reimburse for Shareholder
Representative Expenses pursuant to the terms of this Agreement and the Escrow
Agreement prior to the expiration of the Escrow Period, or if later, the date
on
which all outstanding claims under Article VIII have been discharged in full,
shall be deducted from the Shareholder Representative Escrow Fund and added
back
to the Escrow Fund, for distribution to the holders of the Company Common
Stock,
Options and Warrants in accordance with the terms of the Escrow Agreement and
this Agreement.
(d) All amounts payable to the holders of the Company Securities from the
Escrow
Fund shall be distributed, pursuant to Schedule 1.8(a), promptly following the
Escrow Termination Date, subject to the resolution of any claims under Article
VIII, Sections 1.11 and 8.5(c) hereof and the terms of the Escrow Agreement,
and
in no event shall be distributed later than five (5) years after the Closing
Date in accordance with Proposed Regulation 1.409A-3(g)(5)(iv) issued under
Code
Section 409A and any subsequent Internal Revenue Service ("IRS")
guidance
relating thereto.
1.9 Exchange Procedure.
(a) As soon as reasonably practicable following the Effective Time, the
Surviving Corporation shall send to each Person who was a holder of Company
Securities immediately prior to the Effective Time a letter of transmittal
substantially in the form attached hereto as Exhibit H (the "Letter of
Transmittal") and any other appropriate materials for use in surrendering
to the
Company certificates or agreements that immediately prior to the Effective Time
evidenced Company Securities. Except with respect to Dissenting Shares, until
surrendered as contemplated by this Section 1.9(a), (i) each certificate
evidencing Company Common Stock or Company Preferred Stock (excluding the
Series
E Preferred Stock) and each agreement evidencing an Option or Warrant shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Common Per-Share Merger Consideration, Option
Consideration or Warrant Consideration that the holder thereof has the right to
receive in respect of such Company Securities pursuant to the provisions of
this
Agreement, and (ii) each certificate evidencing the Company's Series E
Preferred
Stock shall be deemed after the Effective Time to represent only the right to
receive the Per-Share Series E Consideration that the holder thereof has the
right to receive in respect to such Series E Preferred Stock pursuant to the
provisions of this Agreement. Other than with respect to Permitted Investments
of amounts in the Escrow Fund, no interest shall be paid or will accrue on any
cash payable to holders of Company Securities. Upon the proper surrender and
exchange of certificates or agreements, or, in the absence thereof, Affidavits
(as defined below), representing Company Securities and the delivery of an
executed Letter of Transmittal to the Company or the Payment Agent in
accordance
herewith, each holder of such Company Securities shall be paid, without
interest
thereon, an amount in cash from the Payment Agent determined in accordance with
Section 1.5 hereof and as otherwise set forth herein. The Payment Agent shall
be
entitled to deduct and withhold, at the direction of the Surviving Corporation,
from any Merger Consideration, Option Consideration, Warrant Consideration, or
the Series E Liquidation Payments otherwise payable pursuant to this Agreement
to any holder of Company Securities, such amounts as the Surviving Corporation
is required to deduct and withhold with respect to the making of such payment
under the Internal Revenue Code of 1986, as amended (the "Code"), or
any
provision of state, local or foreign tax law, and shall remit such withheld
amounts to the Surviving Corporation as soon as reasonably practicable and
consistent with applicable Legal Requirements. To the extent that amounts are
so
withheld, such amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the Company Securities. Notwithstanding
anything herein to the contrary, no payment shall be made to any holder of
Company Securities who does not present certificates or agreements for
cancellation representing shares of Company Common Stock, Company Preferred
Stock, Options or Warrants, or, in the alternative, an affidavit and indemnity,
in form and substance reasonably satisfactory to the Parent, stating that any
of
such certificates or agreements are lost, stolen or destroyed and that such
holder will indemnify and hold the Parent, the Surviving Corporation and each
of
their respective officers, directors and agents harmless from any costs,
expenses and damages that may be incurred if such certificates or agreements
are
later produced (an "Affidavit").
(b) From and after the Effective Time, the stock transfer books of the Company
shall be closed with respect to shares of Company Stock which were outstanding
immediately prior to the Effective Time, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of such shares of Company Stock. If, after the Effective Time,
certificates representing Company Stock are presented to the Surviving
Corporation for any reason, they shall be cancelled and exchanged as provided
herein.
(c) Any portion of the Merger Consideration, Option Consideration, Warrant
Consideration and Series E Liquidation Payments deposited by the Parent with
the
Payment Agent or the Escrow Agent pursuant to Section 1.8 hereof which remains
undistributed to holders of Company Securities twelve (12) months after the
Effective Time shall be delivered to the Parent, upon demand, and any such
holders who have not theretofore complied with this Section 1.9 shall look only
to the Parent (subject to abandoned property, escheat and other similar laws)
as
general creditors for payment of their claim for the applicable Merger
Consideration, Option Consideration, Warrant Consideration or Series E
Liquidation Payments, if any, to be received in accordance herewith. Neither
the
Parent nor the Surviving Corporation shall be liable to any such holder for
cash
representing any portion of the Merger Consideration, Option Consideration,
Warrant Consideration or Series E Liquidation Payments delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
1.10 Dissenting Shares and
Dissenters' Rights.
(a) Notwithstanding anything contained herein to the contrary, any Company
Common Stock held by a holder who has not voted in favor of the Merger or
otherwise consented thereto in writing and who has the right to demand, and
properly demands, an appraisal of any of such holder's shares of Company Common
Stock in accordance with Chapter 13 of the CGCL or any successor provisions
thereof (the "Dissenters' Provisions") (such shares being referred to
herein as
"Dissenting Shares") shall not be converted into the right to receive
the Merger
Consideration as set forth in Section 1.5, Section 1.8 and Section 1.9 hereof,
but shall be converted into the right to receive such consideration as may be
due such holder pursuant to Chapter 13 of the CGCL, unless and until such
holder
fails to perfect or otherwise loses or withdraws any such right to appraisal.
With respect to any Dissenting Shares, the rights of a holder who complies with
the provisions of Chapter 13 of the CGCL shall be limited exclusively to the
appraisal rights provided under such Chapter 13. The Parent and the Surviving
Corporation shall be solely responsible for any settlement of claims with
respect to any Dissenting Shares and any judgment rendered against the Company
in connection with any Dissenting Shares pursuant to Chapter 13 of the CGCL.
Any
such settlement of claims may be paid in cash, capital stock of the Parent or
such other consideration as the Parent may determine, and any such judgment
rendered against the Company in connection with any Dissenting Shares pursuant
to Chapter 13 of the CGCL shall be paid in accordance with the CGCL. Holders of
Dissenting Shares who fail to comply with the provisions of Chapter 13 of the
CGCL with respect to those shares shall have the rights set forth in Section
1.10(b) hereof.
(b) If any holder of Company Common Stock who demands payment of the fair
market
value of its Dissenting Shares pursuant to the Dissenters' Provisions shall
effectively withdraw or lose (through failure to perfect or otherwise) its
right
to such payment at any time, such shares of Company Common Stock shall not
thereafter be Dissenting Shares hereunder and the shares of Company Common
Stock
of such holder shall be converted into a right to receive, and shall receive
without any interest thereon, the Merger Consideration set forth in Section 1.5
hereof in exchange for such shares of Company Common Stock.
(c) The Company shall give prompt notice to the Parent of each demand received
by the Company for appraisal of shares of Company Stock, attempted withdrawals
of such demands and any other instruments and documents received or delivered
in
connection therewith pursuant to the CGCL. The Parent shall have the right to
participate in negotiations and proceedings regarding each such demand. The
Company shall not, except with the prior written consent of the Parent (which
consent shall not be unreasonably withheld, conditioned or delayed), settle or
make any payment regarding any such demand.
(d) The Company shall send to any shareholder of the Company who did not
consent
to the Merger and the transactions contemplated hereby, the notice contemplated
in Section 1301 of the CGCL (the "Dissenters' Notice"). The Parent
shall have
the right to participate in review and approve the Dissenters' Notice (such
approval not to be unreasonably withheld, conditioned or delayed), and shall
furnish such information to the Company as the Company may reasonably request.
1.11 Working Capital Adjustment.
.................. (a) Not later than two (2) Business Days prior to the
Closing, the Company shall prepare and deliver an estimated balance sheet as of
the Closing Date (the "Estimated Closing Balance Sheet"), together
with a good
faith estimate of the Net Working Capital (as defined in subsection (b) below)
of the Company as of the Closing Date (the "Estimated Net Working
Capital"). The
Estimated Closing Balance Sheet shall include line item estimates of (i) the
Company Indebtedness as of the Closing Date, (ii) the Company's Closing Cash
Amount and (iii) the Company's Transaction Expenses. The Estimated Closing
Balance Sheet shall be prepared in accordance with generally accepted
accounting
principles in the United States, as in effect from time to time
("GAAP"),
consistent with the Company's past practice, and shall be certified by the
Company's chief financial officer as being a good faith estimate of the Net
Working Capital, Company Indebtedness, Closing Cash Amount and Transaction
Expenses of the Company as of the Closing. The Merger Consideration shall be
(x)
increased on a dollar-for-dollar basis to the extent that the Estimated Net
Working Capital is a dollar amount that is greater than negative One Million
Seven Hundred and Fifty Thousand Dollars (<$1,750,000>) (the
"Targeted Net
Working Capital") or (y) decreased on a dollar-for-dollar basis to the
extent
that the Estimated Net Working Capital is a dollar amount that is less than the
Targeted Net Working Capital (such positive or negative adjustment being
referred to as the "Working Capital Adjustment Amount"). For the
avoidance of
any doubt, the term "greater" in Section 1.11(a)(x) shall mean any
dollar amount
that is positive, or equal to zero dollars ($0), or between zero dollars ($0)
and an amount up to, but not including, negative One Million Seven Hundred and
Fifty Thousand Dollars (<$1,750,000>).
.................. (b) "Net Working Capital" means the Company's (i)
total
current assets, including without limitation, inventory (participant
equipment),
accounts receivable (net of reserves for doubtful accounts), prepaid expenses,
Permitted Expenditures to the extent paid or accrued on or before Closing, but,
however, in order to avoid duplication, excluding those Permitted Expenditures
classified as current assets (i.e., prepaid rent) and other current assets (but
shall exclude all cash and deferred tax assets) minus (ii) total current
liabilities, including without limitation, accounts payable, accrued
compensation (excluding the employer portion of any state or federal employment
tax obligations arising out of the transactions contemplated by Sections 1.5(c)
and (d) hereof), current portion of capital leases, accrued expenses, deferred
revenue and fees reimbursable (but shall exclude contract billings in excess of
earned revenues, accrued interest to the extent included in Company
Indebtedness
and liabilities resulting from Permitted Expenditures at Closing to the extent
included in Company Indebtedness), determined in all cases, as applicable, in
accordance with GAAP consistent with the Company's past practice; provided that
Final Net Working Capital shall include as current liabilities any Company
Indebtedness and any Transaction Expenses, to the extent such amounts were not
previously deducted from the Merger Consideration as part of the Adjustment
Amount. In addition, for purposes of calculating the Final Net Working Capital,
in the event the Closing Cash Amount set forth on the Final Balance Sheet is
(x)
less than the Closing Cash Amount set forth on the Estimated Closing Balance
Sheet (such deficiency, the "Cash Deficiency"), the Final Net Working
Capital
shall be reduced by such Cash Deficiency, or (y) greater than the Closing Cash
Amount set forth on the Estimated Closing Balance Sheet (such excess amount,
the
"Cash Excess Amount"), the Final Net Working Capital shall be
increased by such
Cash Excess Amount. The parties agree that the Net Working Capital shall be
calculated strictly in accordance with Schedule 1.11(b) and Section 1.11(b)
hereof.
In addition, for the purposes of
this Agreement:
(i) "Company Indebtedness"
shall mean any indebtedness of the Company or
any of its Subsidiaries for
borrowed money, and all other outstanding
notes for indebtedness issued by
the Company or any Subsidiary in
connection with acquisitions by
the Company or any Subsidiary, whether
current or funded, or secured or
unsecured, matured or unmatured, and
without duplication, including
all interest accrued thereon through
the Closing Date and excluding
all prepayment fees or premiums
associated therewith (which are
considered Transaction Expenses under
Section 5.9 hereof), and
including, in any case, Financing approved as
a Permitted Expenditure to the
extent such amount otherwise would
constitute Indebtedness, as of
the Closing Date, and including any
Financing to the extent not approved as a
Permitted Expenditure.
(ii) "Closing Cash Amount"
shall mean Company cash (excluding cash or
investments held in the
Company's accounts or by any Third-Party in
connection with an escrow or
similar arrangement or cash used to
collateralize the long-term
portion of obligations of the Company).
(iii) "Permitted
Expenditures" shall mean such costs, fees, or expenses
(whether capital or operating
and whether current or long-term) and any
related Financing, requested to
be incurred by the Company and approved
by the Parent in its sole and
absolute discretion within ten (10) days
(or such shorter or longer
period of time as may be mutually agreed to
by the parties) of the Company's
written request (the "Approval
Period"), which the Company
has determined in good faith is necessary
to effectuate the associated New
Business Opportunity; provided that,
without limiting the generality
of the foregoing, the Company
acknowledges that the Parent may
place reasonable conditions on its
approval of any Permitted
Expenditures. The Company agrees that in
requesting the approval of the
Permitted Expenditures and any related
Financing, the Company shall
provide the Parent with prompt notice and
reasonable detail of such
expenditures, the New Business Opportunity
and any related Financing.
(iv) "Additional Expenditures"
shall mean such costs, fees or expenses
(whether capital or operating
and whether current or long-term) and any
related Financing, requested to
be incurred by the Company and not
approved by the Parent within
the Approval Period, which the Company
has determined in good faith is
necessary to effectuate the associated
New Business Opportunity. In the
event that the Parent does not approve
the Company's request to treat
an Additional Expenditure or any
Financing as a Permitted
Expenditure, the Parent shall provide the
Company, in reasonably detail,
the basis for its objection.
(v) "New Business
Opportunity" shall mean (i) any new business opportunity
of the Company, or (ii) any
expansion of the Company's Business, that
is, in each case (a) not
included in the Company's Current Budget and
(b) pursued in good faith, in
furtherance of the Company's Business and
in a manner that would not violate
the provisions of Article IV (other
than Sections 4.1(a), 4.3,
4.7(b)(i), 4.9(a), 4.10, 4.14, 4.19(b)
(except for "most favored
nation" clauses or other similar type
restrictions) and 4.21).
(vi) "Financing" shall mean
any secured or unsecured financing entered into
or utilized by the Company in
good faith to finance any Permitted
Expenditure or Additional
Expenditure, as applicable, which financing
shall (i) not exceed the
aggregate amount of the subject Permitted
Expenditure or Additional
Expenditure, as applicable, and (ii) be upon
commercially reasonable terms.
Any Financing approved by Parent as a
Permitted Expenditure, shall be
treated as a Permitted Expenditure (and
excluded from Company
Indebtedness) and any Financing not approved by
Parent as a Permitted
Expenditure shall be included in Company
Indebtedness.
(vii) "Current Budget" shall
mean the Company's current operating budget
dated February 7, 2006, a true,
correct and complete copy of which has
been provided to Parent.
.................. (c) As soon as reasonably practicable after the Closing
Date,
but not later than sixty (60)
days after the Closing Date, the Parent
shall prepare and deliver to the
Shareholder Representative (i) an
unaudited schedule (the
"Final Balance Sheet") setting forth the
Company Indebtedness, Closing
Cash Amount, Transaction Expenses,
Permitted Expenditures and the
Net Working Capital (the "Final Net
Working Capital" and
together with the Final Balance Sheet, the "Final
Statements") of the Company
as of the Closing Date calculated by the
Parent in accordance with GAAP
consistent with the Company's past
practice, and (ii) a schedule
(together with any appropriate back-up
information) describing in
reasonable detail the differences between
the Estimated Net Working
Capital and the Final Net Working Capital.
.................. (d) Within forty-five (45) days of delivery of the Final
Statements, the Shareholder
Representative may deliver written notice
(the "Protest Notice")
to the Parent of any objections that the
Shareholder Representative may have to the
Final Statements. Such
Protest Notice shall set forth
in reasonable detail (to the extent
calculable) the basis of such
objection together with the amount(s) in
dispute and any determination
not specifically objected to in the
Protest Notice shall be deemed
acceptable and shall be final and
binding upon the parties upon
delivery of the Protest Notice. The
failure of the Shareholder
Representative to deliver such Protest
Notice within the prescribed
time period will constitute the
Shareholder Representative's
acceptance of the Final Statements as
determined by the Parent. Upon
receipt of the Final Statements, the
Shareholder Representative shall
be given reasonable access, during
normal business hours, to all of
the Company's (including the Surviving
Corporation's) books and records
(including working papers, schedules
and calculations) reasonably
relating to the Final Statements for the
purpose of verifying the Final
Statements.
.................. (e) Upon receipt of a Protest Notice within such forty-five
(45) day period, the Parent and
the Shareholder Representative shall
attempt in good faith to resolve
any dispute regarding the calculation
of the Final Statements. If the
Parent and the Shareholder
Representative are unable to
resolve any disagreement with respect to
the Final Statements within twenty
(20) days following Parent's receipt
of the Protest Notice, then such
dispute shall be submitted to a
nationally recognized accounting
firm mutually agreed upon, in good
faith, by the Parent and the
Shareholder Representative (the
"Arbitrating
Accountant"). The Arbitrating Accountant will send to the
Parent and the Shareholder
Representative, within thirty (30) days of
the date on which such dispute
is referred to such Arbitrating
Accountant, its determination on
the specific matters in dispute which
calculation shall be between the
determinations prepared by the
Shareholder Representative and
Parent and shall be final and binding on
all parties. The fees, costs and
expenses of the Arbitrating Accountant
shall be paid half by the Parent
and half by the Shareholder
Representative.
.................. (f) Within five (5) days of the determination of the Final
Net Working Capital in accordance
with Sections 1.11(c), (d) and (e),
as applicable:
.................. (i) if the Final Net Working Capital is greater than the
Estimated Net Working Capital,
the Parent shall pay to the Shareholder
Representative, for the benefit
of the holders of the Company Stock,
Options and Warrants, in
immediately available funds, the amount of
such excess (the "Excess
Amount"); or
.................. (ii) if the Estimated Net Working Capital is greater than
the
Final Net Working Capital (such amount the
"Working Capital
Shortfall"), Parent shall
be entitled to recover such amount from the
Escrow Fund.
Each of the parties acknowledge
and agree that in the event of a
Working Capital Shortfall, the Parent shall be entitled to recover the full
amount of the Working Capital Shortfall from the Escrow Fund without regard to
the Deductible or any other limitations set forth in Section 8.3(a) hereof. The
Shareholder Representative shall distribute or cause to be distributed the
Excess Amount to the holders of Company Stock, Options and Warrants in
accordance with Schedule 1.8(c).
ARTICLE II........
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
As used in this Agreement, the
term "Material Adverse Effect" means any
change in or effect on a party and its subsidiaries, taken as a whole, that
individually or in the aggregate is materially adverse to the business, assets,
results of operations or financial condition of such party and its subsidiaries
taken as a whole, or is reasonably likely to materially and adversely affect
the
ability of such party to conduct its business in the manner in which it is
currently conducted or is reasonably likely to affect its ability to perform
its
obligations hereunder and to consummate the transactions contemplated hereby.
Except as expressly contemplated
by this Agreement, or as set forth in
the schedule of exceptions (the "Company Schedule of Exceptions")
delivered by
the Company to the Parent and the Merger Sub concurrently with the execution
and
delivery hereof and updated, if applicable, pursuant to Section 5.7(a) hereof,
the Company hereby represents and warrants to the Parent and the Merger Sub, as
of the Agreement Date and as of the Closing Date, as set forth in this Article
II. References to "Schedules" in this Article II refer to Schedules
contained in
the Company Schedule of Exceptions.
2.1 Organization and Good Standing. The Company is a corporation duly
organized,
validly existing and in good standing under the laws of the State of
California,
with full power and authority to own, operate and lease its assets and
properties and to conduct the Business as currently conducted by the Company.
Each Subsidiary (as defined below) is duly organized, validly existing and in
good standing in the state of its organization, which is set forth on Schedule
2.1, with full power and authority to own, operate and lease its assets and
properties and to conduct the its business as currently conducted. The Company
and each Subsidiary is qualified as a foreign corporation or partnership in
each
jurisdiction in which it is required to qualify to do business except to the
extent any failures to so qualify would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
2.2 Subsidiaries. Schedule 2.2 sets forth a true, complete and correct list of
all direct or indirect subsidiaries of the Company (each a
"Subsidiary" and
collectively the "Subsidiaries") and the amount and nature of the
Company's
ownership percentage or interest therein, and the Company has no direct or
indirect subsidiaries and owns no shares of capital stock or equity interests
of
any corporation or any interest in the ownership or management of any other
entity except in those corporations and entities listed on Schedule 2.2. All of
the outstanding capital stock and ownership interests, as applicable, of the
Subsidiaries are duly and validly issued, fully paid and non-assessable. There
are no options, warrants, equity securities or similar ownership interests,
calls, rights (including preemptive rights), bonds, debentures, notes or other
indebtedness having general voting rights or debt convertible into securities
having such rights, commitments or agreements of any character to which any
Subsidiary is a party or by which it is bound obligating any Subsidiary to
issue, deliver or sell, or cause to be issued, delivered or sold, or
repurchase,
redeem or otherwise acquire, or cause the repurchase, redemption or
acquisition,
of any shares of capital stock or any ownership interest of any Subsidiary or
obligating any Subsidiary to grant, extend, accelerate the vesting of or enter
into any such option, warrant, equity security, partnership interest or similar
ownership interest, call, right, commitment or agreement.
2.3 Company Capital Structure. The authorized capital stock of the Company
consists of (a) 14,000,000 shares of common stock, of which 1,086,842 shares
are
issued and outstanding as of the date hereof, and (b) 8,449,564 shares of
preferred stock, of which (i) 500,000 shares have been designated Series A, all
of which are issued and outstanding as of the date hereof, (ii) 431,550 shares
have been designated Series B, all of which are issued and outstanding as of
the
date hereof, (iii) 2,077,428 shares have been designated Series C, of which
2,074,935 shares are issued and outstanding as of the date hereof, (iv)
2,400,000 shares have been designated Series D, all of which are issued and
outstanding as of the date hereof, (v) 2,015,450 shares have been designated
Series E, all of which are issued and outstanding as of the date hereof, and
(vi) 920,526 shares have been designated Series F, of which 609,492 shares are
issued and outstanding as of the date hereof; and (vii) 104,610 shares have
been
designated Series G, of which 96,525 shares are issued and outstanding as of
the
date hereof. All outstanding shares of Company Stock are duly authorized,
validly issued, fully paid and nonassessable and are not subject to preemptive
or first refusal rights created by statute, the Articles of Incorporation or
Bylaws of the Company or any agreement or document to which the Company is a
party or by which it is bound. As of the date hereof, the outstanding shares of
Series A Preferred are convertible into 500,000 shares of Company Common Stock,
the outstanding shares of Series B Preferred are convertible into 431,550
shares
of Company Common Stock, the outstanding shares of Series C Preferred are
convertible into 2,074,935 shares of Company Common Stock, the outstanding
shares of Series D Preferred are convertible into 3,458,203 shares of Company
Common Stock, the outstanding shares of Series E Preferred are convertible into
2,015,450 shares of Company Common Stock, the outstanding shares of Series F
Preferred are convertible into 609,492 shares of Company Common Stock and the
outstanding shares of Series G Preferred are convertible into 96,525 shares of
Company Common Stock. The Company has reserved an aggregate of 9,326,155 shares
of Company Common Stock for issuance upon conversion of the Company Preferred
Stock. The Company has reserved an aggregate of 830,747 shares of Company
Common
Stock for issuance pursuant to the Company's 1994 Stock Incentive Plan, under
which as of the date hereof Options are outstanding for an aggregate of 365,573
shares of Company Common Stock and no shares of Company Common Stock are
available for grant. The Company has reserved an aggregate of 1,398,078 shares
of Company Common Stock for issuance pursuant to the Company's 1997 Stock
Incentive Plan, under which as of the date hereof Options are outstanding for
an
aggregate of 832,429 shares of Company Common Stock and 92,894 shares of
Company
Common Stock are available for grant. The Company has reserved an aggregate of
761,500 shares of Company Common Stock for issuance pursuant to the Company's
2004 Stock Incentive Plan, under which as of the date hereof Options are
outstanding for an aggregate of 459,500 shares of Company Common Stock and
37,000 shares of Company Common Stock are available for grant. As of the date
hereof, an aggregate of 590,000 shares of Company Common Stock are subject to
outstanding Options issued outside of any stock incentive or similar plan of
the
Company, and an aggregate of 590,000 shares of Company Common Stock have been
reserved for issuance upon the exercise of such Options. As of the date hereof,
there are outstanding Warrants to purchase an aggregate of 15,000 shares of
Company Common Stock and 140,000 shares of Series F Preferred. The Company has
reserved a sufficient number of shares of Company Common Stock and Company
Preferred Stock (as applicable) for issuance upon exercise of Warrants
outstanding on the date hereof and for the conversion of Company Preferred
Stock
issuable upon exercise of certain of such outstanding Warrants into shares of
Company Common Stock. All shares of Company Stock subject to issuance upon the
exercise of Options and Warrants outstanding as of the date hereof, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, would be duly authorized, validly issued, fully paid
and nonassessable. Schedule 2.3 hereof sets forth, as of the Agreement Date, a
complete and accurate list of the holders of record of Company Stock (excluding
any Options or Warrants exercised as of Agreement Date) as reflected in the
Company's books and records, setting forth the number of shares of Company
Stock, and the class or series of such shares, held by each holder and (for
shares other than Company Common Stock) the number of shares of Company Common
Stock (if any) into which such shares are convertible. Schedule 2.3 also sets
forth as of the Agreement Date, a list of all holders of record of outstanding
Options and Warrants (excluding any Options or Warrants exercised as of
Agreement Date) as reflected in the Company's books and records, indicating
with
respect to each such Option or Warrant, the exercise price per share, date of
grant and, as it relates to Options, the stock incentive plan under which such
Option was granted or if granted outside of such plans, a reference to that
effect.
2.4 Obligations With Respect to Capital Stock. Except as set forth in Section
2.3 hereof, there are no equity securities or similar ownership interests of
any
class of capital stock of the Company, or any securities exchangeable or
convertible into or exercisable for such shares of capital stock. Except as set
forth in Section 2.3 hereof, there are no options, warrants, equity securities
or similar ownership interests, calls, rights (including preemptive rights),
bonds, debentures, notes or other indebtedness having general voting rights or
debt convertible into securities having such rights, commitments or agreements
of any character to which the Company is a party or by which it is bound
obligating the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, or repurchase, redeem or otherwise acquire, or cause the
repurchase, redemption or acquisition of, any shares of capital stock of the
Company or obligating the Company to grant, extend or enter into any such
option, warrant, equity security or similar ownership interests, calls or
rights
or to provide funds to make any investment (in the form of a loan, capital
contribution or otherwise). Except as set forth in Schedule 2.4, there are no
registration rights, voting trusts or agreements, proxies or other agreements
or
understandings to which the Company or any Subsidiary is a party, or to the
Company's Knowledge, among the Company's shareholders, with respect to any
equity security of any class of the Company. The allocation of the Merger
Consideration and the Series E Liquidation Payments provided in Section 1.5
hereof, are in accordance with the Company's Articles of Incorporation. There
are no dividends on any shares of Company Stock accrued or declared and unpaid
as of the Agreement Date. In accordance with the terms of the Company's
Articles
of Incorporation, all Company Preferred Stock, other than the Series E
Preferred
Stock, will convert automatically into Company Common Stock immediately prior
to
the Merger without any action on the part of the Company or its shareholders.
2.5 Authority.
(a) The Company has all requisite power, right and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company, subject only to the approval and adoption of this
Agreement and the Merger by the shareholders of the Company and the filing and
recordation of the Agreement of Merger or other instrument having similar
effect
pursuant to the CGCL. This Agreement has been duly executed and delivered by
the
Company and, assuming the due authorization, execution and delivery by the
Parent and the Merger Sub, constitutes the valid and binding obligation of the
Company, enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' right generally and the effect of general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or
at
law). The execution and delivery of this Agreement by the Company does not, and
the performance of this Agreement by the Company will not, (i) conflict with or
violate the Articles of Incorporation or Bylaws of the Company, or the
equivalent organizational documents of any of the Subsidiaries, or any law,
rule, regulation, order, permit, authorization, approval, or other requirement
of a Governmental Entity, judgment or decree applicable to the Company or any
Subsidiary or by which any of their respective properties is bound or affected
(collectively, the "Legal Requirements"), (ii) result in any breach
of, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, give any Person the right to declare a default
or
exercise any remedy under, or to accelerate the maturity or performance of, or
payment under, or to cancel, terminate or modify any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any Subsidiary is a party or
by
which the Company or any Subsidiary or any of their respective assets or
properties are bound or affected, or (iii) result in the creation of a lien,
pledge, hypothecation, charge, encumbrance, security interest, claim or
restriction (collectively, "Liens" and each individually a
"Lien") on any of the
properties or assets of the Company or any Subsidiary pursuant to any of the
foregoing.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, including without limitation
any Medicare or Medicaid program and the Federal Trade Commission (each, a
"Governmental Entity") is required by or with respect to the Company
in
connection with the execution and delivery of this Agreement or with the
consummation of the transactions contemplated hereby, except for (i) the filing
of the Agreement of Merger or other instrument having similar effect with the
Secretary of State of the State of California, and (ii) applicable requirements
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act").
2.6 Corporate Records. The books and records of the Company and the
Subsidiaries
are true, complete and correct in all material respects. Complete and accurate
copies of all books and records of the Company and each Subsidiary have been
provided or made available to the Parent. Complete and accurate copies of all
minute books of the Company and the Subsidiaries have been delivered or made
available to the Parent and in all material respects contain complete and
accurate records of all meetings, resolutions adopted and other actions taken
by
the Boards of Directors, all committees of the Boards of Directors and the
shareholders of the Company and the Subsidiaries from their respective dates of
formation to the date of this Agreement.
2.7 Financial Statements. Schedule 2.7(a) contains true, correct and complete
copies of (i) the audited consolidated balance sheets of the Company as of
December 31, 2005 and December 31, 2004, and the related consolidated
statements
of operations, stockholders equity and cash flows for the fiscal years ended
December 31, 2005, December 31, 2004 and December 31, 2003 and related notes
(all of the foregoing described financial statements being herein collectively
referred to as the "Audited Financial Statements"), (ii) the
unaudited
consolidated balance sheet of the Company as of April 30, 2006 (the
"Unaudited
Balance Sheet"), and (iii) the unaudited consolidated statements of
operations
and cash flows of the Company for the four (4) months ended April 30, 2006
(together with the Unaudited Balance Sheet, the "Unaudited Financial
Statements") (the Audited Financial Statements and the Unaudited Financial
Statements are collectively referred to herein as the "Financial
Statements").
The Financial Statements (w) have been prepared in accordance with GAAP,
consistently applied as of the dates and during the periods covered thereby
(except for the absence of footnotes to the Unaudited Financial Statements),
(x)
present fairly, in all material respects, the consolidated financial position
and consolidated results of operations, changes in stockholders' equity, and
cash flows of the Company as of the dates and for the periods specified
therein,
(y) subject to any adjustments required by GAAP, have been derived from and are
in agreement with the books and accounting records of the Company, and (z)
contain and reflect adequate reserves, in accordance with GAAP, for all
reasonably anticipated losses, costs and expenses.
2.8 No Undisclosed Liabilities; Trade Payables. Except (a) to the extent set
forth or provided for in the Financial Statements or the notes thereto or (b)
as
set forth on Schedule 2.8, neither the Company nor any Subsidiary has (i) any
indebtedness for borrowed money, whether current or funded, or secured or
unsecured, matured or unmatured, or capital lease obligations or (ii) other
liabilities or obligations of the type required to be disclosed pursuant to
GAAP, whether known or unknown, matured or unmatured, accrued, absolute,
contingent or otherwise (including, without limitation, unasserted claims)
other
than such as have been incurred in the ordinary course of the Business,
consistent with past practices (the "Ordinary Course") since the date
of the
Unaudited Balance Sheet that individually or in the aggregate have not had and
could not reasonably be expected to have a Material Adverse Effect on the
Company.
2.9 Absence of Certain Changes. Since December 31, 2005, the Company and each
Subsidiary have conducted the Business in the Ordinary Course, and except as
disclosed in Schedule 2.9 or in the Financial Statements or as contemplated by
this Agreement or the Escrow Agreement, neither the Company nor any Subsidiary
has:
(a) incurred any material debts or liabilities (absolute, accrued, contingent
or
otherwise), other than liabilities as set forth in the Unaudited Balance Sheet
and current liabilities incurred in the Ordinary Course (none of which
individually or in the aggregate has had a Material Adverse Effect on the
Company);
(b) been subjected to or permitted a Lien, other than a Permitted Lien, upon
any
of the assets or properties of the Company or any Subsidiary;
(c) sold, transferred, licensed, leased or otherwise disposed of any of its
material rights, assets or properties other than in the Ordinary Course;
(d) discharged or satisfied any material Lien other than a Lien securing, or
paid any obligation or liability other than, current liabilities shown on the
unaudited consolidated balance sheet dated April 30, 2006 (the "Unaudited
2006
Balance Sheet") included in the Unaudited Financial Statements and current
liabilities incurred prior to the Closing Date, in each case in the Ordinary
Course;
(e) canceled or compromised any debt in excess of $100,000 owed to, or claim of
or against it, or waived or released any right of value in excess of $100,000,
other than in the Ordinary Course;
(f) entered into any material transaction, or otherwise committed or obligated
itself to any material capital expenditure, other than in the Ordinary Course;
(g) made any change in the accounting methods, principles or practices followed
by it;
(h) entered into, made or suffered any amendment or termination of, or waived
or
assigned any material right under, any Contract set forth on Schedules 2.21(a)
or 2.24 or any leases set forth on Schedule 2.10(a);
(i) paid, or agreed to pay, any increase in compensation payable or to become
payable (including any bonus or commission formula) of any kind to any
director,
executive officer, other employee or independent contractor, other than in the
Ordinary Course;
(j) adopted, changed or suffered any material change in any Plan or accelerated
the payments under any Plan affecting any employee of the Company or any
Subsidiary otherwise than to conform to Legal Requirements;
(k) purchased or otherwise acquired all or substantially all of the business or
assets of any other Person (as defined below) which forms a material portion of
the Business;
(l) entered into any transaction or series of related transactions with any
individual Related Person;
(m) failed to pay or perform any of its material obligations when and to the
extent due;
(n) entered into any employment agreements, or other agreement to retain
employees or independent contractors, other than in the Ordinary Course;
(o) entered into any collective bargaining agreements;
(p) failed to renew any insurance policies material to the Business as
currently
conducted by the Company, except where any such insurance policy has been
replaced with a policy having comparable limits, or materially reduced the
amount of insurance coverage provided to the Company by existing insurance
policies or self-insurance program;
(q) suffered any loss or suspension or received notice of any adverse action,
decision or finding with respect to any material Authorizations (as defined
below);
(r) merged or consolidated with, or acquired all or a material portion of the
assets, capital stock or debt securities of, any Person or any business or
division thereof;
(s) other than in the Ordinary Course, (i) disposed of, granted, or obtained,
abandoned, or permitted to lapse any rights to, any Proprietary Assets, or
dispose of or disclose to any Person, other than representatives of the Parent,
any trade secret or (ii) acquire any rights in any Proprietary Assets developed
by any third party;
(t) declared, set aside or paid any dividend or distribution (whether in cash,
securities or property or a combination thereof) to the holders of Company
Stock;
(u) changed or amended the organizational documents of the Company or any
Subsidiary;
(v) made any Tax election inconsistent with past practice, changed any Tax
election already made, settled or compromised any Tax liability or agreement to
an extension of a statutory period of limitations for the assessment of Tax,
failed to file any Tax Return when due, or failed to pay any Taxes when due;
(w) made or suffered any change which has or could be reasonably expected to
constitute a Material Adverse Effect, other than, after the Agreement Date, any
such effect to the extent attributable to or resulting from (but only to the
extent that the effect of a change on the Company and its Subsidiaries is not
materially different than on companies comparable to the Company): (w) any
change in the laws, rules or regulations of general applicability governing
companies comparable to the Company, or interpretations thereof by courts or
any
Governmental Entity, (x) any change in GAAP, regulatory accounting principles
or
interpretations thereof, in each case which affects companies comparable to the
Company, or (y) changes, after the date of this Agreement, in global or
national
political conditions (including the outbreak of war or acts of terrorism); and
(x) entered into any agreement or otherwise obligated itself to do any of the
foregoing.
2.10 Property; Encumbrances.
(a) Schedule 2.10(a) contains a list of all real property leased by the Company
or any Subsidiary (the "Real Property"). Neither the Company nor any
Subsidiary
owns any Real Property.
(b) Schedule 2.10(b) contains a list of all tangible personal property owned by
the Company or any Subsidiary, or held by the Company or any Subsidiary
pursuant
to a lease or license (in which case such lease or license is also listed),
which has a net book value or commitment in excess of $200,000.
(c) The leases and licenses listed on Schedule 2.10(a) and Schedule 2.10(b) are
in full force and effect without any material default or waiver thereunder by
the Company or any Subsidiary or, to the Knowledge of the Company, by any other
party thereto. True and complete copies of all leases and licenses listed on
Schedule 2.10(a) and Schedule 2.10(b) have been delivered or made available to
the Parent. The Company or its Subsidiaries own or have good and marketable fee
title to or a valid leasehold or license interest in all of the Leased Real
Property, material personal assets and properties (including those reflected as
assets on the Unaudited 2006 Balance Sheet or acquired since the date thereof)
used or held for use in connection with the Business as currently conducted by
the Company, free and clear of all Liens other than Permitted Liens. For
purposes of this Agreement, "Permitted Liens" means: (i) any Lien for
Taxes and
general or special assessments not yet due and payable; (ii) Liens in respect
of
pledges or deposits under workers' compensation laws or similar legislation,
any
landlord's, carriers', warehousemen's, attorneys', mechanics', laborers'
materialmen's or similar statutory Liens; (iii) purchase money Liens and Liens
securing rental payments under capital lease arrangements and other similar
equipment lease financing arrangements; (iv) any Lien for indebtedness and
liabilities disclosed: (y) on Schedule 2.10(c)(i); or (z) in the Financial
Statements and listed on Schedule 2.10(c)(ii); (v) easements, reservations,
covenants, conditions and restrictions (but not violations thereof) of public
record or disclosed in the Company's existing title policies, the Company's
leases for real property, or as would be disclosed o