EXHIBIT 2.1
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AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF DECEMBER 8, 1998
BY AND AMONG
FIRSTAMERICA AUTOMOTIVE, INC.
DSW ACQUISITION CORPORATION
AND
DSW & ASSOCIATES, INC.
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AGREEMENT AND PLAN OF REORGANIZATION
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THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is dated as of
December 8, 1998 by and among First America Automotive, Inc., a Delaware
corporation ("FAA"), DSW Acquisition Corporation, a Delaware corporation and a
wholly owned subsidiary of FAA ("Merger Sub"), DSW Associates, Inc., a
California corporation ("DSW") and, solely for the purposes of Article III
hereof, the shareholders of DSW listed on the signature page hereof (the "Major
Shareholders").
RECITALS
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The parties intend to cause a merger whereby Merger Sub will merge with and
into DSW and DSW will become a wholly owned subsidiary of FAA; and
The parties desire to effect such merger on the terms and conditions set
forth herein and in such manner that the merger will be treated as a purchase
for accounting purposes and will constitute a reorganization within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended.
In consideration of the foregoing and the mutual agreements contained
herein, the parties hereby agree as follows:
ARTICLE I
THE MERGER
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1.1 The Merger. Subject to the terms and conditions hereof, and in
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accordance with the California Corporations Code (the "California Code") Merger
Sub will be merged with and into DSW (the "Merger"), as soon as practicable
following the satisfaction or waiver of the conditions set forth in Article VI
hereof. Following the Merger, DSW shall continue as the surviving corporation
(the "Surviving Corporation"), and the separate corporate existence of Merger
Sub shall cease.
1.2 Effective Time. The Merger shall become effective upon the
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filing of a Certificate of Merger with the Secretary of State of the State of
Delaware and the filing of a duly executed Agreement of Merger substantially in
the form of Exhibit A hereto (the "Agreement of Merger") and the required
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officers' certificates (the "Officers' Certificates") with the Secretary of
State of the State of California (the date and time of such filing being
hereinafter referred to as the "Effective Time").
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1.3 Effects of the Merger. The Merger shall have the effects set
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forth in Section 1107 of the California Code. As of the Effective Time, DSW
shall be a wholly-owned subsidiary of FAA.
1.4 Articles of Incorporation and Bylaws. The Articles of
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Incorporation and By-laws of DSW as in effect at the Effective Time shall be
amended to read in their entirety to read substantially as the Certificate of
Incorporation and By-laws of Merger Sub.
1.5 Directors and Officers of the Surviving Corporation. At the
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Effective Time, each director of DSW shall cease to hold such office, and the
directors of the Surviving Corporation shall be the directors of Merger Sub,
each of whom shall hold such office until the next annual meeting of
shareholders of the Surviving Corporation and until his successor shall have
been elected or appointed and qualified to serve, or otherwise as provided in
the Articles of Incorporation or By-laws of the Surviving Corporation.
1.6 Meeting of the Shareholders of DSW. DSW will take all action
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necessary in accordance with the California Code, federal securities laws and
any other applicable law or regulation, and with its Articles of Incorporation
and Bylaws, to obtain the approval by its shareholders of the Merger by written
consent, or to convene a meeting of its shareholders, to be held as soon as
practicable, to consider and vote upon this Agreement. DSW shall use its best
efforts to obtain such shareholder approval. DSW represents and warrants that
its Board of Directors, at a meeting duly called and held, has (i) determined
that as of the date of such meeting, the Merger is fair to and in the best
interests of the shareholders of DSW and (ii) resolved to recommend to the
shareholders of DSW that they approve this Agreement.
1.7 Closing; Consummation of the Merger. The closing of the
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transactions contemplated by this Agreement (the "Closing") shall take place as
soon as practicable after the satisfaction or waiver of the latest to occur of
the conditions set forth in Article VI at the offices of ▇▇▇▇ ▇▇▇▇ ▇▇▇▇ &
Freidenrich LLP, ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇., ▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇ or at such other date
and place as FAA and DSW may agree. The date of the Closing, determined pursuant
to this Section 1.7, is hereinafter referred to as the "Closing Date."
Simultaneously with the Closing, the Agreement of Merger and Officers'
Certificates shall be filed with the Secretary of State of California.
ARTICLE II
CONVERSION OF SHARES; DISSENTING SHARES; EXCHANGE OF SHARES
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2.1 Effect on Capital Stock.
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(a) Subject to Section 2.4 hereof, at the Effective Time each issued
and outstanding share of common stock, $0.001 par value per share, of DSW
(the "DSW Common Shares"), any shares of preferred stock, $0.001 par value
per share, of DSW (the "DSW Preferred
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Shares") issued and outstanding immediately prior to the Effective Time
(excluding any such shares held by FAA, Merger Sub or any other subsidiary of
FAA, which shares shall be canceled in the Merger, and other than Dissenting DSW
Shares (as defined in Section 2.2 hereof)) shall automatically, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the number of shares of Class A common stock, $0.00001 par value per share,
of FAA ("FAA Class A Common Stock") as is determined pursuant to this Section
2.1. The DSW Common Shares and DSW Preferred Shares are collectively referred to
herein as the "DSW Shares." A maximum total of 335,000 shares of FAA Class A
Common Stock will be issued in the Merger at the Effective Time, including
shares issuable on exercise of any (x) warrants, options or other instruments
for the purchase of DSW Common Shares or (y) upon conversion of any convertible
debt or equity instruments (all such instruments referenced in (x) or (y)
preceding are referred to collectively as the "DSW Convertible Securities") and
including shares that would have been issued to holders of Dissenting DSW Shares
(the "Merger Consideration").
(i) Each DSW Preferred Share outstanding at the Effective
Time (excluding any such shares held by FAA, Merger Sub or any other subsidiary
of FAA) shall be exchangeable for a fraction of a FAA Class A Common Share (the
"Preferred Exchange Ratio"). The final Preferred Exchange Ratio shall be such
amount as is indicated in an updated capitalization table indicating the final
exchange ratios for all then outstanding DSW Shares and the allocation of Merger
Consideration in respect of any DSW Convertible Securities (the "Capitalization
Notice") to be delivered to FAA two business days prior to the scheduled
Effective Time.
(ii) Each DSW Common Share outstanding at the Effective Time
shall be exchangeable for a fraction of a FAA Class A Common Share (the "Common
Exchange Ratio"). The final Common Exchange Ratio shall be as noticed in the
Capitalization Notice.
(iii) The DSW Convertible Securities shall be exchanged
directly for FAA Class A Common Shares and cash as provided for in the
Capitalization Notice. (iv) The Agreement of Merger to be filed shall contain
final exchange ratios for each class and series of the DSW Shares after
aggregating the respective amounts to which such classes and series are entitled
pursuant to clauses (i) through (ii) above.
(b) At the Effective Time, each DSW Share held by DSW shall
automatically, by virtue of the Merger, be canceled without payment of any
consideration therefor and without any conversion thereof.
(c) At the Effective Time, each DSW Share issued and outstanding
immediately prior to the Effective Time and held by FAA or Merger Sub or any
other subsidiary of FAA shall automatically, by virtue of the Merger, be
canceled without payment of any consideration therefor and without any
conversion thereof.
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(d) At the Effective Time, each share of common stock, no par value,
of Merger Sub issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and exchangeable for one share of common stock, no
par value, of the Surviving Corporation.
2.2 Dissenting DSW Shares. DSW Shares that have not been voted for
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approval of this Agreement and with respect to which a demand for payment and
appraisal shall have been properly made in accordance with Chapter 13 of the
California Code ("Dissenting DSW Shares") shall not be converted into the Merger
Consideration at or after the Effective Time but shall be converted into such
consideration as may be determined to be due with respect to such Dissenting DSW
Shares pursuant to the California Code. If a holder of Dissenting DSW Shares
("Dissenting Shareholder") shall withdraw his or her demand for such payment and
appraisal or shall become ineligible for such payment and appraisal, then, as of
the Effective Time of the occurrence of such event of withdrawal or
ineligibility, whichever last occurs, such holder's Dissenting DSW Shares shall
cease to be Dissenting DSW Shares and shall be converted into the Merger
Consideration into which such Dissenting DSW Shares would have been converted
pursuant to Section 2.1(a) hereof. DSW shall give FAA prompt notice of any
demand received by DSW from a holder of Dissenting DSW Shares for appraisal of
DSW Shares, and FAA shall have the right to participate in all negotiations and
proceedings with respect to such demand. DSW agrees that, except with the prior
written consent of FAA, or as required under the California Code, it will not
voluntarily make any payment with respect to, or settle or offer to settle, any
such demand for appraisal. Each Dissenting Shareholder who, pursuant to the
provisions of Chapter 13 of the California Code, becomes entitled to payment of
the value of shares of DSW stock shall receive payment therefor (but only after
the value therefor shall have been agreed upon or finally determined pursuant to
such provisions). Any Merger Consideration which would have been issuable with
respect to Dissenting DSW Shares shall be retained by FAA, or to the extent such
Dissenting DSW Shares are attributable to Merger Consideration held in escrow
pursuant to Section 2.8, and Article VII hereof, returned to FAA.
2.3 Delivery of Merger Consideration.
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(a) FAA shall act as Exchange Agent (the "Exchange Agent") for
delivery of the Merger Consideration to the "Escrow Agent" (as such term is
defined in Section 2.8) as is provided in Section 2.8, and to the DSW
shareholders and, if applicable, any cash to which holders of DSW shares shall
be entitled pursuant to Section 2.4 hereof.
(b) Within five (5) days after the Effective Time, the Exchange Agent
shall mail to each holder of record (other than FAA or Merger Sub or any other
subsidiary of FAA) of a certificate or certificates which immediately prior to
the Effective Time represented issued and outstanding DSW Shares (individually a
"Certificate" and collectively the "Certificates"), a letter of transmittal for
return to the Exchange Agent which shall specify that delivery shall be
effected, and risk of loss and the title to the Certificates shall pass, only
upon receipt of the Certificates in exchange for the Merger Consideration.
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(c) Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with and in accordance with such letter of transmittal, the
holder of such Certificate shall be entitled to receive in exchange therefor the
Merger Consideration that such holder is entitled to receive pursuant to Section
2.1(a) hereof subject to the Escrow of such Merger Consideration pursuant to the
terms of this Agreement. Upon such surrender, the Exchange Agent shall promptly
(i) deliver to the DSW shareholder a certificate representing the shares of
Merger Consideration to which such DSW shareholder is entitled excluding shares
of Merger Consideration (if any) to be held in Escrow and in the case of a
holder of DSW Common Shares a notice of the number of shares of Merger
Consideration delivered to the Escrow Agent, (ii) deliver to the Escrow Agent a
certificate representing the shares of Merger Consideration to be held in Escrow
with a copy of such notice to the former holder of DSW Common Shares and (iii)
deliver to the DSW Shareholders' Representatives (as such term is defined in
Article IX) a copy of the notice as indication of such shareholder's interest in
the Merger Consideration held in escrow.
(d) Until surrendered, each Certificate shall be deemed for all
purposes to evidence the number of shares of FAA Class A Common Stock into which
the DSW Shares represented by such Certificate have been converted, and shall
have the rights with respect thereto as provided by the California Code, subject
to the escrow provision of this Agreement. Notwithstanding the foregoing, no
dividends or other distribution declared after the Effective Time with respect
to FAA Class A Common Stock shall be paid to the holders of any unsurrendered
Certificate until the holder thereof surrenders such Certificate.
(e) After the Effective Time there shall be no transfers on the stock
transfer books of either DSW (the stock transfer books of which shall be closed)
or the Surviving Corporation of DSW Shares which were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates are
presented for transfer to the Exchange Agent, together and in accordance with
the letter of transmittal from the Exchange Agent, they shall be canceled and
exchanged for the Merger Consideration subject to the escrow provisions of this
Agreement.
2.4 No Fractional Shares. No certificates or scrip for fractional shares
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of FAA Class A Common Stock will be issued, no FAA stock split or dividend shall
be paid in respect of any fractional share interest, and no such fractional
shares interest shall entitle the owner thereof to vote or to any rights of or
as a shareholder or member of FAA. In lieu of such fractional shares, any holder
of DSW Shares who would otherwise be entitled to a fraction of a share of FAA
Class A Common Stock will, upon surrender of his Certificate or Certificates, be
paid the cash value of such fraction, which shall be equal to the fraction
multiplied by the Fair Value of a full share of FAA Class A Common Stock as
determined by FAA. For each holder of DSW Shares fractional interests shall be
calculated after aggregating all FAA Class A Common Stock to which such holder
is entitled to receive pursuant to Section 2.1(a).
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2.5 DSW Convertible Securities. DSW Convertible Securities shall be
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exchanged for Merger Consideration at the Effective Time and all DSW Convertible
Securities shall be delivered to FAA at the Closing.
2.6 Adjustments. If, between the date hereof and the Effective Time, all
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outstanding shares of FAA Class A Common Stock shall be changed into a different
number of shares or a different class by reason of any reclassification,
recapitalization, split-up, exchange of shares or readjustment, or if a stock
dividend thereon shall be declared with a record date within such period, the
number of shares of FAA Class A Common Stock to be issued and delivered in the
Merger for each outstanding DSW Share as provided in this Agreement shall be
correspondingly adjusted.
2.7 Restricted Status of FAA Class A Common Stock. The parties
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acknowledge and agree that the FAA Class A Common Stock to be issued pursuant to
the Merger will be issued pursuant to a transaction not involving a public
offering and therefore will be characterized as "restricted securities" under
federal securities laws. The parties further acknowledge and agree that (i) FAA
Class A Common Stock is not currently listed for trading on any market and there
currently is no active market for the sale or purchase of FAA Class A Common
Stock and (ii) pursuant to the Securities Act of 1933, as amended (the
"Securities Act") the FAA Class A Common Stock issued in the Merger may be
resold without registration under the Securities Act only in certain limited
circumstances. It is understood that the Certificates issued pursuant to the
Merger will bear the following legend:
"These securities have not been registered under the Securities Act of
1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
2.8 Merger Consideration Escrow. At the Closing, FAA, and the DSW
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Shareholders' Representatives (as such term is defined in Article VIII), shall
execute and deliver an escrow agreement (the "Escrow Agreement") substantially
in the form attached hereto as Exhibit C. Pursuant to the Escrow Agreement, up
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to 150,750 (subject to adjustment for dissenters rights, the completion of
actions required to release Escrow shares prior to closing, the continuation of
the escrow of such shares pursuant to any escrow agreements which the shares of
DSW stock which were converted into Merger Consideration are subject, and the
terms of this Section 2.8) of the shares of FAA Class A Common Stock to be
issued to the holders of DSW Common Stock (the "DSW Common Shareholders") in
exchange for their DSW Common Stock in the Merger shall be placed in escrow (the
"Escrow Shares") for the purpose of securing the indemnification rights of FAA
with respect to the representations and warranties set forth in Section 3 hereof
and as security for the performance of certain actions as provided in Section
7.1, subject to the terms, conditions and limitations specified in Article VII
hereof and the Escrow Agreement. The
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allocation of such Escrow Shares shall be on a pro rata basis among all shares
of FAA Class A Common Stock issuable to the DSW Common Shareholders. No
fractional shares of FAA Class A Common Stock shall be issuable pursuant to
these escrow provisions and the number of Escrow Shares attributable to each DSW
Common Shareholder shall be rounded up to the nearest whole number and the
number of shares of FAA Class A Common Stock not held in escrow issuable to each
DSW Common Shareholder shall be rounded down to the nearest whole number.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DSW
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DSW and the Major Shareholders hereby represent and warrant to FAA and
Merger Sub that the statements contained in this Article III are true and
correct, except as set forth in the disclosure schedule delivered by DSW to FAA
on the date hereof (referred to herein as the "DSW Disclosure Schedule"). The
DSW Disclosure Schedule will be arranged in paragraphs corresponding to the
lettered and numbered paragraphs contained in this Article III, and the
disclosure in any such numbered and lettered section of the DSW Disclosure
Schedule shall qualify only the corresponding section in this Article III
(except to the extent disclosure in any numbered and lettered section of the DSW
Disclosure Schedule is specifically cross-referenced in another numbered and
lettered section of the DSW Disclosure Schedule).
3.1 Certain Definitions. As used in this Agreement the following
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terms have the following meanings (terms defined in the singular to have a
correlative meaning when used in the plural and vice versa).
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"Affiliate" of a Person means any other Person that directly or
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indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with such Person.
"Business Condition" means the assets, liabilities, properties,
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business, financial condition, operations or results of operations of such
corporate entity.
"Intellectual Property" means (a) all inventions (whether patentable
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or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications filed or unfiled, and
invention disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof,
(b) all trademarks, service marks, trade dress, logos, trade names, and
corporate names, uniform resource locations ("url's") together with all
translations, adaptations, derivations, and combinations thereof and
including all goodwill associated therewith, (c) all copyrightable works,
all copyrights, and all applications, registrations, and renewals in
connection therewith, (d) all trade secrets and confidential information
(including ideas, research and development, know-how, formulas,
compositions, drawings, specifications, customer and supplier lists,
pricing and cost information,
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financial information, and business and marketing plans and proposals), (e)
all computer software (including, but not limited to, source code, data and
related documentation), (f) all other proprietary rights relating to the
foregoing, and (g) all copies and tangible embodiments thereof (in whatever
form or medium).
"Material Adverse Effect" shall mean a material adverse effect on the
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Business Condition of the parent corporation and its subsidiaries.
"Ordinary Course of Business" means the ordinary course of business
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consistent with past custom and practice (including with respect to
quantity and frequency).
"Person" means an individual, a partnership, a corporation, an
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association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a governmental entity (or any department,
agency, or political subdivision thereof).
"Security Interest" means any mortgage, pledge, lien, encumbrance,
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charge, or other security interest, other than (a) mechanic's,
materialmen's, and similar liens, (b) liens for taxes not yet due and
payable, (c) liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of
Business and not incurred in connection with the borrowing of money.
3.2 Organizations, Qualification, and Corporate Power. Each of DSW and
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its subsidiaries (all of which are listed in Section 3.2 of the Disclosure
Schedule) is a corporation duly organized, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation, is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required. DSW and each of its
subsidiaries have full corporate power and authority, and each has all necessary
licenses and permits, to carry on the businesses in which it is engaged and to
own and use the properties owned and used by it. Section 3 of the DSW Disclosure
Schedule lists the directors and officers of DSW.
(a) DSW has all requisite corporate power and authority to enter into
this Agreement and the Agreement of Merger and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Agreement of Merger and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate and shareholder action on the part of DSW, subject only to the
approval of the Merger by DSW's shareholders under the California Code. This
Agreement is, and the Agreement of Merger when executed and delivered by the
parties thereto will be, duly executed and delivered by DSW and constitute valid
and binding obligations of DSW, enforceable in accordance with the terms hereof
and thereof, except as such enforceability may be limited by (i) bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and (ii) general principles of equity, regardless of whether asserted
in a proceeding in equity or at law.
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(b) The execution and delivery of this Agreement by DSW does not, and
the consummation of the transactions contemplated by this Agreement will not,
(i) conflict with, or result in any violation or breach of any provision of the
Articles of Incorporation or Bylaws of DSW or any of its Subsidiaries (in each
case as heretofore amended), (ii) result in any violation or breach of, or
constitute (with or without notice or lapse of time, or both) a default (or give
rise to a right of termination, cancellation or acceleration of any obligation
or loss of any material benefit) or require the consent, waiver or agreement of
any person or entity (other than consents, waivers and agreements that have been
or prior to the Closing will be obtained) under any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, lease, contract or
other material agreement, instrument or obligation to which DSW or any of its
Subsidiaries is a party or by which any of them or any of their properties or
assets may be bound, or (iii) subject to the consents, approvals, orders,
authorizations, filings and registrations specified in Section 3.2(c), conflict
with or violate any judgment, order, decree, statute, law, ordinance, rule or
regulation or any material permit, concession, franchise or license applicable
to DSW or any of its Subsidiaries or any of their properties or assets, except
in the cases of clause (ii) for such consents, waivers and agreements, the
absence of which, and such violations, breaches, defaults, terminations,
cancellations or accelerations which, in the aggregate could not reasonably be
expected to have a DSW Material Adverse Effect or a material adverse effect on
the ability of DSW to consummate the transactions contemplated by this
Agreement.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency, commission or
other governmental authority or instrumentality ("Governmental Entity") is
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required by or with respect to DSW or any of its Subsidiaries in connection with
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) the filing of the Agreement of
Merger with the Secretary of State of the State of California in accordance with
the California Code, and (ii) such other consents, approvals, orders,
authorizations, filings, approvals and registrations which, in the aggregate, if
not obtained or made, could not reasonably be expected to have a DSW Material
Adverse Effect or have a material adverse effect on the ability of DSW to
consummate the transactions contemplated by this Agreement.
3.3 Capitalization.
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(a) The authorized capital stock of DSW consists of 30,000,000
shares of DSW Common Stock and 10,000,000 shares of DSW Preferred Stock. As of
August 31, 1998: (i) 7,417,213 shares of DSW Common Stock were issued and
outstanding, all of which are validly issued, fully paid and nonassessable; (ii)
no shares of DSW Preferred Stock are issued or outstanding; (iii) no shares of
DSW Common Stock or DSW Preferred Stock were held in the treasury of DSW or by
Subsidiaries of DSW; and (iv) 1,165,000 shares of DSW Common Stock were reserved
for issuance pursuant to stock options granted and outstanding under DSW's stock
option plans (the "DSW Option Plans"). All shares of DSW Common Stock subject to
issuance as specified above, upon issuance on the terms and conditions specified
in the instruments pursuant to which they are issuable, shall be duly
authorized, validly issued, fully paid and
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nonassessable. There are no obligations, contingent or otherwise, of DSW or any
of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of DSW
Common Stock.
(b) Section 3.3(b) of the DSW Disclosure Schedule lists all of the
holders of options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights and other rights that could require DSW to issue, sell
or otherwise cause to become outstanding any of its capital stock (the "Stock
Rights"), and if determinable, the number of shares of DSW Common Stock or DSW
Preferred Stock subject to such Stock Rights. Except as set forth in Section
3.3(b) of the DSW Disclosure Schedule, there are no other outstanding or
authorized Stock Rights. There are no outstanding or authorized stock
appreciation, phantom stock, profit participation, or similar rights with
respect to DSW. To the knowledge of DSW and the Major Shareholders, there are no
voting trusts, proxies, or other agreements or understandings with respect to
the voting of the capital stock of DSW.
3.4 Fees. DSW has no liability or obligation to pay any fees or
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commissions to any broker, finder, agent or attorney with respect to the
transactions contemplated by this Agreement, except as described in Section 3.4
of the DSW Disclosure Schedule and except with respect to those fees of counsel
to DSW which fees shall not exceed $95,000 in the aggregate.
3.5 Financial Statements. DSW has furnished or made available to FAA its
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consolidated financial statements for each of the fiscal years ended December
31, 1997, December 31, 1996 and December 31, 1995, including a balance sheet of
DSW, and the related statements of income, cash flow and shareholders' equity
(collectively, the "DSW Financial Statements"), and the related management
letters, and DSW's unaudited financial statements as of June 30, 1998, including
an unaudited balance sheet of DSW as of August 31, 1998 (the "Unaudited Balance
Sheet") and the related unaudited statement of income, cash flow and
shareholders' equity (the "Unaudited Financial Statements"). The Unaudited
Financial Statements together with the DSW Financial Statements are collectively
referred to as the "DSW Financial Statements." The DSW Financial Statements
have been prepared in accordance with generally accepted accounting principles
("GAAP") consistently applied (except that the Unaudited Financial Statements do
not contain footnotes required by GAAP and do not contain normally recurring
year-end adjustments, which adjustments will not be material either individually
or in the aggregate) and fairly present the financial position of DSW as at the
dates thereof and the results of their operations and cash flows for the periods
then ended. There has been no change in DSW's accounting policies except as
described in notes to the DSW Financial Statements.
3.6 Receivables. The receivables shown on the Unaudited Balance Sheet
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the ordinary course of business and have been collected or are collectible in
the book amounts thereof, less an amount not in excess of the allowance for
doubtful accounts provided for in such balance sheet. Allowances for doubtful
accounts and warranty returns are adequate and have been prepared in accordance
with GAAP consistently applied and in accordance with the past practices of DSW.
The receivables of DSW arising after August 31, 1998 and prior to the
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Effective Time arose or will arise in the Ordinary Course of Business and have
been collected or are collectible in the book amounts thereof, less allowances
for doubtful accounts and warranty returns determined in accordance with the
past practices of DSW. None of the receivables of DSW is subject to any material
claim of offset, recoupment, setoff or counter-claim and DSW has no knowledge of
any specific facts or circumstances (whether asserted or unasserted) that could
give rise to any such claim. No material amount of receivables are contingent
upon the performance by DSW of any obligation or contract other than normal
warranty repair and replacement in amounts specified in the DSW Disclosure
Schedule. No person has any lien on any of such receivables and no agreement for
deduction or discount has been made with respect to any of such receivables. The
DSW Disclosure Schedule sets forth an aging of accounts receivable of DSW and
its subsidiaries in the aggregate and by customer (0-30 days, 30-90 days and
greater than 90 days).
3.7 Title to Assets. DSW has good and marketable title to, or a valid
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leasehold interest in or license to use, the properties and assets (including,
without limitation, all Intellectual Property material to the conduct of its
business) used by it, located on its premises, or shown on the balance sheet
contained within the DSW Financial Statements (the "Balance Sheet") or acquired
after the date thereof, free and clear of all Security Interests. No Person
other than DSW will own at the time of the Closing any assets or properties
currently utilized in or reasonably necessary to the operations or business of
DSW or situated on any of the premises of DSW (other than the lessors of assets
subject to leases and the licensors of rights subject to licenses). There are
no existing contracts, agreements, commitments or arrangements with any Person
to acquire any of the assets or properties of DSW (or any interest therein)
except for this Agreement and those contracts entered into during the Ordinary
Course of Business for the sale of products and services to customers of DSW.
3.8 Events Subsequent to Fiscal Period End. Since December 31, 1997,
--------------------------------------
there has not occurred any DSW Material Adverse Effect. Without limiting the
generality of the foregoing, since that date:
(a) DSW has not sold, leased, transferred, or assigned any assets or
properties, tangible or intangible, except in the Ordinary Course of
Business;
(b) except for those agreements, contracts, leases and commitments
identified in Section 3.15 of the DSW Disclosure Schedule, DSW has not entered
into, assumed or become bound under or obligated by any agreement, contract,
lease or commitment (collectively, a "DSW Agreement") or extended or modified
the terms of any DSW Agreement which (i) involves the payment of greater than
$10,000 per annum or which extends for more than one (1) year, (ii) involves any
payment or obligation to any Affiliate of DSW (other than salary adjustments
consistent with past practices), (iii) involves the sale of any material assets,
(iv) involves any OEM relationship, or (v) involves any exclusive or
extraordinary license of DSW's technology;
11
(c) no party (including DSW) has accelerated, terminated, made
modifications to, or canceled any agreement, contract, lease, or license to
which DSW is a party or by which it is bound and DSW has not modified, canceled
or waived or settled any debts or claims held by it, or waived or settled any
rights or claims of a substantial value;
(d) none of the assets of DSW, tangible or intangible, has become
subject to any Security Interest;
(e) DSW has not made any capital expenditures except in the Ordinary
Course of Business and not exceeding $10,000 in the aggregate of all such
capital expenditures;
(f) DSW has not made any capital investment in, or any loan to, any
other Person;
(g) DSW has not created, incurred, assumed, prepaid or guaranteed any
indebtedness for borrowed money and capitalized lease obligations, or extended
or modified any existing indebtedness;
(h) DSW has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property, except to customers in the
Ordinary Course of Business;
(i) there has been no change made or authorized in the charter or
bylaws of DSW;
(j) DSW has not issued, sold, or otherwise disposed of any of its
capital stock, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any of its capital
stock;
(k) DSW has not declared, set aside, or paid any dividend or made any
distribution with respect to its capital stock (whether in cash or in kind) or
redeemed, purchased, or otherwise acquired any of its capital stock;
(l) DSW has not experienced any damage, destruction, or loss (whether
or not covered by insurance) to its property in excess of $10,000 in the
aggregate of all such damage, destruction and losses;
(m) DSW has not suffered any repeated, recurring or prolonged
shortage, cessation or interruption of inventory shipments, supplies or utility
services;
(n) DSW has not made any loan to, or entered into any other
transaction with, or paid any bonuses in excess of an aggregate of $5,000 to,
any of its Affiliates, directors, officers, or employees or their Affiliates,
and, in any event, any such transaction was on fair and reasonable terms no less
favorable to DSW than would be obtained in a comparable arm's length transaction
with a Person which is not such a director, officer or employee or Affiliate
thereof,
12
(o) DSW has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(p) DSW has not granted any increase in the base compensation of any
of its directors or officers, or, except in the Ordinary Course of Business, any
of its other employees;
(q) DSW has not adopted, amended, modified, or terminated any bonus,
profit-sharing, incentive, severance, or other plan, contract, or commitment for
the benefit of any of its directors, officers, or employees (or taken any such
action with respect to any other Employee Benefit Plan);
(r) DSW has not made any other change in employment terms for any of
its directors or officers, or any material change in employment terms for any of
its other employees (other than salary adjustments consistent with past
practices);
(s) DSW has not suffered any material adverse change or any threat of
any material adverse change in its relations with, or any loss or threat of loss
of, any of its major customers, distributors or dealers;
(t) DSW has not suffered any material adverse change or any threat of
any material adverse change in its relations with, or any loss or threat of loss
of, any of its major suppliers;
(u) DSW has not received notice or had knowledge of any actual or
threatened labor trouble or strike, or any other occurrence, event or condition
of a similar character;
(v) DSW has not changed any of the accounting principles followed by
it or the method of applying such principles;
(w) DSW has not made a change in any of its banking or safe deposit
arrangements;
(x) DSW has not entered into any material transaction other than in
the Ordinary Course of Business; and
(y) DSW has not committed to do any of the foregoing.
3.9 Undisclosed Liabilities. Except as disclosed or reflected in the
-----------------------
Unaudited Balance Sheet and except for liabilities and obligations arising after
August 31, 1998 in the Ordinary Course of Business that would not reasonably be
expected to have a Material Adverse Effect, DSW has no liabilities or
obligations (whether absolute, accrued or contingent, and whether or not
determined or determinable) of a character which, under GAAP, should be accrued,
shown, or disclosed in an audited balance sheet of DSW (including the footnotes
thereto).
13
3.10 Legal Compliance. DSW has complied in all respects with all
----------------
applicable laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder) of federal, state,
local, and foreign governments (and all agencies thereof) except where failure
to comply would not have a Material Adverse Effect on DSW. No action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand, notice or
inquiry has been filed or commenced against DSW by any governmental body
alleging any failure to so comply. DSW has all licenses, permits, approvals,
registrations, qualifications, certificates and other governmental
authorizations that are necessary for the operations of DSW as they are
presently conducted, except where the failure to obtain any such authorization
would not have a Material Adverse Effect on DSW.
3.11 Tax Matters.
-----------
(a) For purposes of this Agreement, a "Tax" or, collectively, "Taxes"
means any and all federal, state, local and foreign taxes, assessments and other
similar governmental charges, duties and impositions, including taxes based upon
or measured by gross receipts, income, profits, sales, use and occupation, and
value added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest, penalties and
additions imposed with respect to such amounts and any obligations under any
agreements or arrangements with any other person with respect to such amounts
and including any liability for taxes of a predecessor entity.
(b) Each of DSW and its Subsidiaries have accurately prepared and
timely filed (or will so file) all federal, state, local and foreign returns,
estimates, information statements and reports relating to any and all Taxes
concerning or attributable to DSW or any of its Subsidiaries or to their
operations ("Returns") required to be filed at or before the Effective Time, and
such Returns are true and correct in all material respects and have been
completed in all material respects in accordance with applicable law.
(c) Each of DSW and its Subsidiaries as of the Effective Time: (i)
will have paid all Taxes it is required to pay prior to the Effective Time and
(ii) will have withheld with respect to its employees all federal and state
income taxes, FICA, FUTA and other Taxes required to be withheld, except for
Taxes contested in good faith by appropriate proceedings for which adequate
reserves have been taken.
(d) There is no Tax deficiency outstanding, proposed or assessed
against DSW or any of its Subsidiaries that is not reflected as a liability on
the DSW Financial Statements nor has DSW or any of its Subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(e) Neither DSW nor any of its Subsidiaries has any liability for
unpaid federal, state, local or foreign Taxes that has not been accrued for or
reserved on the DSW Financial Statements, whether asserted or unasserted,
contingent or otherwise.
14
(f) No audit or other examination of any Return of DSW or any of its
Subsidiaries is presently in progress, nor has DSW or any of its Subsidiaries
been notified of any request for such an audit or other examination.
(g) DSW has made available to FAA copies of all foreign, federal and
state income and all state sales and use Returns for DSW and all its
Subsidiaries filed for all periods since their respective inceptions.
(h) There are (and immediately following the Effective Time there
will be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort (collectively,
"Liens") on the assets of DSW nor any of its Subsidiaries relating to or
attributable to Taxes other than Liens for Taxes not yet due and payable.
(i) Neither DSW, the Major Shareholders nor any of DSW's Subsidiaries
has knowledge of any basis for the assertion of any claim relating or
attributable to Taxes which, if adversely determined, would result in any Lien
on the assets of DSW or any of its Subsidiaries.
(j) None of the assets of DSW or any of its Subsidiaries are treated
as "tax-exempt use property" within the meaning of Section 168(h) of the Code.
(k) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of DSW or any of its
Subsidiaries that, individually or collectively, could give rise to the payment
of any amount that would not be deductible by DSW or any of its Subsidiaries as
an expense under applicable law. None of DSW nor any of its Subsidiaries has, or
will have as a result of the transactions contemplated by this Agreement, any
liabilities for Taxes (for example under Section 280G of the Code) as a result
of the amount of remuneration paid or to be paid to its employees.
(l) Neither DSW nor any of its Subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section 341(f)(4)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by DSW or any of its Subsidiaries.
(m) Neither DSW nor any of its Subsidiaries is a party to any Tax
sharing, indemnification or allocation agreement and neither owes any amount
under any such agreement, other than this Agreement.
(n) Each of DSW's and its Subsidiaries' Tax basis in its assets for
purposes of determining its future amortization, depreciation and other federal
income Tax deductions is accurately reflected on its respective Tax books and
records.
15
(o) Neither DSW nor any of its Subsidiaries is and has not been at
any time, a "United States real property holding corporation" within the meaning
of Section 897(c)(2) of the Code.
(p) Except as may be required as a result of the Merger, DSW and its
Subsidiaries have not been and will not be required to include any adjustment in
taxable income for any Tax period (or portion thereof) pursuant to Section 481
or Section 263A of the Code or any comparable provision under state or foreign
Tax laws as a result of the transactions, events or accounting methods employed
prior to Closing.
(q) Neither DSW nor any of its Subsidiaries, nor to DSW's knowledge,
any of its other affiliates has taken or agreed to take any action or failed to
take any action which could prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
3.12 Properties.
----------
(a) DSW owns no real property.
(b) Section 3.12 of the DSW Disclosure Schedule lists and describes
briefly all real property leased or subleased to DSW. DSW has delivered to FAA
correct and complete copies of the leases and subleases listed in Section 3.12
of the DSW Disclosure Schedule (as such leases and subleases have been amended
to date). With respect to each lease and sublease listed in Section 3.12 of the
DSW Disclosure Schedule, to the knowledge of DSW and the Major Shareholders:
(i) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect in all respects, except as such
enforceability may be limited by (i) bankruptcy laws and other similar laws
affecting creditors' rights generally and (ii) general principles of equity,
regardless of whether asserted in a proceeding in equity or at law;
(ii) no party to the lease or sublease is in material breach
or default, and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder ;
(iii) no party to the lease or sublease has repudiated any
material provision thereof;
(iv) there are no disputes, oral agreements, or forbearance
programs in effect as to the lease or sublease;
(v) DSW has not assigned, transferred, conveyed, mortgaged,
deeded in trust, or encumbered any interest in the leasehold or subleasehold;
and
16
(vi) to the knowledge of DSW and the Major Shareholders all
facilities leased or subleased thereunder have received all approvals of
governmental authorities (including licenses and permits) required in connection
with the operation thereof, and have been operated and maintained in accordance
with applicable laws, rules, and regulations in all material respects.
3.13 Intellectual Property.
---------------------
(a) Section 3.13(a) of the Disclosure Schedule lists all Intellectual
Property owned by DSW. DSW has not interfered with, infringed upon,
misappropriated or violated any Intellectual Property rights of third parties in
any respect, and has not received since its inception any charge, complaint,
claim, demand, or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that DSW must license or
refrain from using any Intellectual Property rights of any third party). To the
knowledge of DSW and the Major Shareholders, no third party has interfered with,
infringed upon, misappropriated, or violated any Intellectual Property rights of
DSW.
(b) Section 3.13(b) of the DSW Disclosure Schedule identifies each
patent or registration which has been issued to DSW or any Affiliate of DSW with
respect to any of the Intellectual Property used in DSW's business, identifies
each pending patent application or application for registration which DSW or any
Affiliate of DSW has made with respect to any of the Intellectual Property used
in DSW's business, and identifies each license, agreement, or other permission
which DSW or any Affiliate of DSW has granted to any third party with respect to
any of the Intellectual Property used in DSW's business (together with any
exceptions). DSW has made available to FAA correct and complete copies of all
such patents, registrations, applications, licenses, agreements, and permissions
(as amended to date). Section 3.13(b) of the DSW Disclosure Schedule also
identifies (i) each registered and unregistered trade name, trademark and
service ▇▇▇▇ used by DSW or any Affiliate of DSW in connection with any of its
businesses, and (ii) each registered and unregistered copyright owned by DSW or
any Affiliate of DSW with respect to Intellectual Property used in DSW's
business. With respect to each item of Intellectual Property required to be
identified in Section 3.13(b) of the DSW Disclosure Schedule, material to the
conduct of DSW's business or necessary for the operation of DSW's business as
currently conducted:
(i) DSW possesses, or will possess prior to the Closing, all
right, title, and interest in and to the item, free and clear of any Security
Interest, license, or other restriction (except for rights of third parties
under licenses disclosed in the DSW Disclosure Schedule);
(ii) the item is legal and valid and in full force and effect
and is not subject to any outstanding injunction, judgment, order, decree,
ruling, or charge;
(iii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to DSW's knowledge,
threatened in writing which challenges the legality, validity, enforceability,
use or ownership of the item;
17
(iv) DSW has never agreed to indemnify any Person for or
against any interference, infringement, misappropriation, or other conflict with
respect to the item; and
(v) the rights owned or used with respect thereto in the
operation of DSW's business at any time during DSW's last complete fiscal year
will be owned or available for use by DSW on identical terms and conditions
immediately following the Closing.
(c) Except as described in this Section 3.13(c), no other person or
business has, and to the knowledge of DSW and the Major Shareholders, no other
person or business entity has asserted any rights to any of the Intellectual
Property owned or used by DSW. Section 3.13(c) of the DSW Disclosure Schedule
identifies each material item of Intellectual Property that any third party owns
and that DSW uses pursuant to license, sublicense, agreement, or permission,
other than generally available software that can be acquired without signing an
agreement. DSW has delivered to FAA correct and complete copies of all such
licenses, sublicenses, agreements, and permissions (as amended to date). With
respect to each item of Intellectual Property required to be identified in
Section 3.13(c) of the DSW Disclosure Schedule:
(i) the license, sublicense, agreement or permission covering
the item is legal, valid, binding, enforceable, and in full force and effect in
all respects, except as such enforceability may be limited by (i) bankruptcy
laws and other similar laws affecting creditors' rights generally and (ii)
general principles of equity, regardless of whether asserted in a proceeding in
equity or at law;
(ii) to the knowledge of DSW and the Major Shareholders, no
party (other than DSW) to the license, sublicense, agreement, or permission is
in breach or default, and no event has occurred which with notice or lapse of
time would constitute a breach or default or permit termination, modification or
acceleration thereunder;
(iii) to the knowledge of DSW and the Major Shareholders, no
party (other than DSW) to the license, sublicense, agreement, or permission has
repudiated any provision thereof; and
(iv) DSW has not granted any sublicense or similar right with
respect to the license, sublicense, agreement, or permission.
(d) All designs, drawings, specifications, source code, object code,
documentation, flow charts and diagrams incorporating, embodying or reflecting
any of DSW's products at any stage of their development (the "DSW Components")
were written, developed and created solely and exclusively by employees of DSW
without the assistance of any third party, or were created by third parties who
assigned ownership of their rights to DSW in valid and enforceable agreements.
DSW has at all times used commercially reasonable efforts to protect its trade
secrets and has not disclosed or otherwise dealt with such items in such a
manner
18
as to cause the loss of such trade secrets by release thereof into the public
domain. DSW has at all times used commercially reasonable efforts to protect the
confidentiality of all of its other confidential and proprietary information and
that of third parties which is or has been in its possession.
(e) To the knowledge of DSW and the Major Shareholders, no DSW
employee is in violation of any term of any employment contract, non-disclosure
agreement or any other contract or agreement relating to the relationship of any
such person with DSW or, to the best of DSW's knowledge, any other party because
of the nature of the business conducted by DSW or proposed to be conducted by
DSW.
(f) Each person currently or formerly employed by DSW (including
independent contractors, if any) that has or had access to confidential
information of DSW has executed a confidentiality and non-disclosure agreement
in the form previously provided to counsel for FAA. Such confidentiality and
non-disclosure agreements constitute valid and binding obligations of DSW and
such person, enforceable in accordance with their respective terms, except as
enforceability may be limited by general equitable principles or the exercise of
judicial discretion in accordance with such principles.
(g) DSW has acquired all rights to Intellectual Property developed or
held by any employees (within the scope and term of their employment or
otherwise relating to the current or proposed business of DSW) or third parties
who developed Intellectual Property for DSW.
(h) DSW has taken reasonable measures consistent with practice in the
software development industry to protect the proprietary nature of each item of
Intellectual Property and to maintain in confidence all trade secrets and all
confidential information which it owns or uses.
3.14 Tangible Assets. To the knowledge of DSW and the Major Shareholders,
---------------
the buildings, machinery, equipment, and other tangible assets that DSW owns and
leases are free from material defects (patent and latent), have been maintained
in accordance with normal industry practice, and are in good operating condition
and repair (subject to normal wear and tear) and are usable in the Ordinary
Course of Business.
3.15 Contracts. Section 3.15 of the DSW Disclosure Schedule lists the
---------
following contracts, agreements, commitments and other arrangements to which DSW
is a party or by which DSW or any of its assets is bound:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $10,000 per annum;
19
(b) any agreement (or group of related agreements) for the purchase
or sale of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing or receipt of services, the performance of which
will extend over a period of more than one year or involve consideration in
excess of $10,000;
(c) any agreement for the purchase of supplies, components, products
or services from single source suppliers, custom manufacturers or
subcontractors;
(d) any agreement concerning a partnership or joint venture;
(e) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money or
any capitalized lease obligation in excess of $10,000 or under which it has
imposed a Security Interest on any of its assets, tangible or intangible;
(f) any agreement concerning confidentiality, noncompetition or
restraint of trade;
(g) any agreement with any DSW stockholder or any of such
stockholder's Affiliates (other than DSW) or with any Affiliate of DSW;
(h) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or arrangement for
the benefit of its current or former directors, officers, and employees;
(i) any collective bargaining agreement;
(j) any agreement for the employment (other than employment
agreements that are terminable at-will by DSW without incurring any liability to
DSW for severance payments, acceleration of vesting or acceleration of any other
payment payable by DSW) of any individual on a full-time, part-time, consulting,
or other basis;
(k) any agreement under which it has advanced or loaned any amount to
any of its directors, officers, or employees other than amounts advanced for
business expenses incurred in the Ordinary Course of Business;
(l) any agreement under which the consequences of a default or
termination could be reasonably expected to have a Material Adverse Effect on
DSW;
(m) any agreement with any original equipment manufacturer entered
into or performed by DSW since its inception;
(n) any agreement pursuant to which DSW is obligated to provide
maintenance, support or training for its products;
20
(o) any standard form agreement used by DSW, including, but not
limited to, any purchase order, statement of standard terms and conditions of
sale, or employment offer letter;
(p) any agreement pursuant to which any of DSW's products is
manufactured; and
(q) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $10,000 or which is
expected to continue for more than six months from the date hereof.
DSW has delivered to FAA a correct and complete copy of each written agreement
listed in Section 3.15 of the DSW Disclosure Schedule and a written summary
setting forth the terms and conditions of each oral agreement referred to in
Section 3.15 of the DSW Disclosure Schedule. With respect to each such
agreement: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect in all respects, except as such enforceability may be limited
by (i) bankruptcy laws and other similar laws affecting creditors' rights
generally and (ii) general principles of equity, regardless of whether asserted
in a proceeding in equity or at law; (B) neither DSW nor, to the knowledge of
DSW and the Major Shareholders, any other party is in breach or default of any
material provision of such agreement, and no event has occurred, which with
notice or lapse of time would constitute such a breach or default, or permit
termination, modification, or acceleration, under the agreement; (C) neither DSW
nor, to the knowledge of DSW and the Major Shareholders, any other party has
repudiated any material provision of the agreement; and (D) DSW and the Major
Shareholders do not have any reason to believe that the service called for
thereunder cannot be supplied in accordance with its terms.
3.16 Power of Attorney. There are no outstanding powers of attorney
-----------------
executed on behalf of DSW.
3.17 Insurance. DSW has delivered to FAA copies of each insurance policy
---------
(including policies providing property, casualty, liability, and workers'
compensation coverage and bond and surety arrangements) with respect to which
DSW is a party, a named insured, or otherwise the beneficiary of coverage. With
respect to each such insurance policy: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect in all respects (and there has been no
notice of cancellation or nonrenewal of the policy received); (B) neither DSW
nor, to the knowledge of DSW and the Major Shareholders, any other party to the
policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with notice
or the lapse of time, would constitute such a breach or default, or permit
termination, modification, or acceleration, under the policy; (C) neither DSW
nor, to the knowledge of DSW and the Major Shareholders, any other party has
repudiated any provision thereof; and (D) there has been no failure to give any
notice or present any claim under the policy in due and timely fashion. Section
3.17 of the DSW Disclosure Schedule describes any self-insurance arrangements
presently maintained by DSW.
21
3.18 Litigation. Section 3.18 of the DSW Disclosure Schedule sets forth
----------
each instance in which DSW (or any of its assets) (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is or
has been since its inception a party, or, to the knowledge of DSW and the Major
Shareholders, is threatened to be made a party, to any action, suit, proceeding,
hearing, arbitration, or investigation of, in, or before any court or quasi-
judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator. To the knowledge of DSW and the Major
Shareholders, there are no facts or circumstances which would form the basis of
any claim against DSW.
3.19 Product Warranty. Substantially all of the products manufactured,
----------------
sold, leased, and delivered by DSW have conformed in all respects with all
applicable contractual commitments and all express and implied warranties, and,
to DSW's knowledge, DSW has no liability for replacement or repair thereof or
other damages in connection therewith, other than in the Ordinary Course of
Business in an aggregate amount not exceeding $10,000. Substantially all of the
products manufactured, sold, leased, and delivered by DSW are subject to
standard terms and conditions of sale or lease as have been provided to FAA.
3.20 Product Liability. DSW has no liability (whether known or unknown,
-----------------
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due) arising out of any injury to individuals or property as a result of the
ownership, possession, or use of any product manufactured, sold, leased, or
delivered by DSW.
3.21 Employee Matters and Benefit Plans.
----------------------------------
(a) Definitions. With the exception of the definition of "Affiliate"
set forth in Section 3.21(a)(i) below (which definition shall apply only to this
Section 3.21), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under
common control with DSW within the meaning of Section 414(b), (c), (m) or (o) of
the Code and the regulations issued thereunder;
(ii) "DSW Employee Plan" shall mean any plan, program, policy,
practice, contract, agreement 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 or unwritten or otherwise, funded or unfunded,
including without limitation, each "employee benefit plan," within the meaning
of Section 3(3) of ERISA which is or has been maintained, contributed to, or
required to be contributed to, by DSW or any Affiliate for the benefit of any
Employee, or with respect to which DSW or any Affiliate has or may have any
liability or obligation;
22
(iii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "Employee" shall mean any current or former employee,
consultant or director of DSW or any Affiliate;
(vi) "Employee Agreement" shall mean each management,
employment, severance, consulting, relocation, repatriation, expatriation,
visas, work permit or other agreement, contract or understanding between DSW or
any Affiliate and any Employee;
(vii) "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993,
as amended;
(ix) "HIPAA" shall mean the Health Insurance Portability and
Accountability Act of 1996, as amended;
(x) "International Employee Plan" shall mean each DSW
Employee Plan that has been adopted or maintained by DSW or any Affiliate,
whether informally or formally, or with respect to which DSW or any Affiliate
will or may have any liability, for the benefit of Employees who perform
services outside the United States;
(xi) "IRS" shall mean the Internal Revenue Service;
(xii) "Multiemployer Plan" shall mean any "Pension Plan" (as
defined below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA;
(xiii) "PBGC" shall mean the Pension Benefit Guaranty
Corporation; and
(xiv) "Pension Plan" shall mean each DSW Employee Plan which is
an "employee pension benefit plan," within the meaning of Section 3(2) of ERISA.
(b) Schedule. Section 3.21(b) of the DSW Disclosure Schedule
contains an accurate and complete list of each DSW Employee Plan or Employee
Agreement. DSW does not have any plan or commitment to establish any new DSW
Employee Plan, to enter into any new Employee Agreement, or to modify any DSW
Employee Plan or Employee Agreement (except to the extent required by law or to
conform any such DSW Employee Plan or Employee Agreement to the requirements of
any applicable law, in each case as previously disclosed to FAA in writing, or
as required by this Agreement).
23
(c) Documents. DSW has made available to FAA: (i) correct and
complete copies of all documents embodying each DSW Employee Plan and each
Employee Agreement including (without limitation) all amendments thereto and all
related trust documents; (ii) the most recent annual actuarial valuations, if
any, prepared for each DSW Employee Plan; (iii) the three (3) most recent annual
reports (Form Series 5500 and all schedules and financial statements attached
thereto), if any, required under ERISA or the Code in connection with each DSW
Employee Plan; (iv) if any DSW Employee Plan is funded, the most recent annual
and periodic accounting of such DSW Employee Plan's assets; (v) the most recent
summary plan description together with the summary(ies) of material
modifications thereto, if any, required under ERISA with respect to each DSW
Employee Plan; (vi) all IRS determination, opinion, notification and advisory
letters, and all applications and correspondence to or from the IRS or the DOL
with respect to any such application or letter; (vii) all material written
agreements and contracts relating to each DSW Employee Plan, including, but not
limited to, administrative service agreements, group annuity contracts and group
insurance contracts; (viii) all communications material to any Employee or
Employees relating to any DSW Employee Plan and any proposed DSW Employee Plans,
in each case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability to DSW;
(ix) all correspondence to or from any governmental agency relating to any DSW
Employee Plan; (x) all COBRA forms and related notices; (xi) all notices,
certificates and forms required under HIPAA; (xii) all policies pertaining to
fiduciary liability insurance covering the fiduciaries for each DSW Employee
Plan; (xiii) all discrimination tests for each DSW Employee Plan for the last
three plan years; and (xiv) all registration statements, annual reports (Form
11-K and all attachments thereto) and prospectuses prepared in connection with
each DSW Employee Plan.
(d) Employee Plan Compliance. Except as set forth in Section 3.21(d)
of the DSW Disclosure Schedule, (i) DSW has performed in all material respects
all obligations required to be performed by it under, is not in default or
violation of and has no knowledge of any default or violation by any other party
with respect to, each DSW Employee Plan; (ii) each DSW Employee Plan has been
established and maintained in all material respects in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including but not limited to ERISA or the Code; (iii) there are no
actions, suits or claims pending, or, to the knowledge of DSW, threatened or
reasonably anticipated (other than routine claims for benefits) against any DSW
Employee Plan or against the assets of any DSW Employee Plan; (iv) each DSW
Employee Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, without liability to FAA, DSW or
any of its Affiliates (other than ordinary administration expenses); (v) there
are no audits, inquiries or proceedings pending or, to the knowledge of DSW or
any Affiliates, threatened by the IRS or DOL with respect to any DSW Employee
Plan; (vi) neither DSW nor any subsidiary or any Affiliate is subject to any
liability or penalty under Sections 4976 through 4980 of the Code or Title I of
ERISA; (vii) all contributions required to be made by DSW or any subsidiary or
any Affiliate have been made in compliance in all material respects with the
terms
24
of each DSW Employee Plan on or before their due dates and a reasonable amount
has been accrued for contributions to each DSW Employee Plan for the current
plan years; (viii) there has been no prohibited transaction as such term is
defined in Section 406 of ERISA and Section 4975 of the Code; (ix) no reportable
event within the meaning of Section 4043 of ERISA (excluding any such event for
which the thirty (30) day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event described in Section 4062,
4063 or 4041 of ERISA has occurred; and (x) no DSW Employee Plan is covered by,
and neither Company nor any subsidiary or Affiliate has incurred or expects to
incur any liability under, Title IV of ERISA or Section 412 of the Code.
(e) Pension Plan. Neither DSW nor any Affiliate has ever maintained,
established, sponsored, participated in, or contributed to, (i) any Pension Plan
which is subject to Title IV of ERISA or Section 412 of the Code or (ii) any DSW
Employee Plan intended to qualify under Section 401(a) of the Code.
(f) Multiemployer Plans. At no time has DSW or any Affiliate
contributed to or been required to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Section
3.21(g) of the DSW Disclosure Schedule, no DSW Employee Plan provides, or
reflects or represents any liability to provide, retiree life insurance, retiree
health or other retiree employee welfare benefits to any person for any reason,
except as may be required by COBRA or other applicable statute, and DSW has
never represented, promised or contracted (whether in oral or written form) to
any Employee (either individually or to Employees as a group) or any other
person that such Employee(s) or other person would be provided with retiree life
insurance, retiree health or other retiree employee welfare benefit, except to
the extent required by statute.
(h) COBRA. Neither DSW nor any Affiliate has, prior to the Effective
Time and in any material respect, violated any of the health care continuation
requirements of COBRA, the requirements of HIPAA, the requirements of FMLA or
any similar provisions of state law applicable to its Employees.
(i) Effect of Transaction.
(i) Except as set forth in Section 3.21(i) of the DSW
Disclosure Schedule, the execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the occurrence
of any additional or subsequent events) constitute an event under any DSW
Employee Plan, Employee Agreement, trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee.
25
(ii) Except as set forth in Section 3.21(i) of the DSW
Disclosure Schedule, no payment or benefit which will or may be made by DSW or
its Affiliates with respect to any Employee as a result of the transactions
contemplated by this Agreement or otherwise will be characterized as a
"parachute payment," within the meaning of Section 280G(b)(2) of the Code (but
without regard to clause (ii) thereof).
(iii) Employment Matters. DSW: (i) is in compliance in all
material respects with all applicable foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld and reported all amounts required by law or by
agreement to be withheld and reported with respect to wages, salaries and other
payments to Employees; (iii) is not liable for any arrears of wages or any taxes
or any penalty for failure to comply with any of the foregoing; and (iv) is not
liable for any payment to any trust or other fund governed by or maintained by
or on behalf of any governmental authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice). There are no pending or, to the
knowledge of DSW or the Major Shareholders, threatened or reasonably anticipated
claims or actions against DSW under any worker's compensation policy or long-
term disability policy. No Employee has advised any executive officer of DSW
prior to the Closing Date that he or she plans to terminate employment with DSW
during the next twelve months.
(j) Labor. No work stoppage or labor strike against DSW is pending
or, to the knowledge of DSW, threatened or reasonably anticipated. DSW does not
know of any activities or proceedings of any labor union to organize any
Employees. Except as set forth in Section 3.21(j) of the DSW Disclosure
Schedule, there are no actions, suits, claims, labor disputes or grievances
pending, or, to the knowledge of DSW or the Major Shareholders, threatened or
reasonably anticipated relating to any labor, safety or discrimination matters
involving any Employee, including, without limitation, charges of unfair labor
practices or discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, result in any material liability to DSW.
Neither DSW nor any of its subsidiaries has engaged in any unfair labor
practices within the meaning of the National Labor Relations Act. Except as set
forth in Section 3.21(j) of the DSW Disclosure Schedule, DSW is not presently,
nor has it been in the past, a party to, or bound by, any collective bargaining
agreement or union contract with respect to Employees and no collective
bargaining agreement is being negotiated by DSW.
(i) International Employee Plan. DSW does not now and never has
established or maintained an International Employee Plan.
3.22 Guaranties. DSW is not a guarantor or otherwise responsible for any
----------
liability or obligation (including indebtedness) of any other Person.
26
3.23 Environment, Health, and Safety.
-------------------------------
(a) As of the date hereof, neither nor any of its Subsidiaries
has any reason to believe that any Hazardous Material- (as defined herein)
related underground storage tanks, sumps, vaults, piping or other underground
Hazardous Material-related equipment (collectively, "USTs"), are present at any
property that DSW or any of its Subsidiaries has at any time owned, operated,
occupied, or leased, where the use, condition, or presence of such USTs would be
reasonably likely to give rise to any corrective, investigative, or remedial
obligation or any exposure to money damages under any Environmental Law (as
defined herein) that could reasonably be expected to have a Material Adverse
Effect.
(b) Neither DSW nor any of its Subsidiaries has disposed of, emitted,
discharged, handled, stored, transported, used or released any Hazardous
Material (collectively, "Hazardous Material Handling"), arranged for any
Hazardous Material Handling, or exposed any employee or other individual to any
Hazardous Material so as to give rise to any corrective, investigative, or
remedial obligation under any Environmental Law that could reasonably be
expected to have a Material Adverse Effect.
(c) Neither DSW nor any of its Subsidiaries is aware of the presence
at any time of any Hazardous Material-related contamination at, in, on, beneath,
or relating to any property that DSW or its Subsidiaries has at any time owned,
operated, occupied, or leased that could reasonably be expected to have a
Material Adverse Effect.
(d) DSW and its Subsidiaries have performed or arranged Hazardous
Material Handling in compliance with all Environmental Laws except where non-
compliance would not reasonably be expected to have a Material Adverse Effect.
Without limiting the generality of the preceding sentence, neither DSW nor any
of its subsidiaries has disposed of, labeled, packaged, transported, sold,
recycled, discarded, or manufactured any product or component of a product
containing a Hazardous Material (the "Hazardous Material Product Activities") in
violation of any Environmental Laws where such violation would reasonably be
expected to have a Material Adverse Effect.
(e) DSW and its Subsidiaries currently hold all governmental
environmental Hazardous Material-related approvals, permits, licenses,
clearances, consents, and orders (the "Environmental Permits") necessary for the
conduct of their respective Hazardous Material Handling and Hazardous Material
Product Activities and other businesses of DSW and its Subsidiaries as such
activities are currently being conducted, except where the failure to hold any
such Environmental Permit would not reasonably be expected to have a Material
Adverse Effect.
(f) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction, or other governmental action is pending or, to the
knowledge of DSW threatened, concerning any Environmental Permits, or any
Hazardous Material Handling or any Hazardous
27
Material Product Activities of DSW or any of its Subsidiaries that could
reasonably be expected to have a Material Adverse Effect.
(g) Neither DSW nor any of its Subsidiaries is aware of any fact or
circumstance which could involve DSW or any of its Subsidiaries in any
litigation or in any administrative enforcement action, penalty or sanction, or
impose upon DSW or any of its Subsidiaries any liability, with respect to any
Hazardous Materials Handling, any Hazardous Material Product Activities, or any
Hazardous Material-related contamination relating to any business operation of
DSW or its Subsidiaries or relating to a property that DSW or any of its
Subsidiaries at any time has owned, operated, occupied, or leased that could
reasonably be expected to have a Material Adverse Effect.
(h) To the knowledge of DSW and the Major Shareholders, no property
that DSW or any of its Subsidiaries has at any time owned, operated, occupied,
or leased is proposed for listing on the National Priorities List, CERCLIS, or
any similar state, local or foreign list of sites that potentially endanger
human health, ecology or environment or that require environmental investigation
or cleanup.
(i) To the knowledge of DSW and the Major Shareholders, any asbestos-
containing material which is on, in or a part of any property or structure
thereon currently owned, operated, occupied, or leased by DSW or any of its
Subsidiaries complies with current applicable standards of Environmental Law
except where non-compliance would not have a Material Adverse Effect.
(j) To the knowledge of DSW and the Major Shareholders, no
governmental notification, approval, or consent, whether before or after the
Closing, is required under Environmental Laws in connection with the
consummation of the transaction contemplated by this Agreement.
(k) As used herein, "Hazardous Material" means any substance, waste,
material, chemical, compound or mixture which is harmful to the environment,
flora, fauna, or human health, or which is flammable, ignitable, corrosive,
reactive, radioactive, or explosive, or which is defined, listed, designated,
described or characterized under Environmental Laws as hazardous, toxic,
biohazardous, a contaminant, a pollutant, or words of similar import, and
includes without limitation asbestos, polychlorinated biphenyls, petroleum
(including crude oil or any fraction or distillate thereof), and natural gas.
(l) As used herein, "Environmental Laws" means all applicable civil,
criminal, and administrative laws (including common law), statutes, codes,
rules, regulations, ordinances, and legally enforceable orders, decrees,
judgments, permits, licenses, approvals, authorizations, and other requirements,
directives, consents, and obligations imposed by local, state, federal, foreign,
or supranational governmental authority pertaining to protection of the
environment, flora, fauna, public health and safety.
3.24 Disclosure Documents. None of the information supplied or to be
--------------------
supplied by DSW for inclusion in the information materials relating to the
solicitation of the approval of
28
DSW's shareholders of the Merger (the "Information Materials") at the time of
mailing of the Information Materials to shareholders of DSW, and at the time of
the meeting of DSW shareholders to be held in connection with the Merger or
action by written consent of shareholders approving the Merger, contain any
untrue statement of a material fact or omits or will omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
3.25 Restrictions on Business Activities. There is no agreement (non-
-----------------------------------
compete or otherwise), commitment, judgment, injunction order or decree to which
DSW is a party or otherwise binding upon DSW or any employee of DSW or any of
DSW's subsidiaries or its employees which has or could reasonably be expected to
have the effect of prohibiting or impairing any business practice of DSW, any
acquisition of property by DSW or the conduct of business by DSW. Without
limiting the foregoing, none of DSW or any of its subsidiaries has entered into
any agreement under which they are restricted from selling, licensing or
otherwise distributing any of its product.
3.26 Interested Party Transactions. No officer, director or stockholder of
-----------------------------
DSW (nor any ancestor, sibling, descendant or spouse of any such person, or any
trust, partnership or corporation in which any of such persons has or has had an
interest) has or has had, directly or indirectly, (i) an economic interest in
any entity which furnished or sold, or furnishes or sells, services or products
that DSW furnishes or sells or proposes to furnish or sell, or (ii) an economic
interest in any entity that purchases from, or sells or furnishes to, DSW any
goods or services; provided that ownership of no more than one percent (1%) of
the outstanding voting stock of a publicly traded corporation shall not be
deemed an "economic interest in any entity" for purposes of this Section 3.26.
3.27 Absence of Certain Business Practices. To the knowledge of DSW and
-------------------------------------
the Major Shareholders, neither DSW nor any of its Subsidiaries, nor any
officer, employee or agent of any of them, nor any other person acting on their
behalf, has, directly or indirectly, since January 1, 1995, given or agreed to
give any gift or similar benefit to any customer, supplier, governmental
employee or other person who is or may be in a position to help or hinder the
business of DSW (or assist DSW in connection with any actual or proposed
transaction) which (except as would not have a Material Adverse Effect on DSW)
(a) might subject DSW to any damage or penalty in any civil, criminal or
governmental litigation or proceeding, (b) if not given in the past, might have
an adverse effect on the assets, business or operations of DSW as reflected in
the DSW Financial Statements or (c) if not continued in the future, might
adversely affect DSW's assets, business, operations or prospects or which might
subject DSW to suit or penalty in any private or governmental litigation or
proceeding.
3.28 No Adverse Developments. There is no development (exclusive of
-----------------------
general economic factors affecting business in general) or, to the knowledge of
DSW or the Major Shareholders, threatened development affecting DSW (or
affecting customers, suppliers, employees, and other Persons which have
relationships with DSW) that (i) is having or is
29
reasonably likely to have a Material Adverse Effect on DSW, or (ii) would
prevent FAA from conducting the business of the Surviving Corporation following
the Closing in the manner in which it was conducted or planned to be conducted
by DSW prior to the Closing.
3.29 Full Disclosure. No representation or warranty in this Article III or
---------------
in any document delivered by DSW pursuant to the transactions contemplated by
this Agreement, and no statement, list, certificate or instrument furnished to
FAA pursuant hereto or in connection with this Agreement when taken as a whole
contains any untrue statement of a material fact, or omits to state any fact
necessary in the light of the circumstances in which it was made, to make any
statement herein or therein not materially misleading. There is no fact,
development or threatened development (excluding general economic factors
affecting business in general) which DSW has not disclosed to FAA in writing and
which is having or is reasonably likely to have a Material Adverse Effect on
DSW. DSW has delivered to FAA true, correct and complete copies of all
documents, including all amendments, supplements and modifications thereof or
waivers currently in effect thereunder, described in the DSW Disclosure
Schedule.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FAA AND MERGER SUB
----------------------------------------------------
FAA hereby represents and warrants to DSW that the statements contained in
this Article IV are true and correct, except as set forth in the disclosure
schedule delivered by FAA to DSW on the date hereof (referred to herein as the
"FAA Disclosure Schedule"). The FAA Disclosure Schedule will be arranged in
paragraphs corresponding to the lettered and numbered paragraphs contained in
this Article IV, and the disclosure in any such numbered and lettered section of
the FAA Disclosure Schedule shall qualify only the corresponding section in this
Article IV (except to the extent disclosure in any numbered and lettered section
of the FAA Disclosure Schedule is specifically cross-referenced in another
numbered and lettered section of the FAA Disclosure Schedule).
4.1 Organization; Qualification, and Corporate Power. Each of FAA and
------------------------------------------------
Merger Sub is a corporation, duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, is duly authorized
to conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required. Each of FAA and Merger Sub has full
corporate power and authority, and has all necessary licenses and permits, to
carry on the businesses in which it is engaged and to own and use the properties
owned and used by it. FAA has delivered to DSW complete and correct copies of
its Certificate of Incorporation, as amended, and the Bylaws of FAA and the
Articles of Incorporation and Bylaws of Merger Sub, as amended to the date
hereof.
(a) FAA has all requisite corporate power and authority to enter into
this Agreement and the Agreement of Merger, and to consummate the transactions
contemplated hereby and thereby. Merger Sub has all requisite corporate power
and authority to enter into this
30
Agreement and the Agreement of Merger. The execution and delivery by FAA and by
Merger Sub of this Agreement and the Agreement of Merger, and the consummation
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of FAA and Merger Sub. This Agreement
is, and the Agreement of Merger when executed and delivered by the parties
thereto will be, duly executed and delivered by FAA and Merger Sub and
constitute valid and binding obligations of each of FAA and Merger Sub
enforceable in accordance with their terms, except as enforcement may be limited
by (i) bankruptcy, insolvency, or other similar laws affecting the enforcement
of creditors' rights generally and (ii) general principles of equity, regardless
of whether asserted in a proceeding in equity or law.
(b) The execution and delivery of this Agreement by FAA and Merger
Sub does not, and the consummation of the transactions contemplated by this
Agreement will not, (i) conflict with, or result in any violation or breach of
any provision of the charter documents of either of them (in each case as
heretofore amended), (ii) result in any violation or breach of, or constitute
(with or without notice or lapse of time, or both) a default (or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
any material benefit) or require the consent, waiver or agreement of any person
or entity (other than consents, waivers and agreements that have been or prior
to the Closing will be obtained) under any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, lease, contract or
other material agreement, instrument or obligation to which either FAA or Merger
Sub is a party or by which either of them or any of their properties or assets
may be bound, or (iii) subject to the consents, approvals, orders,
authorizations, filings and registrations specified in Section 4.2(c), conflict
with or violate any judgment, order, decree, statute, law, ordinance, rule or
regulation or any material permit, concession, franchise or license applicable
to either FAA or Merger Sub or any of their properties or assets, except in the
cases of clause (ii) for such consents, waivers and agreements, the absence of
which, and such violations, breaches, defaults, terminations, cancellations or
accelerations which, in the aggregate could not reasonably be expected to have a
Material Adverse Effect on or a material adverse effect on the ability of either
FAA or Merger Sub to consummate the transactions contemplated by this Agreement.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to either FAA or Merger Sub in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of the Agreement of Merger with the Secretary
of State of the State of California in accordance with the California Code, and
(ii) such other consents, approvals, orders, authorizations, filings, approvals
and registrations which, in the aggregate, if not obtained or made, could not
reasonably be expected to have a Material Adverse Effect on either FAA or Merger
Sub or have a material adverse effect on the ability of either FAA or Merger Sub
to consummate the transactions contemplated by this Agreement.
31
4.2 FAA Capital Structure.
---------------------
(a) The authorized capital stock of FAA consists of 65,000,000 shares
of common stock, $0.00001 par value per share, of which 30,000,000 shares are
designated FAA Class A Common Stock, 5,000,000 shares are designated Class B
Common Stock (the "FAA Class B Common Stock") and 30,000,000 shares are
designated Class C Common Stock (the "FAA Class C Common Stock" and together
with FAA Class A Common Stock and FAA Class B Common Stock, the "FAA Common
Stock"), 10,000 shares of preferred stock, $0.00001 par value per share, of
which 3,500 shares are designated as 8% cumulative redeemable preferred stock
(the "FAA 8% Preferred Stock") and 500 shares of which are designated as
redeemable preferred stock (the "FAA Redeemable Preferred Stock"). As of
November 1, 1998: (i) 11,179,029 shares of FAA Class A Common Stock, 3,532,000
shares of FAA Class B Common Stock, no shares of FAA Class C Common Stock, 3,500
shares of FAA 8% Preferred Stock and 500 shares of FAA Redeemable Preferred
Stock were issued and outstanding, all of which are validly issued, fully paid
and nonassessable; (ii) no shares of FAA Class A Common Stock or FAA Preferred
Stock were held in the treasury of FAA or by Subsidiaries of FAA; (iii)
1,300,000 shares of FAA Class A Common Stock were reserved for issuance pursuant
to stock options granted and outstanding under FAA's stock option plans (the
"FAA Option Plans"); and (iv) 331,700 shares of FAA Class A Common Stock were
reserved for issuance upon exercise of outstanding warrants. All shares of FAA
Class A Common Stock subject to issuance as specified above, upon issuance on
the terms and conditions specified in the instruments pursuant to which they are
issuable, shall be duly authorized, validly issued, fully paid and
nonassessable. There are no obligations, contingent or otherwise, of FAA or any
of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of FAA
Class A Common Stock.
(b) Except as set forth in this Section 4.2 or as reserved for future
grants of rights or options under the FAA Option Plans, there are no equity
securities of any class of FAA, or any security exchangeable into or exercisable
for such equity securities, issued, reserved for issuance or outstanding. Except
pursuant to the FAA Option Plans or any related agreement in effect as of the
date of this Agreement, or as set forth in this Section 4.2, there are no
options, warrants, equity securities, calls, rights, commitments or agreements
of any character to which FAA is a party or by which it is bound obligating FAA
to issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of FAA obligating FAA to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call, right,
commitment or agreement, and, to the best knowledge of FAA, there are no voting
trusts, proxies or other agreements or understandings with respect to the shares
of capital stock of FAA to which FAA is a party.
4.3 Validity of FAA Class A Common Stock. The FAA Class A Common Stock to
------------------------------------
be issued in the Merger will, when issued, be validly issued, fully paid,
nonassessable and issued in compliance with all applicable federal and state
securities laws.
32
4.4 Consents and Approvals of Governmental Authorities. No consent,
--------------------------------------------------
approval, authorization, order, registration or qualification of or with any
court or any regulatory authority or any other governmental body is required on
the part of FAA or Merger Sub for the consummation by either of the transactions
contemplated by this Agreement and the Agreement of Merger.
4.5 Disclosure Documents. None of the information supplied or to be
--------------------
supplied by FAA for inclusion in the Information Materials at the time of
mailing of the Information Materials to shareholders of DSW, and at the time of
the meeting of DSW shareholders to be held in connection with the Merger or
action by written consent of shareholders approving the Merger, contain any
untrue statement of a material fact or omits or will omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
4.6 Absence of Certain Business Practices. To the knowledge of FAA,
-------------------------------------
neither FAA nor any officer, employee or agent of FAA, nor any other person
acting on its behalf, has, directly or indirectly, since January 1, 1997, given
or agreed to give any gift or similar benefit to any customer, supplier,
governmental employee or other person who is or may be in a position to help or
hinder the business of FAA (or assist FAA in connection with any actual or
proposed transaction) which (except as would not have a Material Adverse Effect
on FAA) (a) might subject FAA to any damage or penalty in any civil, criminal or
governmental litigation or proceeding, (b) if not given in the past, might have
an adverse effect on the assets, business or operations of FAA, or (c) if not
continued in the future, might adversely effect FAA's assets, business,
operations or prospects, or which might subject FAA to suit or penalty in any
private or governmental litigation or proceeding which may have a Material
Adverse Effect.
4.7 SEC Filings; Financial Statements.
---------------------------------
(a) FAA has filed and made available to DSW all forms, reports and
documents required to be filed by FAA with the United States Securities and
Exchange Commission (the "SEC") since January 1, 1997 (collectively, the
"FAA SEC Reports"). The FAA SEC Reports (i) at the time filed, complied
---------------
in all material respects with the applicable requirements of the Securities Act
and the Securities Exchange Act of 1934, as amended (the "Exchange Act") as the
case may be, and (ii) did not at the time they were filed (or if amended or
superseded by a subsequent filing, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated in such FAA SEC Reports or necessary in order to make the statements
in such FAA SEC Reports, in the light of the circumstances under which they were
made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in the FAA SEC Reports, including any FAA SEC
Reports filed after the date of this Agreement until the Closing (the "FAA
---
Financial Statements"), complied or will comply as to form in all material
--------------------
respects with the applicable published rules and regulations of
33
the SEC with respect thereto, was or will be prepared in accordance with GAAP
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes to such financial statements or, in the case of unaudited
statements, as permitted by Form 10-Q or 8-K promulgated by the SEC), and fairly
presented or will fairly present the consolidated financial position of FAA and
its subsidiaries as at the respective dates and the consolidated results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount.
4.8 Full Disclosure. No representation or warranty in this Article IV or
---------------
in any document delivered by FAA pursuant to the transactions contemplated by
this Agreement, and no statement, list, certificate or instrument furnished to
FAA pursuant hereto or in connection with this Agreement when taken as a whole
contains any untrue statement of a material fact, or omits to state any fact
necessary in the light of the circumstances in which it was made, to make any
statement herein or therein not materially misleading. There is no fact,
development or threatened development (excluding general economic factors
affecting business in general) which FAA has not disclosed to DSW in writing and
which is having or is reasonably likely to have a Material Adverse Effect on
FAA. FAA has made available to DSW true, correct and complete copies of all
documents, including all amendments, supplements and modifications thereof or
waivers currently in effect thereunder, described in the FAA Disclosure
Schedule.
4.9 Fees. FAA has no liability or obligation to pay any fees or
----
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement, except as described in Section 4.9 of the FAA
Disclosure Schedule.
4.10 Litigation. There is no action, suit, proceeding, claim arbitration
----------
or, to the knowledge of FAA, investigation against FAA pending, or to the
knowledge of FAA, threatened, which, if decided adversely to FAA, could
reasonably be expected to have a Material Adverse Effect on FAA.
4.11 Tax Matters. Neither FAA nor any of its Subsidiaries, nor to FAA's
-----------
knowledge, any of its other affiliates has taken or agreed to take any action or
failed to take any action which could prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
34
ARTICLE V
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE
-------------------------------------------
TIME; ADDITIONAL AGREEMENTS
---------------------------
5.1 Conduct of Business of DSW.
--------------------------
(a) During the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, DSW shall carry on its business in the Ordinary Course of
Business in substantially the same manner as conducted prior to the date of this
Agreement and, to the extent consistent with such businesses, use all
commercially reasonable efforts consistent with past practice and policies to
preserve intact its present business organizations, keep available the services
of its present officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it, to the end that its goodwill and ongoing businesses
shall be unimpaired at the Effective Time. DSW shall promptly notify FAA of any
event or occurrence not in the Ordinary Course of Business of DSW, and any event
which could have a Material Adverse Effect on DSW.
(b) Except as expressly contemplated by this Agreement or
disclosed in the DSW Disclosure Schedule, DSW shall not, without the prior
written consent of FAA:
(i) Accelerate, amend or change the period of
exercisability of options, warrants and stock purchase rights or authorize cash
payments in exchange therefor;
(ii) (A) Enter into any commitment or transaction not in
the Ordinary Course of Business to be performed over a period longer than six
months in duration, or to purchase fixed assets with an aggregate purchase price
exceeding $5,000, or (B) sell or commit to sell any products with an aggregate
purchase price greater than $10,000 in any single month (x) if the expected
profit margins are lower than those customarily obtained for sales of similar
products by DSW in the past, or (y) to any customer for whom more than 10% of
such customer's existing accounts receivable (other than receivables related
solely to warranty claims) are more than thirty (30) days past due.
(iii) Grant any severance or termination pay to any
director, officer, employee or consultant, except mandatory payments made
pursuant to standard written agreements outstanding on the date hereof (any such
agreement or arrangement to be disclosed in the DSW Disclosure Schedule) or
payments made in accordance with the Company's existing severance policy;
(iv) Transfer to any person or entitle any rights to the
DSW Intellectual Property Rights except in the Ordinary Course of Business;
35
(v) Enter into or amend any agreements pursuant to
which any other party is granted marketing or other similar rights of any type
or scope with respect to any products or DSW;
(vi) Except in the Ordinary Course of Business with
prior notice to FAA, violate, amend or otherwise modify in any material respect
the terms of any of their material contracts binding on DSW set forth on the DSW
Disclosure Schedule;
(vii) Commence a lawsuit other than for the routine
collection of bills or for a breach of this Agreement;
(viii) Declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or repurchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except from
former employees, directors and consultants in accordance with agreements
providing for the repurchase of shares in connection with any termination of
service to DSW;
(ix) Issue, deliver or sell, authorize or propose the
issuance, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or other convertible
securities, other than (A) the issuance of shares of DSW Common Stock upon the
exercise of DSW Options, (B) the conversion into DSW Preferred Stock of DSW
Convertible Securities, and (C) the issuance of DSW Shares upon the exercise of
DSW Warrants and DSW Convertible Securities;
(x) Solicit approval for or effect any amendments to
DSW's Articles of Incorporation or Bylaws (other than as contemplated by this
Agreement);
(xi) Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to the Business Condition of DSW other than the acquisition of RAMAC
Corporation, a California corporation ("RAMAC");
(xii) Sell, lease, license or otherwise dispose of any
material properties or assets;
(xiii) Incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others;
36
(xiv) Adopt or amend any DSW Employee Plan, or enter into
any employment contract, pay any special bonus or special remuneration to any
director, employee or consultant, or increase the salaries or wage rates of its
employees other than pursuant to scheduled employee reviews under DSW's normal
employee review cycle, as the case may be, in all cases consistent with past
practice;
(xv) Revalue any of its assets, including without
limitation, writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business and consistent with
past practice, except for adjustments approved by DSW's outside auditors, which
adjustments will not be material either individually or in the aggregate;
(xvi) Pay, discharge or satisfy in an amount in excess of
$10,000 in any one case any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the Ordinary Course of Business of liabilities
reflected or reserved against in DSW's Financial Statements or those incurred
after the date of the Unaudited Balance Sheet in the ordinary course of
business;
(xvii) Make any material Tax election, change any material
Tax election, adopt any material Tax accounting method, change any material Tax
accounting method, file any material Tax return (other than any estimated Tax
returns, payroll Tax returns or sale Tax returns) or any amendment to a material
Tax return, enter into any closing agreement, settle any Tax claim or
assessment, or consent to any Tax claim or assessment;
(xviii) Engage in any activities or transactions that are
outside the Ordinary Course of its Business consistent with past practice;
(xix) Other than as disclosed to FAA fail to pay or
otherwise satisfy its monetary obligations as they become due, except in
accordance with past practice (but in any event not later than 45 days past due)
and such as are being contested in good faith;
(xx) Waive or commit to waive any rights of
substantial value;
(xxi) Cancel or materially amend any insurance policy; or
(xxii) Take, or agree (in writing or otherwise) to take,
any of the actions described in Sections 5.1(i) through (xxi) above, or any
action which would make any of the representations or warranties or covenants of
DSW contained in this Agreement untrue or incorrect in any material respect.
(c) DSW acknowledges that it is a condition to the obligations of FAA
to close the Merger that at the Effective Time the total liabilities of DSW
shall not exceed DSW's current assets by greater than $1,000,000 or such amount
as is provided pursuant to Section 6.2(k). DSW has provided a listing of all its
liabilities as of the date of this Agreement on Schedule 5.1(c). DSW
acknowledges and agrees that it will make no payment in respect of
37
the liabilities listed on the attached Schedule 5.1(c) without the prior written
consent of FAA. DSW further agrees that it will consult with FAA regarding; and
will not settle and/or compromise such liabilities without FAA's prior written
consent.
5.2 Access to Information. Subject to Section 5.12, DSW shall afford
---------------------
FAA and its accountants, counsel and other representatives, reasonable access
during normal business hours and upon reasonable prior notice during the period
from the date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement to (i) all of DSW's properties, books, contracts,
commitments and records, and (ii) all other information concerning the business,
properties and personnel of DSW as FAA may reasonably request. DSW shall provide
FAA and its respective accountants, counsel and other representatives copies of
internal financial statements promptly upon request. No information or knowledge
obtained in any investigation pursuant to this Section 5.2 shall affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger.
5.3 Support of Merger by Certain Shareholders. DSW shall use its best
-----------------------------------------
efforts to cause all of its officers and directors to support the Merger and to
take all actions and execute all documents reasonably requested by FAA to carry
out the foregoing matters, including execution of the Shareholder Agreement by
the Key Shareholders.
5.4 Intentionally omitted.
5.5 Exclusivity; Acquisition Proposals. Unless and until this Agreement
----------------------------------
shall have been terminated by either party pursuant to Section 10.1, DSW shall
not, directly or indirectly, through any officer, director, agent or otherwise,
(i) solicit, initiate or encourage submission of proposals or offers from any
person relating to (x) any acquisition or purchase of all or substantially all
of the assets of, or any equity interest in, DSW or any merger, consolidation,
business combination or similar transaction with DSW, or (y) any other material
transaction incompatible with the Merger (including, without limitation, a joint
venture or other similar transaction), or (ii) participate in any discussions or
negotiations regarding, furnish to any other person any confidential information
with respect to, or otherwise cooperate in any way with, or participate in,
facilitate or encourage, any effort or attempt by any other person to do or seek
any of the foregoing. In the event DSW receives, or prior to termination of this
Agreement, from any third party any offer or indication of interest regarding
any of the transactions referred to in the foregoing sentence, or any request
for information about DSW with respect to any of the foregoing, then DSW shall
immediately communicate to FAA the material terms of each such offer, indication
of interests, or request, including the identity of the third party.
5.6 Breach of Representations, Warranties and Covenants. Each of FAA,
---------------------------------------------------
Merger Sub and DSW shall not take, or fail to take, any action which from the
date hereof through the Closing would cause or constitute a breach of any of
their respective representations, warranties and covenants set forth in this
Agreement or which would from the date hereof through the Closing cause any of
such representations or warranties to be inaccurate. In the event of, and
38
promptly after becoming aware of, the occurrence of or the pending or threatened
occurrence of any event which would cause or constitute such a breach of
inaccuracy, each party shall give detailed notice thereof to the other parties
and shall use its best efforts to prevent or promptly remedy such breach or
inaccuracy.
5.7 Consents. Each of FAA and DSW shall promptly apply for or otherwise
--------
seek, and use its commercially reasonable efforts to obtain, all consents,
waivers and approvals required to be obtained by it for the consummation of the
Merger.
5.8 Best Efforts. FAA and DSW shall each use its reasonable best efforts
------------
to effectuate the transactions contemplated hereby and to fulfill and cause to
be fulfilled the conditions to closing under this Agreement.
5.9 Legal Conditions to the Merger.
------------------------------
(a) DSW shall take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on DSW with respect to
the Merger and will promptly cooperate with and furnish information to FAA in
connection with any such requirements imposed upon FAA, Merger Sub or any other
Subsidiary in connection with the Merger. DSW shall take all reasonable actions
to obtain (and to cooperate with FAA and its Subsidiaries in obtaining) a
consent, authorization, order or approval of, or any exception by, any
governmental entity, required to be obtained or made by DSW (or by FAA or its
Subsidiaries) in connection with the Merger or the taking of any action
contemplated thereby, by this Agreement or by the Agreement of Merger, and to
defend all lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby, to lift or rescind any
injunction or restraining order or other order adversely affecting the ability
or the parties to consummate the transactions contemplated hereby and by the
Agreement of Merger, and to effect all necessary registrations and filings and
submissions or information required by any governmental entity, and to fulfill
all conditions to this Agreement.
(b) Each of FAA and Merger Sub shall take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed on
them with respect to the Merger and will promptly cooperate with and furnish
information to DSW in connection with any such requirement imposed upon DSW in
connection with the Merger. FAA and Merger Sub shall take all reasonable actions
to obtain (and to cooperate with DSW in obtaining) any consent, authorization,
order or approval of, or exemption by, any Governmental Entity required to be
obtained or made by FAA or any of its Subsidiaries (or by DSW) in connection
with the Merger or the taking of any action contemplated by this Agreement or by
the Agreement of Merger, and to defend all lawsuits or other legal proceedings
challenging this Agreement or the consummation of the transactions contemplated
hereby and by the Agreement of Merger, to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transaction contemplated hereby, and to effect all necessary
39
registrations and filings and submissions of information requested by any
governmental entity, and to fulfill all conditions to this Agreement.
5.10 Expenses. Whether or not the Merger is consummated, all costs and
--------
expenses incurred in connection with this Agreement, the Agreement of Merger and
the transactions contemplated hereby shall be paid by the party incurring such
expense.
5.11 Public Announcements. Each party will consult in advance with the
--------------------
other concerning the timing and content of any announcements, press releases and
public statements concerning this Agreement, the Merger, and any other
transactions contemplated thereby and will not make any such announcement,
release or statement without the other's prior written consent (which shall not
be unreasonably withheld); provided, however, that either FAA or DSW may make
any public statement concerning the Merger without the other party's consent if,
in the opinion of counsel for such party, such statement or announcement is
required or advisable to comply with applicable law.
5.12 Confidentiality. No party hereto nor any of its subsidiaries shall
---------------
release, publish, reveal or disclose, directly or indirectly, any business or
technical information of any other party hereto or any of its subsidiaries
designated orally or in writing as "confidential" or "proprietary" (or like
words), including, but not limited to, Intellectual Property, Confidential
Information systems, processes, formulae, data, functional specifications,
and/or technical specifications, computer programs, source code, blueprints,
know-how, improvements, discoveries, developments, designs, inventions,
techniques, new products, marketing and advertising methods, supplier
agreements, customer lists, pricing policies, financial information,
projections, forecasts, strategies, budgets or other information related to its
business or its customers ("Evaluation Material"), except to a party's
directors, officers, employees, financial advisors, legal counsel, independent
public accountants or other agents, advisors or representatives as shall require
access thereto on a need-to-know basis for the purpose of the transactions
contemplated by this Agreement and who shall agree to be bound by the terms of
this Section 5.12. Each party agrees to take all reasonable precautions to
safeguard the confidentiality of the other party's Evaluation Material and to
exercise the same degree of care with respect to such Evaluation Material that
such party exercises with respect to its own confidential information. No party
shall make, or permit to be made, except in furtherance of the transactions
contemplated by this Agreement, any copies, abstracts or summaries of the
Evaluation Material. In addition, all such Evaluation Material shall be used
solely for the purpose of the investigation contemplated by this Section 5.12
and shall not be used for any other purpose, including any use which would be to
the detriment of any other party or its subsidiaries, nor shall such information
be used in competition with any other party or its subsidiaries. The
restrictions on disclosure of information contained in this Section 5.12 do not
extend to any item of information that (a) is already known to the receiving
party; (b) was or is independently developed by the receiving party without the
use of the Evaluation Material; or (c) is now or hereafter becomes available to
the public other than as a consequence of a breach of obligations under this
Section 5.12 or similar confidentiality agreements. Upon written request, the
parties shall return all writings, documents and materials
40
containing Evaluation Material with a letter confirming that all copies,
abstracts and summaries of the Evaluation Material have been destroyed. In the
event that any party hereto becomes legally required to disclose another
party's Evaluation Material, it shall provide such other party with prompt
prior written notice of such requirement prior to such disclosure. In the
event that a protective order or other remedy is not obtained, or such other
party waives compliance with the provisions of this Section 5.12 with respect
to the Evaluation Material subject to such requirement, such party agrees to
furnish only that portion of the Evaluation Material which it is legally
required to furnish and, where appropriate, to use its best efforts to obtain
assurances that such Evaluation Material will be accorded confidential
treatment.
5.13 DSW Shareholders' Consent; Consent of DSW Convertible Security
--------------------------------------------------------------
Holders.
--------
(a) DSW shall either (i) call a meeting of its shareholders (the
"Shareholders' Meeting") to be held as promptly as practicable after the
execution of this the "Shareholders' Meeting Date") or (ii) solicit
shareholder approval by written consent in accordance with applicable law, for
the purpose of obtaining the shareholder approval required in connection with
the transactions contemplated hereby and by the Agreement of Merger, and shall
use its best efforts to obtain such approval. If a Shareholders' Meeting is
called, DSW shall not change the Shareholders' Meeting Date without the prior
written consent of FAA, nor shall DSW adjourn the Shareholders' Meeting
without the prior consent of FAA, unless such adjournment is due to the lack
of a quorum, in which case the Chairman of the Shareholders' Meeting shall
announce at such meeting the time and place of the adjourned meeting.
(b) DSW shall obtain the consent of all holders of DSW Convertible
Securities to this Agreement and the transaction contemplated herein,
including without limitation, the conversion of their DSW Convertible
Securities into Merger Consideration in full satisfaction of any and all
claims they may have against DSW pursuant to the terms of such Convertible
Securities.
5.14 Preparation of Proxy Statement or Information Statement. As soon as
-------------------------------------------------------
practicable after the execution of this Agreement, DSW shall prepare, with the
cooperation of FAA, the Proxy Statement or, in the case of a written consent,
the Information Statement (either shall be referred to hereinafter as the "Proxy
Statement") for purposes of soliciting the approval of the shareholders of DSW
and the holders of DSW Convertible Securities of this Agreement, the Agreement
of Merger and the transactions contemplated hereby and thereby. DSW shall use
its best efforts to cause the Proxy Statement to comply with applicable federal
and state securities laws requirements. Each of FAA and DSW agrees to provide
promptly to the other such information concerning its business and financial
statements and affairs as, in the reasonable judgment of the providing party or
its counsel, may be required or appropriate for including in the Proxy
Statement, or any amendments or supplements thereto, and to cause its counsel
and auditors to cooperate with the other's counsel and auditors in the
preparation of the Proxy Statement. DSW will promptly advise FAA, and FAA will
promptly advise DSW, in writing if
41
at any time prior to the Effective Time either DSW or FAA shall obtain
knowledge of any facts that might make it necessary or appropriate to amend or
supplement the Proxy Statement in order to make the statements contained
therein not misleading or to comply with applicable law. The Proxy Statement
shall contain the unanimous recommendation of the Board of Directors of DSW
that the DSW shareholders approve the Merger and this Agreement and the
conclusion of the Board of Directors that the terms and conditions of the
Merger are fair and reasonable to the shareholders of DSW. Anything to the
contrary contained herein notwithstanding, DSW shall not include in the Proxy
Statement any information with respect to FAA or its affiliates or associates,
the form and content of which information shall not have been approved by FAA
prior to such inclusion.
5.15 Key Employee Agreements. Each employee of DSW listed as a Key
-----------------------
Employee on the attached Schedule 5.15 shall enter into an employment
agreement (the "Key Employee Agreements").
5.16 Non-Disclosure and Confidentiality Agreements. DSW shall use its
---------------------------------------------
best efforts to obtain executed Non-Disclosure and Confidentiality agreements
(the "Employee Agreements" substantially in the form of Exhibit D hereto) from
---------
each employee of DSW as of the date of this Agreement and any person who
becomes an employee of DSW prior to the Effective Time.
5.17 Acquisition of RAMAC. DSW shall acquire RAMAC and obtain the
--------------------
assignment to itself and for the benefit of FAA of the Intellectual Property
of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ as pertains to any intellectual property of RAMAC (the
"RAMAC Intellectual Property").
5.18 Intellectual Property Matters. DSW shall use its best efforts to
-----------------------------
complete the actions described on Schedule 5.18 hereto pertaining to the
preservation and perfection of DSW's interests in its Intellectual Property.
5.19 Tax-Free Reorganization. Each of FAA and DSW shall and shall cause
-----------------------
its respective Subsidiaries to use its best efforts to cause the Merger to be
treated as a reorganization within the meaning of Section 368(a) of the Code.
No party hereto, nor any Subsidiary thereof, shall take any action that would
cause the Merger not to qualify under Section 368(a) of the Code, and the
parties hereto shall, and shall cause their respective Subsidiaries to take the
position for all purposes that the Merger qualifies as a reorganization under
such Section of the Code.
ARTICLE VI
CONDITIONS PRECEDENT
--------------------
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing of the following conditions:
42
(a) Shareholder Approval. This Agreement and the Agreement of
--------------------
Merger and all the transactions contemplated hereby and thereby shall have
been approved and adopted by such affirmative vote as is required by the
California Code and the Articles of Incorporation and Bylaws of DSW.
(b) Legal Action. No temporary restraining order, preliminary
------------
injunction or permanent injunction or other order preventing the consummation
of the Merger shall have been issued by any governmental entity and remain in
effect, and no litigation seeking the issuance of such an order or injunction,
or seeking relief against DSW, the Surviving Corporation or FAA if the Merger
is consummated, shall be pending which, in the good faith judgment of DSW's or
FAA's Board of Directors (acting upon the written opinion of their respective
outside counsel) has a reasonable probability of resulting in such order,
injunction or relief and such relief would have a Material Adverse Effect on
such party. In the event any such order or injunction shall have been issued,
each party agrees to use its commercially reasonable best efforts to have any
such injunction lifted.
(c) Statutes. No action shall have been taken, and no statute, rule,
--------
regulation or order shall have been enacted, promulgated or issued or deemed
applicable to the Merger by any governmental entity which would (i) make the
consummation of the Merger illegal, (ii) prohibit FAA's or DSW's ownership or
operation of all or a material portion of the business or assets of DSW, or
FAA and its subsidiaries taken as a whole, or compel FAA or DSW to dispose of
or hold separate all or a material portion of the business or assets of DSW,
or FAA and its subsidiaries taken as a whole, as a result of the Merger or
(iii) render FAA, Merger Sub or DSW unable to consummate the Merger, except
for any waiting period provisions.
(d) Escrow Agreement. The Escrow Agreement shall have been executed
----------------
and delivered by FAA, the DSW Shareholders' Representatives and the Escrow
Agent.
6.2 Conditions to Obligations of FAA and Merger Sub. The obligations of
-----------------------------------------------
FAA and Merger Sub to effect the Merger are subject to the satisfaction of the
following conditions, unless waived by FAA and Merger Sub:
(a) Representations and Warranties. The representations and
------------------------------
warranties of DSW set forth in this Agreement shall be true and correct in all
respects as of the date of this Agreement and as of the Closing Date (except
as could not reasonably be expected to have a Material Adverse Effect on DSW);
and there shall have been no willful breach by DSW of any of its
representations or warranties made in this Agreement. FAA shall have received
a certificate signed by the chief executive officer of DSW to such effect on
the Closing Date.
43
(b) No Material Adverse Change. There shall have been no Material
--------------------------
Adverse Effect on DSW from the date of this Agreement through the Closing Date
and FAA shall have received a certificate signed by the chief executive
officer and the chief financial officer of DSW to such effect on the Closing
Date. For purposes of this Section 6.2(b), the following shall be deemed to
constitute a Material Adverse Effect on DSW: (i) a material claim affecting
the Intellectual Property of DSW shall arise or (ii) the agreement described
in Schedule 7.1(c) pertaining to the CCC Milestone shall have been terminated.
(c) Performance of Obligations of DSW. DSW shall have performed all
---------------------------------
obligations and covenants required to be performed by it under this Agreement
and the Agreement of Merger prior to the Closing Date except those obligations
and covenants the nature of which is such that if not performed by DSW such
failure would not result in a Material Adverse Effect to DSW, and FAA shall
have received a certificate signed by the chief executive officer of DSW to
such effect on the Closing Date.
(d) Approvals. All authorizations, consents, orders or approvals
---------
of, or declarations or filings with, or expiration of waiting periods imposed
by, any governmental entity necessary for the consummation of the transactions
contemplated by this Agreement shall have been filed, occurred or been
obtained, other than filings and approvals relating to the Merger or affecting
FAA's ownership of DSW or any of its properties if failure to make such filing
or obtain such approval would not be materially adverse to DSW or FAA and its
subsidiaries taken as a whole.
(e) Consents. FAA shall have received duly executed copies of all
--------
third-party consents and approvals required for the consummation of the
transaction contemplated by this Agreement or the DSW Disclosure Schedule in
form and substance reasonably satisfactory to FAA including, without
limitation, the consent of lenders to FAA, except those which, if not
received, would not have a Material Adverse Effect on DSW.
(f) Resignation of Directors. The directors of DSW in office
------------------------
immediately prior to the Effective Time shall have resigned as directors of
the Surviving Corporation effective as of the Effective Time.
(g) Dissenting Shares Limitation. At least 95% of the DSW Shares
----------------------------
which may be otherwise eligible to become Dissenting Shares shall have been
voted in favor of the Merger.
(h) Key Employee Agreements. Key Employee Agreements shall have
-----------------------
been entered between DSW and/or FAA and the individuals listed on Schedule
5.15 and such Key Employee Agreements shall be in full force and effect.
44
(i) RAMAC Intellectual Property. DSW shall have acquired RAMAC and
---------------------------
obtained the assignment of the RAMAC Intellectual Property in form and substance
reasonably satisfactory to FAA and its legal counsel.
(j) Intellectual Property Matters. DSW shall have taken the actions
-----------------------------
described on Schedule 5.18 pertaining to Intellectual Property required to be
performed prior to Closing.
(k) DSW Liabilities. DSW's total liabilities shall not exceed DSW's
---------------
current assets by the lesser of (i) $1,000,000 or (ii) $1,000,000 reduced by
such payments, settlement and/or compromises as have been made after the consent
of FAA as provided in Section 5.1(c) subsequent to the date of Schedule 5.1(c).
(l) Non-Compete Agreements. The individuals listed on Schedule
----------------------
6.2(l) shall have entered into Non-Compete Agreements substantially in the form
of Exhibit E.
---------
(m) Opinion of DSW Counsel. At the Closing, there shall be delivered
----------------------
to FAA and Merger Sub the opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ ("WSGR"),
counsel for DSW, dated the Closing Date, in form and substance satisfactory to
FAA and Merger Sub and their counsel, to the effect that:
(i) DSW is a corporation duly organized, validly existing and
in good standing under the laws of the State of California with corporate power
to own its property and to conduct its business as now conducted;
(ii) The authorized, issued and outstanding capital stock of
DSW on the Closing Date is as set forth in such opinion;
(iii) The issued and outstanding shares of capital stock of DSW
have been duly and validly issued, are fully paid and nonassessable, and have
been issued in full compliance with all applicable federal and state securities
laws;
(iv) All requisite corporate action has been taken by DSW
under its Articles of Incorporation and Bylaws and the laws of the State of
California to enable DSW to execute and deliver this Agreement and the Agreement
of Merger and to perform its obligations hereunder and thereunder;
(v) The execution of this Agreement and the Agreement of
Merger by DSW, and the performance of its obligations hereunder and thereunder,
will not result in the violation of any order or decree known to such counsel of
any court binding upon the DSW or its property, or conflict with or constitute a
material default under DSW's charter or Bylaws or under any material note, debt
instrument, security agreement or mortgage, or any other material agreement or
commitment known to such counsel by which DSW is bound, or to the knowledge of
such counsel result in the creation or imposition of any lien or encumbrance in
favor of any third person upon any material property of DSW;
45
(vi) This Agreement and the Agreement of Merger have been duly
authorized, executed and delivered by DSW, and are binding upon and enforceable
against DSW in accordance with their respective terms, except as the
enforceability hereof or thereof may be subject to or limited by bankruptcy,
insolvency, reorganization, arrangement or similar laws affecting the rights of
creditors generally and subject to general equity principles and to limitations
on availability of equitable relief, including specific performance; and
(vii) WSGR may include in their opinion a statement that they
do not hold themselves out as experts in, and express no opinion as to, the laws
of any state or jurisdiction other than the laws of the United States and the
State of California.
(n) DSW Convertible Securities. All DSW Convertible Securities shall
--------------------------
have been delivered at the closing for conversion into Merger Consideration
together with the Consents described in Section 5.13(b) and such documents as
are necessary to release any security interest of such DSW Convertible
Securities in property of DSW.
6.3 Conditions to Obligations of DSW. The obligation of DSW to effect the
--------------------------------
Merger is subject to the satisfaction of the following conditions unless waived
by DSW:
(a) Representations and Warranties. The representations and
------------------------------
warranties of FAA and Merger Sub set forth in this Agreement shall be true and
correct in all respects as of the date of this Agreement and as of the Closing
Date (except as could not have a Material Adverse Effect on FAA); and there
shall have been no willful breach by either FAA or Merger Sub of any of its
representations or warranties made in this Agreement. DSW shall have received a
certificate signed by the chief executive officer and chief financial officer of
each of FAA and Merger Sub to such effect on the Closing Date.
(b) Performance of Obligations of FAA and Merger Sub. FAA and
------------------------------------------------
Merger Sub shall have performed all obligations and covenants required to be
performed by them under this Agreement and the Agreement of Merger prior to the
Closing Date except those obligations and covenants the nature of which is such
that if not performed by FAA or Merger Sub, such failure would not result in a
Material Adverse Effect to FAA, and DSW shall have received a certificate signed
by the chief executive officer and the chief financial officer of FAA to such
effect on the Closing Date.
(c) No Material Adverse Change. There shall have been no Material
--------------------------
Adverse Effect on FAA from the date of this Agreement through the Closing Date
and DSW shall have received a certificate signed by the chief executive officer
and the chief financial officer of FAA to such effect on the Closing Date.
(d) Approvals. All authorizations, consents, orders or approvals of,
---------
or declarations or filings with, or expiration of waiting periods imposed by,
any governmental entity necessary for the consummation of the transactions
contemplated by this Agreement shall have
46
been filed, occurred or been obtained, other than filings and approvals relating
to the Merger or affecting FAA's ownership of DSW or any of its properties if
failure to make such filing or obtain such approval would not be materially
adverse to DSW or FAA and its subsidiaries taken as a whole.
(e) Consents. DSW shall have received duly executed copies of all
--------
third-party consents and approvals required for the consummation of the
transaction contemplated by this Agreement or the FAA Disclosure Schedule in
form and substance reasonably satisfactory to DSW including, without limitation,
the consent of lenders to FAA, except those which, if not received, would not
have a Material Adverse Effect on FAA.
(f) Opinion of FAA Counsel. At the Closing, there shall be delivered
----------------------
to DSW and Merger Sub the opinion of ▇▇▇▇, ▇▇▇▇ ▇▇▇▇ & Freidenrich ("GCWF"),
counsel for FAA, dated the Closing Date, in form and substance satisfactory to
FAA and Merger Sub and their counsel, to the effect that:
(i) FAA is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware with corporate power to
own its property and to conduct its business as now conducted;
(ii) All requisite corporate action has been taken by FAA
under its Certificate of Incorporation and Bylaws and the laws of the State of
Delaware to enable FAA to execute and deliver this Agreement and the Agreement
of Merger and to perform its obligations hereunder and thereunder;
(iii) Upon issuance in accordance with the terms of this
Agreement the FAA Class A Common Shares issued as Merger Consideration will be
validly issued, fully paid and nonassessable.
(iv) The execution of this Agreement and the Agreement of
Merger by FAA, and the performance of its obligations hereunder and thereunder,
will not result in the violation of any order or decree known to such counsel of
any court binding upon the FAA or its property, or conflict with or constitute a
material default under FAA's charter or Bylaws or under any material note, debt
instrument, security agreement or mortgage, or any other material agreement or
commitment known to such counsel by which FAA is bound, or to the knowledge of
such counsel result in the creation or imposition of any lien or encumbrance in
favor of any third person upon any material property of FAA; and
(v) This Agreement and the Agreement of Merger have been duly
authorized, executed and delivered by FAA, and are binding upon and enforceable
against FAA in accordance with their respective terms, except as the
enforceability hereof or thereof may be subject to or limited by bankruptcy,
insolvency, reorganization, arrangement or similar laws
47
affecting the rights of creditors generally and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance;
ARTICLE VII
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION
----------------------------------------------------------------------
7.1 Escrow Fund. As soon as practicable after the Effective Time of the
-----------
Merger, all of the Escrow Shares shall be registered in the name of, and be
deposited with, an institution selected by FAA, and reasonably acceptable to
DSW, to act as escrow agent (the "Escrow Agent"), such deposit to constitute the
"Escrow Fund" and to be governed by the terms set forth herein and in the Escrow
Agreement. The Escrow Fund shall be available to compensate FAA for breaches of
the representations and warranties of DSW contained in Section 3 hereof, and as
security for the performance of certain actions, all as described following:
(a) 44.5% or 67,000 shares of the Escrow Shares shall be held in the
Escrow Fund as security for the indemnification rights of FAA pursuant to this
Article VII (the "Indemnification Escrow").
(b) 33.3% or 50,250 shares of the Escrow Shares shall be held in the
Escrow Fund as security for the performance of the Intellectual Property matters
as indicated on Schedule 5.18 (the "Intellectual Property Escrow"). Such amount
of shares to be held in the Escrow Fund may be reduced to the extent that such
actions there listed are performed prior to the Effective Time in such amounts
as are there listed beside each action to be taken. Shares of FAA Class A Common
Stock escrowed pursuant to this Section 7.1(b) shall be released in such amounts
as are indicated on Schedule 5.18 as such actions there listed are taken. The
actions indicated on Schedule 5.18 shall be taken by DSW or FAA, with the
assistance of DSW. The DSW Shareholders' Representatives may (subject to the
consent of FAA which shall not be unreasonably withheld) determine third party
consultants to be used in the completion of the actions required by Schedule
5.18 in connection with the Intellectual Property Matters.
(c) 22.2% or 33,500 shares of the Escrow Shares shall be held in the
Escrow Fund as security for the performance of the CCC Milestone (as defined in
Schedule 7.1(c)), subject to reduction in respect of DSW Dissenting Shares. Upon
completion of the CCC Milestone, all such shares shall be released from the
Escrow Fund. The CCC Milestone Escrow shall be reduced by the number of shares
of FAA Class A Common Stock issuable in respect of any DSW Dissenting Shares for
which Dissenters Rights are perfected and not lost, and which shares of FAA
Class A Common Stock would therefore not be issuable.
(d) Upon any adjustment of the CCC Milestone escrow for dissenting
shares as provided in the preceding paragraph (c), the proportionate interest of
former DSW Shareholders in each of the three escrow funds shall be adjusted
accordingly.
48
(e) The parties acknowledge that in connection with the acquisition
of RAMAC, shares of DSW issued in such acquisition are subject to the provisions
of an escrow (the "RAMAC Escrow") under the terms of the RAMAC acquisition
agreement (the "RAMAC Agreement") as security for the indemnification rights of
DSW under said acquisition agreement (the "RAMAC Escrow Shares"). FAA and DSW
further agree that the number of Escrow Shares actually delivered to the Escrow
Agent shall be reduced by such amounts of Merger Consideration issuable in
respect of the RAMAC Escrow Shares as would have been required to be placed in
Escrow under this Agreement (the "RAMAC Merger Consideration Escrow Shares").
The RAMAC Merger Consideration Escrow Shares shall remain in the RAMAC Escrow
and be subject to the terms of the RAMAC Escrow and shall also be subject to the
provisions of this Article VII regarding indemnification, the Intellectual
Property matters and the CCC Milestone. FAA and DSW further agree as follows
regarding the RAMAC Merger Consideration Escrow Shares:
(i) FAA will be entitled to seek indemnification under the
RAMAC Agreement and this Agreement.
---
(ii) If it is finally determined that FAA is entitled to
recovery for a breach under the RAMAC Agreement, and FAA is entitled to also
recover for such breach under this Agreement, FAA shall first recover from the
RAMAC Escrow. If the RAMAC Escrow is not sufficient to cover the full amount of
any such recovery, the balance shall be recoverable against the Indemnification
Escrow.
The foregoing limitations shall not prevent recovery under this Agreement
for any Adverse Consequences (as such term is defined in Section 7.2(a)) to the
extent not fully recovered from the RAMAC Escrow.
7.2 Indemnification Provisions.
--------------------------
(a) Subject to the terms and conditions of this Article VII, in the
event of any breach of any of the representations, warranties, agreements or
covenants of DSW contained herein, provided that FAA makes a written claim for
indemnification in the manner provided for in this Article VII on or prior to
the date one year following the date of Closing (the "Survival Termination
Date"), FAA and the Surviving Corporation, and their respective officers,
directors, agents and employees, shall be indemnified and held harmless from and
against the entirety of any and all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses, and fees, including court costs and reasonable attorneys' fees and
expenses ("Adverse Consequences") that FAA may suffer through and after the date
of the claim for indemnification resulting from, arising out of, in the nature
of, or caused by such breach.
49
(b) Subject to the terms and conditions of this Article VII, in the
event of any breach of any of the representations, warranties, agreements or
covenants of FAA contained herein, provided that the DSW Shareholders'
Representatives or DSW makes a written claim for indemnification in the manner
provided for in this Article VII on or prior to the Survival Termination Date,
DSW and its shareholders and their respective officers, directors, agents and
employees shall be indemnified and held harmless from and against the entirety
of any and all Adverse Consequences that they may suffer through and after the
date of the claim for indemnification resulting from, arising out of, in the
nature of, or caused by such breach except where and to the extent that such
breach of FAA is attributable to, or caused by, a breach of the representations
warranties agreements or covenants of DSW contained herein.
7.3 Limitations on Indemnification Claims; Termination of Escrow.
------------------------------------------------------------
(a) Claims for indemnification shall be limited as follows:
(i) FAA shall not be entitled to recover indemnification for
any Adverse Consequences unless and until the aggregate amount of all Adverse
Consequences under all claims of indemnification asserted under this Section 7
("Claims") exceeds $20,000, in which case FAA shall be entitled to
indemnification for the full amount of Adverse Consequences, in excess of and
excluding the first $20,000, subject to Section 7.3(c) below. In determining the
amount of any Adverse Consequences attributable to a breach, any materiality
standard contained in a representation, warranty or covenant of DSW shall be
disregarded.
(ii) DSW shall not be entitled to recover indemnification for
any Adverse Consequences unless and until the aggregate amount of all Adverse
Consequences under all Claims exceeds $20,000, in which case DSW shall be
entitled to indemnification for the full amount of Adverse Consequences, in
excess of and excluding the first $20,000. In determining the amount of any
Adverse Consequences attributable to a breach, any materiality standard
contained in a representation, warranty or covenant of FAA shall be disregarded.
FAA's total liability for indemnification under this Section 7 shall be limited
to an amount equal to the market value of the 67,000 shares of FAA Class A
Common stock initially subject to the Indemnification Escrow as of the one year
anniversary of the Closing. All claims for indemnification by DSW pursuant to
this Section 7 shall be subject to offset by claims by FAA pursuant to this
Section 7.
(b) For purposes of determining the number of shares of FAA Class A
Common Stock required to be released from escrow to FAA for any indemnification
claim, the value of such shares shall be the market value of the shares as of
the one year anniversary of the Closing, as determined by the mutual agreement
of FAA and the DSW Shareholders' Representatives. At the option of the DSW
Shareholders' Representatives and the individual shareholders otherwise entitled
to receive escrowed shares, any payment of claim by FAA may be settled by
payment of cash, either in full or partial settlement of any claim. At the
option of FAA any claim of DSW may be settled in cash or offset as described in
Section 7.3(b).
50
(c) In any event, the maximum amount recoverable by FAA pursuant to
FAA's indemnification rights in this Article VII shall be the number of shares
held as Indemnification Escrow Shares, as defined by the Escrow Agreement, and
no claim for indemnification shall be asserted against any of the stockholders
of DSW other than against the Escrow Fund pursuant to the provisions of Article
VII and Section 4 of the Escrow Agreement. Notwithstanding the other provisions
of this Article VII pertaining to indemnification rights of FAA, all claims for
indemnification against the escrow described in Section 7.1(a) shall be paid on
the one year anniversary of the Closing when finally determined in accordance
with the provisions of this Article VII. For the avoidance of doubt, should any
indemnification claim be unresolved, or the value of the Common Exchange shares
held in escrow be subject to negotiation, FAA shall be entitled to require a
reasonable number of such shares be retained in escrow pending final settlement
of such matters in accordance with Section 7 of the Escrow Agreement.
(d) On the one-year anniversary date from the Effective Time, the
Indemnification Escrow, Intellectual Property Escrow and the CCC Milestone
Escrow will terminate pursuant to the terms of the Escrow Agreement. At such
time all FAA Class A Common Shares held in the Indemnification Escrow other than
shares retained to cover pending claims or due to disputes over valuation shall
be distributed to the DSW Shareholder Representatives pursuant to the terms of
the Escrow Agreement. Any shares remaining in the Intellectual Property Escrow
and the CCC Milestone Escrow other than shares subject to dispute as to
performance of matters related to such escrows shall be returned to FAA.
7.4 Procedure for Indemnification Claims; Matters Involving Third Parties.
----------------------------------------------------------------------
(a) As used in this Article VII the term "Indemnitor" means the party
against whom indemnification hereunder is sought, and the term "Indemnitee"
means the party seeking indemnification hereunder.
(b) A claim for indemnification hereunder (an "Indemnification
Claim,") shall be made by Indemnitee by delivery of a written notice to
Indemnitor as soon as reasonably practicable following Indemnitee's awareness of
circumstances giving rise to such Indemnification Claim, requesting
indemnification and specifying the basis on which indemnification is sought in
reasonable detail (and shall attach relevant documentation related to the
Indemnification Claim), the amount of the asserted Adverse Consequences, as the
case may be, and, in the case of a Third Party Claim (as defined below),
containing (by attachment or otherwise) such other information as Indemnitee
shall have concerning such Third Party Claim; provided that the failure to give
such notice shall not prejudice the rights of the Indemnitee under this
Agreement, except to the extent the Indemnitor is materially prejudiced thereby.
(c) If the Indemnification Claim involves a matter other than a Third
Party Claim, Indemnitor shall have thirty (30) days to object to such
Indemnification Claim by delivery of a written notice of such objection to
Indemnitee specifying in reasonable detail the basis for
51
such objection. Failure to timely so object shall constitute a final and binding
acceptance of the Indemnification Claim by Indemnitor, and the Indemnification
Claim shall thereafter be paid by Indemnitor in accordance with Section 7.3
hereof and the Escrow Agreement. If an objection is timely delivered by
Indemnitor and the dispute is not resolved within twenty (20) business days from
the delivery of such objection (the "Negotiation Period"), either party may
bring an action in court to resolve such dispute. The right of Indemnitee to be
indemnified hereunder shall not limit or otherwise affect any other rights or
remedies it may have with respect to the matters indemnified.
(d) Should any claim be made, or suit or proceeding (including,
without limitation, a binding arbitration or an audit by any taxing authority)
be instituted against Indemnitee which, if prosecuted successfully, would be a
matter for which Indemnitee is entitled to indemnification under this Agreement
(a "Third Party Claim"), the obligations and liabilities of the parties
hereunder with respect to such Third Party Claim shall be subject to the
following terms and conditions:
(i) Indemnitee shall give Indemnitor written notice of any
such claim promptly after receipt by Indemnitee of notice thereof. Any delay in
giving notice to the extent it does not materially prejudice Indemnitor, shall
not affect Indemnitee's rights to Indemnification hereunder except to the extent
that such failure prejudices the Indemnitor's ability to respond to or defend
the claim.
(ii) If the DSW Shareholders' Representatives and FAA shall
agree on the terms of a settlement, the costs of Adverse Consequences shall be
paid fifty percent by FAA and fifty percent shall be chargeable against the
Indemnification Escrow.
(iii) If FAA and the DSW Shareholders' Representatives disagree
as to the terms of a settlement or agree that a Third Party Claim should be
resisted, and the result is an arbitration award, a final judgment (after
expiration of all periods for appeal of such judgment or other final,
nonappealable order (any of them a "Judgment")) against an Indemnitee, the costs
of Adverse Consequences attributable to such Judgment shall be, in an instance
where DSW is the Indemnitor, chargeable against the Indemnification Escrow, and
in an instance where FAA is the indemnitor, subject to Section 7.3(b) payable by
FAA.
(iv) In an instance where DSW is the Indemnitor, if FAA and
the DSW Shareholders' Representatives disagree as to the terms of a settlement
and FAA chooses to settle the Third Party Claim, FAA shall not be entitled to
indemnification for the costs of such settlement.
(v) In an instance where DSW is the Indemnitor, if the Third
Party Claim is resisted and results in no Judgment against an Indemnitee, the
expenses of resisting such Third Party Claim shall be paid by FAA and no claim
for indemnification shall be made for such expenses.
52
(vi) With respect to Third Party Claims for which
indemnification is claimed hereunder, the Indemnitor shall be entitled to
participate in and, if the Indemnitor admits that this indemnity fully covers
the claim or litigation, the Indemnitor shall be entitled to direct the defense
of any claim at its expense, but such defense shall be conducted by legal
counsel reasonably satisfactory to the Indemnitee.
(vii) After notice from the Indemnitor to the Indemnitee of its
election to assume the defense of such claim or action, the Indemnitor shall not
be liable to the Indemnitee under this Section 7.4(d) for any legal or other
expenses subsequently incurred by the Indemnitee in connection with the defense
thereof other than reasonable costs of investigation or of assistance as
contemplated by this Section 7.4(d); provided, however, that the Indemnitee
shall have the right to employ counsel to represent it if it is reasonably
advisable for the Indemnitee to be represented by separate counsel due to actual
or potential conflicts of interest, and in that event the fees and expenses of
such separate counsel shall be paid by the Indemnitor; provided, that in no
event shall the Indemnitor be responsible for the fees of more than one counsel
to the Indemnitee.
(viii) The Indemnitee and the Indemnitor shall each render to
each other such assistance as may reasonably be requested in order to ensure the
proper and adequate defense of any such claim or proceeding.
(ix) The DSW Shareholders' Representatives and FAA agree to
negotiate in good faith regarding the settlement of Third Party Claims and shall
not unreasonably withhold their consent to such settlements. It shall not be
unreasonable to withhold consent to any settlement that does not contain an
unconditional release of the Indemnitee.
(e) Subject to Section 7.3, upon determination of the amount of an
Indemnification Claim by a Judgment, such amount shall be paid by drawing on the
Indemnification Escrow Fund in accordance with the terms of the Escrow
Agreement.
ARTICLE VIII
DSW SHAREHOLDERS' REPRESENTATIVES
---------------------------------
8.1 In the event the Merger is approved by the shareholders of DSW,
without any further action on the part of any such shareholders, such
shareholders shall be deemed to have consented to the appointment of ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ as representatives of such
shareholders (the "DSW Shareholders' Representatives"), as the attorneys-in-fact
for and on behalf of each DSW Common Shareholder, and the taking by the DSW
Shareholders' Representatives of any and all actions and the making of any
decisions required or permitted to be taken by them under this Agreement or the
Escrow Agreement, including, without limitation, the exercise of the power to
(i) execute the Escrow Agreement, (ii) receive or give any notice on behalf of
DSW Common Shareholders pursuant to this Agreement or the Escrow Agreement,
53
(iii) authorize delivery to FAA of the Escrow Fund, or any portion thereof, in
satisfaction of Claims, (iv) agree to, negotiate, enter into settlements and
compromises of, and demand arbitration and comply with orders of courts and
awards of arbitrators with respect to such Claims, (v) resolve any Claims and
(vi) take all actions necessary in the judgment of the DSW Shareholders'
Representatives for the accomplishment of the foregoing and all of the other
terms, conditions and limitations of this Agreement and the Escrow Agreement.
Accordingly, the DSW Shareholders' Representatives have unlimited authority and
power to act on behalf of each DSW Common Shareholder with respect to this
Agreement and the Escrow Agreement and the disposition, settlement or other
handling of all claims, rights or obligations arising from and taken pursuant to
this Agreement. The DSW Common Shareholders will be bound by all actions taken
by the DSW Shareholders' Representatives in connection with this Agreement and
the Escrow Agreement, and FAA shall be entitled to rely on any action or
decision of the DSW Shareholders' Representatives evidenced by a written
document executed by both of the DSW Shareholders' Representatives as the action
or decision of each of the DSW Common Shareholders. The DSW Shareholders'
Representatives (in their capacity as DSW Shareholders' Representatives and not
as DSW Common Shareholders) will incur no liability with respect to any action
taken or suffered by them in reliance upon any notice, direction, instruction,
consent, statement or other document believed by them to be genuine and to have
been signed by the proper person (and shall have no responsibility to determine
the authenticity thereof), nor for any other action or inaction, except their
own willful misconduct, bad faith or gross negligence. In all questions arising
under this Agreement or the Escrow Agreement, the DSW Shareholders'
Representatives may rely on the advice of counsel, and for anything done,
omitted or suffered in good faith by the DSW Shareholders' Representatives based
on such advice, the DSW Shareholders' Representatives (in their capacity as DSW
Shareholders' Representatives and not as DSW Common Shareholders) will not be
liable to anyone. At any time during the term of the Escrow Agreement, holders
of a majority of the Escrow Shares may appoint new DSW Shareholders'
Representatives by written consent by sending notice and a copy of the written
consent appointing such new DSW Shareholders' Representative signed by holders
of a majority of the Escrow Shares to FAA and the Escrow Agent. Such appointment
will be effective upon the later of the date indicated in the consent or the
date such consent is received by FAA and the Escrow Agent. The Shareholder
Representatives have executed this Agreement as acknowledgment and acceptance of
the provision of this Article VIII.
ARTICLE IX
POST CLOSING AGREEMENTS
-----------------------
9.1 Employee Benefits. FAA agrees that the employees of DSW who continue
-----------------
as employees of DSW or FAA ("Continuing Employees") after the Effective Time
shall be entitled to the following employee benefits:
(a) Medical insurance will be provided for Continuing Employees
beginning with the Effective Time.
54
(b) Continuing Employees shall be entitled to accrue vacation time
after the Effective Time at such rate as is FAA's then standard vacation accrual
policy, except that, Continuing Employees shall be given credit for time
employed by DSW in determining the rate at which vacation shall accrue from such
time forward.
(c) Continuing Employees shall be entitled to participate in FAA's
other standard employee benefit programs, such as 401K Plan, Stock Option Plans,
etc. beginning with the Effective Time as if newly hired by FAA on such date.
9.2 FAA Escrow Covenants.
--------------------
(a) FAA agrees that until the earlier of completion of the CCC
Milestone or November 15, 1998, FAA shall (1) use commercially reasonable best
efforts to continue the employment of the DSW employees listed on Schedule 9.2
and (2) provide them with commercially reasonable resources as are required to
achieve the CCC Milestone.
(b) Neither FAA nor any of its affiliates shall in any material way
impede or prevent DSW or any of its former employees from the accomplishment of
the actions listed in (i) Sections 5.18 and 7.1(b) of this Agreement and the
corresponding Schedule 5.18 attached hereto, with respect to intellectual
property matters (the "IP Actions") or (ii) Section 7.1(c) of this Agreement and
the corresponding Schedule 7.1(c) attached hereto, with respect to the CCC
Milestone (the "CCC Actions"). In addition, FAA and its affiliates shall (i)
take such actions and obtain such approvals as are reasonable and necessary to
accomplish the IP Actions and the CCC Actions and (ii) provide reasonable
resources necessary to accomplish the IP Actions and the CCC Actions, including
such resources involving the allocation of personnel, professional or financial
support or otherwise. In the event FAA or any of its affiliates in any material
way impedes or prevents DSW or any of its former employees from the
accomplishment of either the IP Actions or the CCC Actions or fails to
reasonably take any of the actions in the preceding sentence and such actions
are the cause of failure to accomplish the IP Actions or the CCC Actions, then
the Escrow Agent shall release to the DSW Shareholders' Representatives the
shares held in the IP Escrow or CCC Escrow, as the case may be.
9.3 DSW Liabilities. FAA shall use its reasonable best efforts to pay the
---------------
liabilities listed on Schedule 5.1(c) in accordance with the schedule there
listed. FAA shall use its reasonable best efforts to secure the release of
▇▇▇▇▇ ▇▇▇▇▇▇▇ from any personal obligations he may have as guarantor or co-
obligor of the liabilities listed on Schedule 5.1(c).
55
ARTICLE X
GENERAL PROVISIONS
------------------
10.1 Termination.
-----------
(a) This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the Merger by the
shareholders of DSW:
(i) by mutual agreement of the Boards of Directors of FAA and
DSW;
(ii) by FAA, if there has been a breach by DSW of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of DSW which is material and which DSW fails to cure within five
business days after notice thereof is given by FAA (except that no cure period
shall be provided for a breach by DSW which by its nature cannot be cured);
(iii) by DSW, if there has been a breach by FAA or Merger Sub
of any representation, warranty, covenant or agreement set forth in this
Agreement on the part of FAA or Merger Sub which is material and which FAA or
Merger Sub, as the case may be, fails to cure within five business days after
notice thereof is given by DSW (except that no cure period shall be provided for
a breach by FAA or Merger Sub which by its nature cannot be cured);
(iv) by FAA or DSW, if the Merger shall not have been
consummated on or before January 31, 1999; or
(v) by FAA or DSW if any permanent injunction or other order
of a court or other competent authority preventing the Merger shall have become
final and nonappealable.
(b) Where action is taken to terminate this Agreement pursuant to
this Section 10.1, it shall be sufficient for such action to be authorized by
the Board of Directors of the party taking such action.
(c) In the event of termination of this Agreement as provided in this
Section, the other provisions of this Agreement shall forthwith become void,
except that the agreements contained or referred to in Sections 5.10 (expenses),
5.19 (brokers, finders), 5.11 (public announcements), 5.12 (confidentiality) and
10.1 (termination) shall survive. Notwithstanding the foregoing, in the event of
a breach of this Agreement by any party hereto, nothing herein shall limit the
remedies at law or in equity of the other party with respect thereto.
10.2 Amendment. This Agreement may be amended by the parties hereto, by
---------
action taken by their respective Boards of Directors, at any time before or
after approval of the Merger by the shareholders of DSW; provided that following
approval of the Merger by the shareholders
56
of DSW, no amendment shall be made which by law requires the further approval of
such shareholders without obtaining such further approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
10.3 Extension; Waiver. At any time prior to the Effective Time, each of
-----------------
DSW and FAA, by action taken by its Board of Directors, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other, (ii) waive any inaccuracies in the
representations and warranties made to it contained herein or in any document
delivered pursuant hereto and (iii) waive compliance with any of the agreements
or conditions for the benefit of it contained herein. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party.
10.4 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or sent by facsimile,
confirmation received, to the parties at the following addresses and telecopy
numbers (or at such other address or number for a party as shall be specified by
like notice):
(a) If to FAA or Merger Sub, to:
FirstAmerica Automotive, Inc.
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇, Chief Financial Officer
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to:
▇▇▇▇ ▇▇▇▇ ▇▇▇▇ & Freidenrich LLP
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Telephone No.: (▇▇▇) ▇▇▇-▇▇▇▇
57
(b) if to DSW, to:
DSW Associates, Inc.
Attn: ▇▇▇▇▇ ▇▇▇▇▇▇▇, CEO
▇▇▇ ▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Telephone No.: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to:
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇, A Professional Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Telephone No.: (▇▇▇) ▇▇▇-▇▇▇▇
(c) if to the DSW Shareholders' Representatives, to:
________________________________
________________________________
________________________________
________________________________
with a copy to:
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇, A Professional Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Telephone No.: (▇▇▇) ▇▇▇-▇▇▇▇
10.5 Interpretation. When a reference is made in this Agreement to
--------------
Sections or Exhibits, such references shall be to a Section or Exhibit to this
Agreement unless otherwise indicated. The words "include," "includes" and
"including" when used herein shall be deemed in each case to be followed by the
words "without limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
58
10.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
10.7 Entire Agreement. This Agreement and the documents and instruments
----------------
and other agreements among the parties delivered pursuant hereto constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral,
including without limitation the Outline, among the parties with respect to the
subject matter hereof and are not intended to confer upon any other person any
rights or remedies hereunder except as otherwise expressly provided herein.
10.8 No Transfer. This Agreement and the rights and obligations set forth
-----------
herein may not be transferred or assigned by operation of law or otherwise
without the consent of each party hereto. This Agreement is binding upon and
will inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
10.9 Severability. If any provision of this Agreement, or the application
------------
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as reasonably to effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
10.10 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law or equity on
such party; and the exercise of any one remedy will not preclude the exercise of
any other.
10.11 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to evidence and reflect the transactions described herein and
contemplated hereby and to carry into effect the intents and purposes of this
Agreement.
10.12 Absence of Third-Party Beneficiary Rights. No provision of this
-----------------------------------------
Agreement is intended, nor will be interpreted, to provide to create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, employee, partner or any party hereto or any
other person or entity, and all provisions hereof will be personal solely
between the parties to this Agreement.
59
10.13 Mutual Drafting. This Agreement is the joint product of FAA and DSW,
---------------
each provision hereof has been subject to the mutual consultation, negotiation
and agreement of FAA and DSW, and shall not be construed for or against any
party hereto.
Governing Law. This Agreement shall be governed in all respects, including
-------------
validity, interpretation and effect, by the laws of the State of California
(without giving effect to its choice of law principles).
60
IN WITNESS WHEREOF, FAA, Merger Sub and DSW have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
FIRSTAMERICA AUTOMOTIVE, INC. DSW SHAREHOLDER REPRESENTATIVES
Solely with respect to Articles VII, VIII and X
By: /s/ ▇▇▇▇▇▇ ▇. Price /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
--------------------------------- ---------------------------------
Name: ▇▇▇▇▇▇ ▇. Price ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Chief Executive Officer
/s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
---------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
/s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇
---------------------------------
▇▇▇▇▇▇▇ ▇▇▇▇▇
DSW ACQUISITION CORPORATION
MAJOR SHAREHOLDERS
Solely with respect to Article III
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
--------------------------------- ---------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Chief Financial Officer
/s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
---------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
/s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇
---------------------------------
▇▇▇▇▇▇▇ ▇▇▇▇▇
DSW & ASSOCIATES, INC.
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
---------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: President
61
