-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WCuuN51hmkO1A3rpvwklYPQFWvyP0C4xgLO+/ValaSD/cBshxF7SAiTuBEZI7Qcm btkp6leD9Phzcjxe6e/CkQ== 0000898430-99-000465.txt : 19990212 0000898430-99-000465.hdr.sgml : 19990212 ACCESSION NUMBER: 0000898430-99-000465 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990127 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAILY JOURNAL CORP CENTRAL INDEX KEY: 0000783412 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 954133299 STATE OF INCORPORATION: SC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-14665 FILM NUMBER: 99531008 BUSINESS ADDRESS: STREET 1: 915 E FIRST STREET CITY: LOS ANGELES STATE: CA ZIP: 90012 BUSINESS PHONE: 2132295436 MAIL ADDRESS: STREET 1: 915 E FIRST STREET CITY: LOS ANGELES STATE: CA ZIP: 90012 FORMER COMPANY: FORMER CONFORMED NAME: DAILY JOURNAL CO DATE OF NAME CHANGE: 19870427 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 27, 1999 DAILY JOURNAL CORPORATION ------------------------- (Exact Name of Registrant as Specified in Charter) South Carolina 0-14665 95-4133299 - -------------- ------- ---------- (State or Other (Commission File (I.R.S. Employer Jurisdiction of Number) Identification No.) Incorporation) 355 South Grand Avenue, 34th Floor Los Angeles, California 90071-1560 - -------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (213) 624-7715 Not Applicable -------------- (Former Name or Former Address, if Changed Since Last Report 1 Item 2. Acquisition or Disposition of Assets. On January 27, 1999, Daily Journal Corporation invested a total of $6.67 million in cash (a) to purchase 80% of the capital stock of Choice Information Systems, Inc. from Choice and Michael W. Payton and Terence E. Hahm, the two shareholders of Choice, (b) to cause Choice to purchase substantially all of the assets of Quindeca Corporation, which assets primarily consisted of software and computers, and (c) to leave approximately $4 million in Choice as working capital immediately following these transactions. Immediately following the investment, Choice entered into employment agreements with Michael W. Payton and Terence E. Hahm, shareholders of Choice, and with Jerry L. Short, shareholder of Quindeca. In addition, Daily Journal, Quindeca and Messrs. Payton and Hahm, the shareholders of Choice, entered into a Shareholders' Agreement with Choice covering all shares of Choice held by them. Choice and Quindeca develop, market and support the SUSTAIN(R) family of software products which enable court systems and other justice agencies to automate their operations. Daily Journal intends to continue the business of Choice and Quindeca. Daily Journal raised the funds required for its investment by selling approximately $6.67 million of U.S. Treasury Bills previously held by Daily Journal. Subsequent to the investment, Daily Journal, through Choice, repurchased approximately $4 million of U.S. Treasury Bills. Item 7. Financial Statements and Exhibits. (a) Financial Statements of Business Acquired. The financial statements of Choice and Quindeca required by this Item 7(a) will be filed by an amendment to this Form 8-K no later than April 12, 1999. (b) Pro Forma Financial Information. The pro forma financial statements required by this Item 7(b) will be filed by amendment to this Form 8-K no later than April 12, 1999. (c) The following exhibits are filed herewith or incorporated by reference herein: Exhibit Number Description -------------- ----------- 2.1 Stock Purchase Agreement, dated as of January 22, 1999, by and among Daily Journal Corporation, Choice Information Systems, Inc., Michael W. Payton and Terence E. Hahm. 2.2 Asset Purchase Agreement, dated as of January 22, 1999, by and among Choice Information Systems, Inc., Quindeca Corporation and Jerry L. Short. 10.1 Employment Agreement, dated as of January 22, 1999, between Choice Information Systems, Inc. and Michael W. Payton. 2 10.2 Employment Agreement, dated as of January 22, 1999, between Choice Information Systems, Inc. and Jerry L. Short. 10.3 Employment Agreement, dated as of January 22, 1999, between Choice Information Systems, Inc. and Terence E. Hahm. 10.4 Shareholders' Agreement, dated as of January 22, 1999, among Choice Information Systems, Inc., Daily Journal Corporation, Quindeca Corporation, Michael W. Payton and Terence E. Hahm. 99.1 Press Release of Daily Journal Corporation issued January 27, 1999 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DAILY JOURNAL CORPORATION By: /s/ GERALD L. SALZMAN Name: Gerald L. Salzman Title: Chief Financial Officer Dated: February 11, 1999 4 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 2.1 Stock Purchase Agreement, dated as of January 22, 1999, by and among Daily Journal Corporation, Choice Information Systems, Inc., Michael W. Payton and Terence E. Hahm. 2.2 Asset Purchase Agreement, dated as of January 22, 1999, by and among Choice Information Systems, Inc., Quindeca Corporation and Jerry L. Short. 10.1 Employment Agreement, dated as of January 22, 1999, between Choice Information Systems, Inc. and Michael W. Payton. 10.2 Employment Agreement, dated as of January 22, 1999, between Choice Information Systems, Inc. and Jerry L. Short. 10.3 Employment Agreement, dated as of January 22, 1999, between Choice Information Systems, Inc. and Terence E. Hahm. 10.4 Shareholders' Agreement, dated as of January 22, 1999, among Choice Information Systems, Inc., Daily Journal Corporation, Quindeca Corporation, Michael W. Payton and Terence E. Hahm. 99.1 Press Release of Daily Journal Corporation issued January 27, 1999 5 EX-2.1 2 STOCK PURCHASE AGREEMENT EXHIBIT 2.1 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement is made as of January 22, 1999, by Daily Journal Corporation, a South Carolina corporation ("Daily Journal"), Choice Information Systems, Inc., a Virginia corporation ("Choice"), Michael W. Payton, an individual resident in Virginia ("Payton") and Terence E. Hahm, an individual resident in Wisconsin ("Hahm" and, collectively with Payton, the "Sellers"). RECITALS The Sellers own all issued and outstanding shares of capital stock of Choice. In order to induce Daily Journal to contribute capital and management expertise to Choice, thereby benefitting all Sellers, each Seller has entered into this Agreement whereby (a) Choice will issue 194.5 newly issued shares (the "New Shares") of capital stock of Choice to Daily Journal, Payton will sell 51.25 issued and outstanding shares (the "Payton Shares") of capital stock of Choice to Daily Journal and Hahm will sell 51.25 issued and outstanding shares (the "Hahm Shares") of capital stock of Choice to Daily Journal, in each case on the terms and conditions set forth in this Agreement, (b) each Seller will enter into an Employment Agreement concurrently with the Closing under this Agreement and (c) Choice, each Seller, Quindeca Corporation and Daily Journal will enter into a Shareholders Agreement concurrently with the Closing under this Agreement. NOW, THEREFORE, in consideration of the premises and of the respective representations, warranties, covenants, agreements and conditions contained herein, the parties hereto hereby agree as follows: AGREEMENT The parties, intending to be legally bound, agree as follows: ARTICLE 1. SALE AND TRANSFER OF SHARES; CLOSING 1.1 Shares. Subject to the terms and conditions of this Agreement, at the Closing, Sellers will sell and transfer the Shares to Daily Journal, and Daily Journal will purchase the Shares from Sellers. 1.2 Purchase Price. The purchase price (the "Purchase Price") for the Shares will be $6,666,667, payable as follows: $4,365,053 to Choice as payment in full for the New Shares; $1,150,807 to Payton as payment in full for the Payton Shares; and $1,150,807 to Hahm as payment in full for the Hahm Shares, in each case subject to adjustment as provided in Section 1.4. 1.3 Closing. The purchase and sale (the "Closing") provided for in this Agreement will take place at the offices of Munger, Tolles & Olson LLP at 355 South Grand Avenue, 35/th/ Floor, Los Angeles, California, at 10:00 a.m. (local time) on the date of this Agreement, or at such other time and place as the parties may agree. 1.4 Purchase Price Adjustment. 1 (a) Within six (6) months after the Closing Date, Daily Journal will prepare a balance sheet (the "Final Balance Sheet") of Choice as of the Closing Date and deliver the proposed Final Balance Sheet to the Sellers. The Final Balance Sheet shall be prepared in accordance with GAAP and each of the guidelines and procedures (the "Guidelines and Procedures") specified on Exhibit 1.4 to this Agreement. If the shareholders' equity shown on such Final Balance Sheet is: (i) less than $500,000, the Sellers shall each be jointly and severally liable to Daily Journal for the difference, (ii) greater than $550,000, then Daily Journal shall be liable to the Sellers for the difference, and shall pay such amount to the Sellers, to each in proportion to his share of the Purchase Price, or (iii) equal to or between $500,000 and $550,000, then neither party shall owe any further sums to the other pursuant to this Section 1.4, or. (b) The Sellers may participate in and observe the preparation of the Final Balance Sheet. Daily Journal shall make all of its workpapers and other relevant documents in connection with the preparation of the Final Balance Sheet available to the Sellers and shall make the persons in charge of the preparation of the Final Balance Sheet available for reasonable inquiry by the Sellers. The proposed Final Balance Sheet will be the Final Balance Sheet unless the Sellers shall notify Daily Journal in writing within 20 days following the receipt of the proposed Final Balance Sheet if the Sellers do not agree with the proposed Final Balance Sheet, in which case the Sellers on the one hand and Daily Journal on the other hand will use good faith efforts during the 10-day period following the date of such written notice was received by Daily Journal to resolve any differences they may have as to the proposed Final Balance Sheet. The written notice will identify with reasonable specificity the calculations with which the Sellers disagree or other bases for such disagreement. If the Sellers and Daily Journal cannot reach agreement during such 10-day period, disagreements shall be promptly submitted to an independent, nationally- recognized public accounting firm jointly selected by the Sellers and Daily Journal (the "Independent Accountant"), which shall conduct such additional review as is necessary to resolve the specific disagreements referred to it and shall determine the Final Balance Sheet which will be binding on the parties. The review of the Independent Accountant will be restricted as to scope to address only those matters as to which the Sellers and Daily Journal have not reached agreement. The Independent Accountant's determination of the Final Balance Sheet shall be completed as promptly as practicable but in no event later than 30 days following its selection, shall be confirmed by the Independent Accountant in writing to the parties and shall be final and binding on the Sellers and Daily Journal. (c) Any amounts payable pursuant to this Section 1.4 shall be paid within 10 days following the date the Final Balance Sheet becomes final and binding on the parties pursuant to paragraph (b) above. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE SELLERS. The Sellers jointly and severally represent and warrant to Daily Journal as follows: 2.1 Organization and Good Standing. Choice is a corporation duly organized, validly existing, and in good standing under the laws of the Commonwealth of Virginia, with full corporate power and authority to conduct 2 its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, and to perform all its obligations under Applicable Contracts. Choice is duly qualified to do business as a foreign corporation and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification, except where the absence of such qualification could not reasonably be expected to have a material adverse effect on Choice. Choice has no Subsidiaries. 2.2 Authority; No Conflict. (a) This Agreement constitutes the legal, valid, and binding obligation of Choice and the Sellers, enforceable against each in accordance with its terms. Choice and each Seller have the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement, the Employment Agreement to which each is a party and the Shareholders Agreement and to perform their obligations under this Agreement, the Employment Agreement to which each is a party and the Shareholders Agreement. (b) Except as set forth in Part 2.2 of the Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time): (i) contravene, conflict with, or result in a violation of (A) any provision of the Organizational Documents of Choice, or (B) any resolution adopted by the board of directors or the shareholders of Choice; (ii) contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which Choice, or any of the assets owned or used by Choice, may be subject; (iii) contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate, or modify, any material Governmental Authorization that is held by Choice or that otherwise relates to the business of, or any of the assets owned or used by, Choice; (iv) contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract; or (v) result in the imposition or creation of any Encumbrance upon or with respect to any of the assets owned or used by Choice. As of the date of this Agreement, Choice and the Sellers shall have given all notices and obtained all Consents required from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions. 2.3 Capitalization. The authorized equity securities of Choice consist of 5,000 shares of common stock, no par value, of which 152 shares are issued and outstanding. The Sellers are and will be on the Closing Date the record and beneficial owners and holders of all outstanding shares of capital stock of Choice, free and clear of all Encumbrances. Payton owns 76 shares and 3 Hahm owns 76 shares. No legend or other reference to any purported Encumbrance (except for transfer restrictions imposed under securities laws) appears upon any certificate representing equity securities of Choice. All of the outstanding equity securities of Choice have been duly authorized and validly issued and are fully paid and nonassessable. The New Shares have been duly and validly authorized and, when issued and delivered to Daily Journal against payment therefor as provided in this Agreement, will be duly and validly issued and fully paid and nonassessable. There are no Contracts relating to the issuance, sale, or transfer of any equity securities or other securities of Choice. None of the equity securities or other securities of Choice was issued, redeemed or repurchased by Choice in violation of the Securities Act or any other Legal Requirement. Choice does not own, and has no Contract to acquire, any equity securities or other securities of any Person or any direct or indirect equity or ownership interest in any other business. 2.4 Financial Statements. On or immediately prior to the date of this Agreement, the Sellers have delivered to Daily Journal a balance sheet of Choice setting forth the financial condition of Choice as of December 31, 1998 (the "Preliminary Balance Sheet"). Except as stated in Part 2.4 of the Disclosure Letter, the Preliminary Balance Sheet has been prepared in accordance with the books and records of Choice and each of the Guidelines and Procedures and fairly presents the financial condition of Choice as of its date. 2.5 Books and Records. The books of account, minute books, stock record books, and other records of Choice, all of which have been made available to Daily Journal, are complete and correct in all material respects and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls. The minute books of Choice contain accurate and complete records of all meetings held of, and corporate action taken by, the shareholders, the Boards of Directors, and committees of the Board of Directors of Choice, and no meeting of any such shareholders, Board of Directors, or committee has been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, all of those books and records will be in the possession of Choice. 2.6 Title to Properties; Encumbrances. Choice owns (with good and marketable title in the case of real property) all the properties and assets (whether real, personal, or mixed and whether tangible or intangible) that it purports to own located in the facilities owned or operated by Choice or reflected as owned in the books and records of Choice. Except as set forth in Part 2.6 of the Disclosure Letter, all such properties and assets are free and clear of all Encumbrances. 2.7 Condition and Sufficiency of Assets. The equipment of Choice is in good operating condition and repair and is adequate for the uses to which it is being put, and none of such equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. The buildings and equipment of Choice are sufficient for the continued conduct of Choice's businesses after the Closing, assuming Choice's business is conducted in substantially the same manner after the Closing as it was conducted prior to the Closing. 2.8 Accounts Receivable. All accounts receivable of Choice that are reflected on the Preliminary Balance Sheet (the "Accounts Receivable") represent valid obligations arising from sales actually made or services actually performed (except for Accounts Receivable offset on the Preliminary Balance Sheet by corresponding liabilities for deferred revenues) in the Ordinary Course of Business. The Accounts Receivable are current and, to the Knowledge of Sellers, collectible net of the reserves shown on the Preliminary Balance Sheet (which reserves are calculated consistent with past practice 4 and, to the Knowledge of Sellers, are adequate). To the Knowledge of Sellers, there is no contest, claim, or right of set-off, other than returns in the Ordinary Course of Business, under any Contract with any obligor of an Accounts Receivable relating to the amount or validity of such Accounts Receivable. 2.9 No Undisclosed Liabilities. Choice has no liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent, or otherwise) except for liabilities or obligations reflected or reserved against in the Preliminary Balance Sheet, and except for liabilities and obligations incurred by Choice in the Ordinary Course of Business since the date of the Preliminary Balance Sheet. 2.10 Taxes. (a) Choice has filed or caused to be filed all Tax Returns that are or were required to be filed by or with respect to it pursuant to applicable Legal Requirements. Choice has paid, or made provision for the payment of, all Taxes that have or may have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment, except such Taxes, if any, as are listed in Part 2.10 of the Disclosure Letter and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the Preliminary Balance Sheet. (b) The charges, accruals, and reserves with respect to Taxes on the respective books of Choice are adequate (determined in accordance with GAAP) and are at least equal to Choice's liability for Taxes. There exists no proposed tax assessment against Choice except as disclosed in the Preliminary Balance Sheet or in Part 2.10 of the Disclosure Letter. No consent to the application of Section 341(f)(2) of the IRC has been filed with respect to any property or assets held, acquired, or to be acquired by Choice. All Taxes that Choice is or was required by Legal Requirements to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person. (c) All Tax Returns filed by (or that include on a consolidated basis) Choice are true, correct, and complete in all material respects. There is no tax sharing agreement that will require any payment by Choice after the date of this Agreement. Choice is not, and within the five-year period preceding the Closing Date has not been, an "S" corporation. 2.11 Employee Benefits. Part 2.11 of the Disclosure Letter lists all employee benefit plans (as defined in Section 3(3) of ERISA) and all other profit-sharing, bonus, deferred compensation, stock option, severance pay, "parachute", insurance, short-term or long-term incentive compensation, or retirement plan, program, agreement or arrangement sponsored by Choice or to which any Choice is required to contribute (collectively, the "Plans"). Each Plan has been operated in all material respects in accordance with its terms and all applicable Legal Requirements and Orders and the annual report for each such Plan with respect to which such report is required has been timely filed. Choice has not received any notice that any Plan has been operated in violation of any such Legal Requirements and Orders. No claim is pending or, to the Knowledge of the Sellers, Threatened against any such Plan except for benefits properly due. Choice has made or accrued for all contributions which are required of it under any Plan for all plan years ending on or prior to the Closing Date and which become due on or prior to the Closing Date. None of the Plans has an accumulated funding deficiency (as defined in Section 412 of the IRC), and no prohibited transaction (as defined in Section 4975 of the IRC) has occurred with respect to any Plan unless the transaction has been corrected and all liability occasioned thereby has been satisfied. Choice has complied in all material respects with all reporting and disclosure requirements under ERISA and the IRC to the extent applicable to any Plan. 5 2.12 Compliance with Legal Requirements; Government Authorizations. (a) Choice is, and at all times since January 1, 1994 has been, in compliance in all material respects with Legal Requirements that are or were applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets. No event has occurred or circumstance exists that (with or without notice or lapse of time) (i) may constitute or result in a violation in any material respect by Choice of, or a failure on the part of Choice to comply in any material respect with, any Legal Requirement, or (ii) may give rise to any obligation of Choice to undertake, or to bear all or any portion of the cost of, any remedial action of any nature. Except as set forth in Part 2.12(a) of the Disclosure Letter, Choice has not received, at any time since January 1, 1994, any notice or other communication from any Governmental Body or any other Person regarding (i) any actual, alleged, possible, or potential violation of, or failure to comply with, any Legal Requirement, or (ii) any actual, alleged, possible, or potential obligation on the part of Choice to undertake, or to bear all or any portion of the cost of, any remedial action of any nature. (b) Except as set forth in Part 2.12(b) of the Disclosure Letter, each Governmental Authorization that is held by Choice or that otherwise relates to the business of, or to any of the assets owned or used by, Choice is valid and in full force and effect. Such Governmental Authorizations collectively constitute all of the Governmental Authorizations necessary to permit Choice to lawfully conduct and operate its business in the manner it currently conducts and operates such business and to permit Choice to own and use its assets in the manner in which it currently owns and uses such assets. Choice is, and at all times since January 1, 1994 has been, in compliance in all material respects with all of the terms and requirements of each Governmental Authorization. Except as set forth in Part 2.12(b) of the Disclosure Letter, Choice has not received, at any time since January 1, 1994, any notice or other communication from any Governmental Body or any other Person regarding (A) any actual, alleged, possible, or potential violation of or failure to comply with any term or requirement of any Governmental Authorization, or (B) any actual, proposed, possible, or potential revocation, withdrawal, suspension, cancellation, termination of, or modification to any Governmental Authorization. 2.13 Legal Proceedings; Orders. (a) Part 2.13 of the Disclosure Letter lists all pending Proceedings which have been commenced by or against Choice or, to the Knowledge of Sellers, that otherwise relate to or may affect the business of, or any of the assets owned or used by, Choice, or that challenge, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To the Knowledge of the Sellers, (1) no such Proceeding has been Threatened, and (2) no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such Proceeding. The Proceedings listed in Part 2.13 of the Disclosure Letter will not have a material adverse effect on the business, operations, assets, condition, or prospects of Choice. (b) There is no Order to which Choice, or any of the assets owned or used by it, is subject, and no Seller is subject to any Order that relates to the business of, or any of the assets owned or used by, Choice. (c) As of the date of this Agreement, no Person has made or Threatened any claim asserting that such Person (a) is the holder or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any stock of, or any other voting, equity, or ownership interest 6 in, Choice, or (b) is entitled to all or any portion of the Purchase Price payable for the Shares. 2.14 Contracts; No Defaults. (a) Part 2.14(a) of the Disclosure Letter contains a complete and accurate list, and the Sellers have delivered to Daily Journal true and complete copies, of each of the following that are currently in effect: (i) each Applicable Contract that involves performance of services or delivery of goods or materials by Choice of an amount or value in excess of $10,000; (ii) each Applicable Contract that involves performance of services or delivery of goods or materials to Choice of an amount or value in excess of $10,000; (iii) each Applicable Contract that was not entered into in the Ordinary Course of Business and that involves expenditures or receipts by Choice in excess of $5,000; (iv) each lease, rental or occupancy agreement, license, installment and conditional sale agreement, and other Applicable Contract affecting the ownership of, leasing of, title to, use of, or any leasehold or other interest in, any real or personal property (except personal property leases and installment and conditional sales agreements having a value per item or aggregate payments of less than $1,000 and with terms of less than one year); (v) each licensing agreement or other Applicable Contract with respect to patents, trademarks, copyrights, or other intellectual property, including agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any of the Intellectual Property Assets; (vi) each employment agreement, collective bargaining agreement and other Applicable Contract to or with any employee, labor union or other employee representative of a group of employees; (vii) each joint venture, partnership, and other Applicable Contract (however named) involving a sharing of profits, losses, costs, or liabilities by Choice with any other Person; (viii) each Applicable Contract containing covenants that in any way purport to restrict the business activity of Choice or any Affiliate of Choice or limit the freedom of Choice or any Affiliate of Choice to engage in any line of business or to compete with any Person; (ix) each Applicable Contract providing for payments to or by any Person based on sales, purchases, or profits, other than direct payments for goods; (x) each power of attorney that is currently effective and outstanding; (xi) each Applicable Contract entered into other than in the Ordinary Course of Business that contains or provides for an express undertaking by Choice to be responsible for consequential damages; (xii) each Applicable Contract for capital expenditures in excess of $5,000; 7 (xiii) each written warranty, guaranty, and or other similar undertaking with respect to contractual performance extended by Choice other than in the Ordinary Course of Business; and (xiv) each amendment, supplement, and modification (whether oral or written) in respect of any of the foregoing. (b) No Seller (and no Related Person of any Seller) has or may acquire any rights under, and no Seller has or may become subject to any obligation or liability under, any Contract that relates to the business of, or any of the assets owned or used by, Choice. (c) Each Contract identified or required to be identified in Part 2.14(a) of the Disclosure Letter is in full force and effect. (d) Choice is, and at all times since January 1, 1994 has been, in compliance in all material respects with all applicable terms and requirements of each Contract under which it has or had any obligation or liability or by which it or any of the assets owned or used by it is or was bound. Each other Person that has or had any obligation or liability under any Contract under which Choice has or had any rights is, and at all times since January 1, 1994 has been, in compliance in all material respects with all applicable terms and requirements of such Contract. No event has occurred or circumstance exists that (with or without notice or lapse of time) may contravene, conflict with, or result in a material violation of, or breach of, or give Choice or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract. Choice has not given to or received from any other Person, at any time since January 1, 1994, any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation or breach of, or default under, any Contract. (e) There are no renegotiations of, attempts to renegotiate, or outstanding rights to renegotiate any material amounts paid or payable to Choice under current or completed Contracts with any Person and no such Person has made written demand for such renegotiation. (f) The Contracts relating to the sale, design, manufacture, or provision of products or services by Choice have been entered into in the Ordinary Course of Business and have been entered into without the commission of any act alone or in concert with any other Person, or any consideration having been paid or promised, that is or would be in violation of any Legal Requirement. 2.15 Insurance. Except as set forth in Part 2.15 of the Disclosure Letter, all policies of insurance to which Choice is a party or that provide coverage to Choice or any director or officer of Choice: (a) are valid, outstanding, and enforceable; (b) are issued by an insurer that is financially sound and reputable; (c) taken together, provide adequate insurance coverage for the assets and the operations of Choice for all risks normally insured against by a Person carrying on the same business or businesses as Choice; (d) are sufficient for compliance with all Legal Requirements and Contracts to which Choice is a party or by which it is bound; (e) will continue in full force and effect following the consummation of the Contemplated Transactions; and (f) do not provide for any retrospective premium adjustment or other experienced-based liability on the part of Choice. Choice has not received (a) any refusal of coverage or any notice that a defense will be afforded with reservation of rights, or (b) any notice of cancellation or any other indication that any insurance policy is no longer in full force or effect or will not be renewed or that the issuer of any policy is not willing or able to perform its obligations thereunder. Choice has paid all premiums due, and has 8 otherwise performed all of its obligations, under each insurance policy to which it is a party or that provides coverage to it or any director or officer thereof. Choice has given notice to the insurer of all claims that may be insured thereby. 2.16 Environmental Matters. Choice is, and at all times has been, in compliance in all material respects with, and has not been and is not in violation of or liable in any material respect under, any Environmental Law. There are no pending or, to the Knowledge of the Sellers, Threatened claims, Encumbrances, or other restrictions of any nature, resulting from any Environmental, Health, and Safety Liabilities or arising under or pursuant to any Environmental Law, with respect to or affecting any of the Facilities or any other properties and assets (whether real, personal, or mixed) in which Choice has or had an interest. 2.17 Employees. Choice has never been and is not presently a party to any written or oral employment Contract, collective bargaining or other labor Contract. There has not been, there is not presently pending or existing, and there is not Threatened, (a) any strike, slowdown, picketing, work stoppage, or employee grievance process, (b) any Proceeding against or affecting Choice relating to the alleged violation of any Legal Requirement pertaining to labor relations or employment matters, including any charge or complaint filed by an employee or union with the National Labor Relations Board, the Equal Employment Opportunity Commission, or any comparable Governmental Body, organizational activity, or other labor or employment dispute against or affecting Choice or its premises, or (c) any application for certification of a collective bargaining agent. Choice has complied in all material respects with all Legal Requirements relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, occupational safety and health, and plant closing. Choice is not liable in any material respect for the payment of any compensation, damages, taxes, fines, penalties, or other amounts, however designated, for failure to comply with any of the foregoing Legal Requirements. 2.18 Intellectual Property. (a) Definition of "Intellectual Property Assets." The term ------------------------------------------- "Intellectual Property Assets" includes: (i) the names "Choice Information Systems", "ECOURT", "SUSTAIN", "SUSTAIN Case Management System", "steps -- Scaleable Tools for Engineering Powerful Solutions" and "Justice Edition", and all other fictional business names, trading names, registered and unregistered trademarks, service marks, and applications owned by Choice (collectively, "Marks"); (ii) all patents and patent applications owned by Choice (collectively, "Patents"); (iii) all copyrights owned by Choice in both published works and unpublished works (collectively, "Copyrights"); (iv) all rights in mask works owned by Choice (collectively, "Rights in Mask Works"); and (v) all know-how, trade secrets, confidential information, customer lists, software, technical information, data, process technology, plans, drawings, and blue prints (collectively, "Trade Secrets"); owned by Choice. 9 Choice owns all items of the type described in clauses (i) through (v) above that are used by it in its business other than commercially available software licensed by Choice. (b) Agreements. Part 2.18(b) of the Disclosure Letter contains a ---------- complete and accurate list and summary description, including the amount of any royalties paid or received by Choice, of all Contracts relating to the Intellectual Property Assets to which Choice is a party or by which Choice is bound, except for any license implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value of less than $500 under which Choice is the licensee. There are no outstanding and, to the Knowledge of the Sellers, no Threatened disputes or disagreements with respect to any such agreement. (c) Know-How Necessary for the Business. The Intellectual Property ----------------------------------- Assets are all those necessary for the operation of Choice's business as it is currently conducted. Except as set forth on Part 2.18(c) of the Disclosure Letter, Choice is the owner of all right, title, and interest in and to each of the Intellectual Property Assets, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims, and has the right to use without payment to a third party all of the Intellectual Property Assets. Neither Seller nor, to the Knowledge of Sellers, any other employee of Choice has entered into any Contract that restricts or limits in any way the scope or type of work in which the employee may be engaged or requires the employee to transfer, assign, or disclose information concerning his work to anyone other than Choice. (d) Patents. Choice does not own any Patents. To the Knowledge of ------- Sellers, none of the products sold, nor any process or know-how used, by Choice infringes or is alleged to infringe any patent or other proprietary right of any other Person. (e) Trademarks. Part 2.18(e) of Disclosure Letter contains a complete ---------- and accurate list and summary description of all Marks, if any. Except as set forth on Part 2.18(e) of the Disclosure Letter, Choice is the owner of all right, title, and interest in and to each of the Marks, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims. All Marks that have been registered with the United States Patent and Trademark Office are currently in compliance with all formal legal requirements (including the timely post-registration filing of affidavits of use and incontestability and renewal applications), are valid and enforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety days after the Closing Date. No Mark has been or is now involved in any opposition, invalidation, or cancellation and, to the Knowledge of the Sellers, no such action is Threatened with the respect to any of the Marks. To the Knowledge of the Sellers, there is no potentially interfering trademark or trademark application of any third party. No Mark is infringed or, to the Knowledge of the Sellers, has been challenged or threatened in any way. None of the Marks owned by Choice or, to the Knowledge of Sellers, licensed or otherwise used by Choice, infringes or is alleged to infringe any trade name, trademark, or service mark of any third party. All products and materials containing a Mark that have been registered as described above bear the proper federal registration notice where permitted by law. (f) Copyrights. Part 2.18(f) of the Disclosure Letter contains a ---------- complete and accurate list and summary description of all Copyrights, if any. Choice is the owner of all right, title, and interest in and to each of the Copyrights, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims. All the Copyrights have been registered and are currently in compliance with formal legal requirements, are valid and enforceable, and are not subject to any maintenance fees or taxes or 10 actions falling due within ninety days after the date of Closing. No Copyright is infringed or, to the Knowledge of the Sellers, has been challenged or threatened in any way. None of the subject matter of any of the Copyrights infringes or is alleged to infringe any copyright of any third party or is a derivative work based on the work of a third party. All works encompassed by the Copyrights have been marked with the proper copyright notice. (g) Trade Secrets. With respect to each Trade Secret, the documentation ------------- relating to such Trade Secret is current, accurate, and sufficient in detail and content to identify and explain it and to allow its full and proper use without reliance on the knowledge or memory of any individual. Choice has taken all reasonable precautions to protect the secrecy, confidentiality, and value of its Trade Secrets. Choice has good title and an absolute (but not necessarily exclusive) right to use the Trade Secrets. The Trade Secrets are not part of the public knowledge or literature, and, to the Knowledge of the Sellers, have not been used, divulged, or appropriated either for the benefit of any Person or to the detriment of Choice. No Trade Secret is subject to any adverse claim or has been challenged or threatened in any way. 2.19 Computer Software. (a) Performance. To the Knowledge of the Sellers, each of the computer ----------- software products owned by Choice, other than commercially available software programs not marketed by Choice (the "Software Products"), performs in accordance with specifications, documentation and other written material used in connection with the sale, license, distribution, marketing or use thereof. Part 2.19(a) of the Disclosure Letter contains a complete list of Software Products sold, licensed, distributed or marketed by Choice since January 1, 1994. (b) Development. No Seller or, to the Knowledge of Sellers, other ----------- employee of Choice is in default under any employment Contract relating to the Software Products, any noncompetition or confidentiality Contract or any other Contract or restrictive covenant relating to the Software Products or their development or exploitation. The Software Products do not include any inventions of a Seller made prior to the time the Seller became an employee of Choice or made outside of the scope of the Seller's employment, nor any property or any previous employer of the Seller. To the Knowledge of the Sellers, the Software Products do not include any inventions of other employees of Choice made prior to the time such employees became employees of Choice or made outside of the scope of such employees' employment, nor any property or any previous employer of such employee. (c) Title. All right, title and interest in and to the Software Products ----- owned by Choice is free and clear of all liens. No government funding was utilized in the development of any of the Software Products owned by Choice or, to the Knowledge of Sellers, any other Software Products. The sale, license, distribution, marketing or use of the Software Products by Choice does not violate any rights of any other Person, and Choice has not received any communication alleging such violation. Except as set forth on Part 2.19(c) of the Disclosure Letter, Choice has no obligation to compensate any Person for the sale, license, distribution, marketing or use of the Software Products other than any obligation to Quindeca Corporation disclosed on Part 2.14(a) of the Disclosure Letter. Choice has not granted to any other Person any license, option or other right in or to any of the Software Products, except for non- exclusive, royalty-bearing, end-user licenses granted by Choice in the Ordinary Course of Business pursuant to license agreements substantially in the form attached in Part 2.19(c) of the Disclosure Letter (the "End-User Licenses"). (d) Maintenance. Choice has no obligation to any other Person to ----------- maintain, modify, improve or upgrade any of the Software Products, except 11 for any such obligations set forth in the End-User Licenses or under a maintenance agreement. Certain maintenance agreements are listed in Part 2.19(d) of the Disclosure Letter. (e) Year 2000. The Software Products currently being sold, --------- distributed or marketed by Choice (i) include Year 2000 date conversion and capabilities including, but not limited to: date data century recognition, calculations which accommodate same century and multi-century formulas and date values, correct sort ordering, and date data interface values that reflect the century; (ii) automatically compensates for and manages and manipulates data involving dates, including single century formulas and multi-century formulas, and will not cause an abnormal abort within the application or result in the generation of incorrect values or invalid inputs involving such date; (iii) provides that all date-related user interface functionalities and data fields include the indication of the correct century; (iv) provides that all date- related system-to-system or application-to-application data interface functionalities will include the indication of the correct century; and (v) will continue to comply with clauses (i) through (iv) above. All data processing by the Software Products currently being sold, distributed or marketed by Choice includes four digit year format and recognizes and correctly processes dates for leap years. Choice has no obligation to modify, improve or upgrade any of the Software Products previously sold, distributed or marketed by Choice in order to ensure their compliance with the Year 2000 capabilities described in this Section 2.19(e). (f) Protection of the Proprietary Nature of the Software Products. ------------------------------------------------------------- Choice has kept secret and has not disclosed the source code for the Software Products to any Person other than certain employees, licensed customers and contractors of Choice. Choice has taken all reasonable measures to protect the security, confidentiality and value of the Software Products. 2.20 Relationship with Customers. Choice has used its reasonable business efforts to maintain, and currently maintains, in all material respects, good working relationships with all of its customers. Each of Choice's contracts with its customers and related customer relationships which have been terminated (other than by expiration of its stated term) or canceled during the one year period ended on the Closing Date are set forth and described on Part 2.20 of the Disclosure Letter. During that one year period, none of Choice's existing customers has given Choice written notice terminating, canceling or threatening to terminate or cancel any contract or relationship with Choice. 2.21 Certain Payments. Since January 1, 1994, neither Choice nor any director, officer, agent, or employee of Choice, or to the Knowledge of the Sellers, any other Person associated with or acting for or on behalf of Choice, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of Choice or any Affiliate of Choice, or (iv) in violation of any Legal Requirement, or (b) established or maintained any fund or asset that has not been recorded in the books and records of Choice. 2.22 Disclosure. No representation or warranty of the Sellers in this Agreement and no statement in the Disclosure Letter omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. 2.23 Relationships with Related Persons. No Seller or any Related Person of any Seller or of Choice has, or since January 1, 1994 has had, any interest in any property (whether real, personal, or mixed and whether 12 tangible or intangible), used in or pertaining to Choice's business. No Seller or any Related Person of any Seller or of Choice is, or since January 1, 1994 has owned (of record or as a beneficial owner) an equity interest or any other financial or profit interest in, a Person that has (i) had business dealings or a material financial interest in any transaction with Choice other than business dealings or transactions conducted in the Ordinary Course of Business with Choice at substantially prevailing market prices and on substantially prevailing market terms, or (ii) engaged in competition with Choice with respect to any line of the products or services of Choice (a "Competing Business") in any market presently served by Choice. Except as set forth in Part 2.23 of the Disclosure Letter, no Seller or any Related Person of any Seller or of Choice is a party to any Contract with, or has any claim or right against, Choice. 2.24 Brokers or Finders. The Sellers and their agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF DAILY JOURNAL Daily Journal represents and warrants to each Seller as follows: 3.1 Organization and Good Standing. Daily Journal is a corporation duly organized, validly existing, and in good standing under the laws of the State of South Carolina. 3.2 Authority; No Conflict. (a) This Agreement constitutes the legal, valid, and binding obligation of Daily Journal, enforceable against Daily Journal in accordance with its terms. Daily Journal has the absolute and unrestricted right, power, and authority to execute and deliver this Agreement and the Shareholders Agreement and to perform its obligations under this Agreement and under the Shareholders Agreement. (b) Neither the execution and delivery of this Agreement by Daily Journal nor the consummation or performance of any of the Contemplated Transactions by Daily Journal will give any Person the right to prevent, delay, or otherwise interfere with any of the Contemplated Transactions pursuant to: (i) any provision of Daily Journal's Organizational Documents; (ii) any resolution adopted by the board of directors or the shareholders of Daily Journal; (iii) any Legal Requirement or Order to which Daily Journal may be subject; or (iv) any Contract to which Daily Journal is a party or by which Daily Journal may be bound. Daily Journal is not and will not be required to obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions. 3.3 Investment Intent. Daily Journal is acquiring the Shares for its own account and not with a view to their distribution within the meaning of Section 2(11) of the Securities Act. 13 3.4 Certain Proceedings. There is no pending Proceeding that has been commenced against Daily Journal and that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To Daily Journal's Knowledge, no such Proceeding has been Threatened. 3.5 Brokers and Finders. Daily Journal and its officers and agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement and will indemnify and hold the Sellers harmless from any such payment alleged to be due by or through Daily Journal as a result of the action of Daily Journal or its officers or agents. ARTICLE 4. TERMINATION This Agreement may, by notice given prior to or at the Closing, be terminated by either Daily Journal or by all of the Sellers at any time after the date of this Agreement if the Closing shall not have occurred on the date of this Agreement. ARTICLE 5. INDEMNIFICATION; REMEDIES 5.1 Survival. All representations, warranties and obligations in this Agreement and the Disclosure Letter will survive the Closing. 5.2 Indemnification and Payment of Damages by Sellers. Subject to the provisions set forth below, the Sellers, jointly and severally, will indemnify and hold harmless Daily Journal and its Representatives, shareholders and controlling persons (collectively, the "Indemnified Persons") for, and will pay to the Indemnified Persons the amount of, any loss, liability, claim, damage, expense (including costs of investigation and defense and reasonable attorneys' fees) or diminution of value, whether or not involving a third-party claim (collectively, "Damages"), arising, directly or indirectly, from or in connection with: (a) any Breach of any representation or warranty made by any Seller in this Agreement or the Disclosure Letter; (b) any Breach by Choice or any Seller of any obligation of such Person in this Agreement or any Seller's Employment Agreement; (c) any Software Product shipped or manufactured by, or any services provided by, Choice prior to the Closing Date; or (d) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with any Seller or Choice (or any Person acting on their behalf) in connection with any of the Contemplated Transactions. The amount of Damages computed hereunder for an Indemnified Person shall be reduced by the amount of proceeds actually received by the Indemnified Person from any insurance policy covering such Damages. The remedies provided in this Section 5.2 are the sole and exclusive remedy of each Indemnified Person under this Agreement for any of the matters covered by clauses (a) through (d) above, provided that these indemnification provisions are in addition to and not in derogation of any statutory or common law remedy for fraud that may be available to any Indemnified Person. 14 5.3 Indemnification and Payment of Damages by Daily Journal. Daily Journal will indemnify and hold harmless the Sellers, and will pay to the Sellers the amount of any Damages arising, directly or indirectly, from or in connection with (a) any Breach of any representation or warranty made by Daily Journal in this Agreement or in any certificate delivered by Daily Journal pursuant to this Agreement, (b) any Breach by Daily Journal of any covenant or obligation of Daily Journal in this Agreement, or (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Daily Journal (or any Person acting on its behalf) in connection with any of the Contemplated Transactions. The amount of Damages computed hereunder for Sellers shall be reduced by the amount of proceeds actually received by any Seller from any insurance policy covering such Damages. The remedies provided in this Section 5.3 are the sole and exclusive remedy of Sellers under this Agreement for any of the matters covered by clauses (a) through (d) above, provided that these indemnification provisions are in addition to and not in derogation of any statutory or common law remedy for fraud that may be available to any Seller. 5.4 Time Limitations. (a) If the Closing occurs, the Sellers will have no liability (for indemnification or otherwise) with respect to any matters covered by paragraphs (a), (b) or (c) of Section 5.2, other than those specified in Sections 2.3 or 2.10, unless on or before the date one year after the Closing Date Daily Journal notifies the Sellers of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Daily Journal. A claim with respect to the matters covered by Section 2.3 or 2.10, paragraph (d) of Section 5.2 or any other claim not based upon any matter covered by paragraphs (a), (b) or (c) of Section 5.2 may be made at any time. (b) If the Closing occurs, Daily Journal will have no liability (for indemnification or otherwise) with respect to any matters covered by paragraphs (a) or (b) of Section 5.3, unless on or before the date one year after the Closing Date the Sellers notify Daily Journal of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by the Sellers. Any other claim with respect to the matters covered by paragraph (c) of Section 5.3 or any other claim not based upon any matter covered by paragraphs (a) or (b) of Section 5.3 may be made at any time. 5.5 Limitations on Amount--Sellers. The Sellers will have no liability (for indemnification or otherwise) with respect to the matters described in clause (a), (b) or (c) of Section 5.2 until the total of all Damages with respect to such matters exceeds $10,000, and then only for the amount by which such Damages exceed $10,000; provided that these limits will not apply to any Breach of any of the Sellers' representations and warranties of which any Seller had Knowledge at any time prior to the date on which such representation and warranty is made or any intentional Breach by any Seller of any covenant or obligation, and the Sellers will be jointly and severally liable for all Damages with respect to such Breaches. Notwithstanding any other provision of this Agreement, the aggregate liability of Sellers under this Agreement to Indemnified Persons under paragraphs (a), (b) and (c) of Section 5.2 (other than Breaches of Sections 2.3 or 2.10) will be limited to $460,322. In any event, the matters excluded from this dollar limitation of $460,322 shall be counted in determining whether this dollar limitation has been exceeded. 5.6 Limitations on Amount--Daily Journal. Daily Journal will have no liability (for indemnification or otherwise) with respect to the matters described in clause (a) or (b) of Section 5.3 until the total of all Damages with respect to such matters exceeds $10,000, and then only for the amount by 15 which such Damages exceed $10,000. However, this Section 5.6 will not apply to any Breach of any of Daily Journal's representations and warranties of which Daily Journal had Knowledge at any time prior to the date on which such representation and warranty is made or any intentional Breach by Daily Journal of any covenant or obligation, and Daily Journal will be liable for all Damages with respect to such Breaches. Notwithstanding any other provision of this Agreement, the aggregate liability of Daily Journal under this Agreement to Sellers under paragraphs (a) and (b) of Section 5.3 will be limited to $460,322. 5.7 Procedure for Indemnification--Third Party Claims. (a) Promptly after receipt by an indemnified party under Section 5.2 or 5.3 of notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party's failure to give such notice. (b) If any Proceeding referred to in Section 5.7(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will, unless the claim involves Federal or state income Taxes of the indemnified party, be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Article 5 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the indemnified party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Proceeding, it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification. Neither the indemnified party nor the indemnifying party may concede, settle or compromise any claim without the consent of the other party, which consent will not be unreasonably withheld. (c) Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld). (d) The Sellers hereby consent to the non-exclusive jurisdiction of any court in which a Proceeding is brought against any Indemnified Person for purposes of any claim that an Indemnified Person may have under this Agreement with respect to such Proceeding or the matters alleged therein, and 16 agree that process may be served on the Sellers with respect to such a claim anywhere in the world. 5.8 Procedure for Indemnification--Other Claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought. 5.9 Other Limitations. Any indemnification payable under Section 5.2 shall be, to the extent permitted by law, an adjustment to the Purchase Price for Payton Shares and/or Hahm Shares, as the case may be. No indemnification payable under Section 5.2 of this Agreement may be offset in any manner against obligations or amounts owed to any Seller under their Employment Agreement, except as specified in the Employment Agreement. Each indemnified person shall have the duty to use its commercially reasonable efforts to mitigate the amount of any Damages that the indemnified person may suffer as a result of or arising out of or relating to any breach of a representation or warranty or failure to perform any covenant under this Agreement, provided that the indemnified party shall be entitled to recover from the indemnifying party mitigation costs incurred by the indemnified party. There shall be no indemnification obligation under this Article 5 for any indirect, special or consequential damages of the indemnified persons. ARTICLE 6. DEFINITIONS For purposes of this Agreement, the following terms have the meanings specified or referred to in this Article 6: "Accounts Receivable" is defined in Section 2.8. "Applicable Contract" means any Contract (a) under which Choice has or may acquire any rights, (b) under which Choice has or may become subject to any obligation or liability, or (c) by which Choice or any of the assets owned or used by it is or may become bound. A "Breach" of a representation, warranty, covenant, obligation, or other provision of this Agreement or any instrument delivered pursuant to this Agreement will be deemed to have occurred if there is or has been any inaccuracy in or breach of, or any failure to perform or comply with, such representation, warranty, covenant, obligation, or other provision. "Closing" is defined in Section 1.3. "Closing Date" is the date and time as of which the Closing actually takes place. "Consent" means any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization). "Contemplated Transactions" mean all of the transactions contemplated by this Agreement, including: (a) the sale of the Shares by the Sellers to Daily Journal; (b) the execution, delivery, and performance of the Employment Agreements and the Shareholders Agreement; (c) the performance by Daily Journal and the Sellers of their respective covenants and obligations under this Agreement; and (d) Daily Journal's acquisition and ownership of the Shares. 17 "Contract" means any agreement, contract, obligation, promise, or undertaking (whether written or oral and whether express or implied) that is legally binding. "Daily Journal" is defined in the first paragraph of this Agreement. "Damages" is defined in Section 5.2. "Disclosure Letter" means the disclosure letter delivered by the Sellers to Daily Journal concurrently with the execution and delivery of this Agreement. "Employment Agreements" means the Employment Agreements to be entered into by each of the Sellers with Choice at the Closing. "Encumbrance" means any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership. "Environment" means soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwaters, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource. "Environmental, Health, and Safety Liabilities" mean any cost, damages, expense, liability, obligation, or other responsibility arising from or under Environmental Law or Occupational Safety and Health Law and consisting of or relating to: (a) any environmental, health, or safety matters or conditions (including on-site or off-site contamination, occupational safety and health, and regulation of chemical substances or products); (b) fines, penalties, judgments, awards, settlements, legal or administrative proceedings, damages, losses, claims, demands and response, investigative, remedial, or inspection costs and expenses arising under Environmental Law or Occupational Safety and Health Law; (c) financial responsibility under Environmental Law or Occupational Safety and Health Law for cleanup costs or corrective action, including any investigation, cleanup, removal, containment, or other remediation or response actions ("Cleanup") required by applicable Environmental Law or Occupational Safety and Health Law (whether or not such Cleanup has been required or requested by any Governmental Body or any other Person) and for any natural resource damages; or (d) any other compliance, corrective, investigative, or remedial measures required under Environmental Law or Occupational Safety and Health Law. The terms "removal," "remedial," and "response action," include the types of activities covered by the United States Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. (S) 9601 et seq., as amended ("CERCLA"). "Environmental Law" means any Legal Requirement that is designed to minimize, prevent, punish, or remedy the consequences of actions that damage or threaten the Environment. 18 "ERISA" means the Employee Retirement Income Security Act of 1974 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "Facilities" mean any real property, leaseholds, or other interests currently or formerly owned or operated by Choice and any buildings, plants, structures, or equipment (including motor vehicles, tank cars, and rolling stock) currently or formerly owned or operated by Choice. "Final Balance Sheet" is defined in Section 1.4. "GAAP" means generally accepted United States accounting principles. "Governmental Authorization" means any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement, other than actions under a Contract with a Governmental Body. "Governmental Body" means any (a) nation, state, county, city, town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi- governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi- national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature. "Guidelines and Procedures" is defined in Section 1.4. "Independent Accountant" is defined in Section 1.4. "Intellectual Property Assets" is defined in Section 2.18(a). "IRC" means the Internal Revenue Code of 1986 or any successor law, and regulations issued by the IRS pursuant to the Internal Revenue Code or any successor law. "IRS" means the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury. "Knowledge" -- an individual will be deemed to have "Knowledge" of a particular fact or other matter if such individual is actually aware of such fact or other matter or a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter. A Person (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, partner, executor, or trustee of such Person (or in any similar capacity) has, or at any time had, Knowledge of such fact or other matter. "Legal Requirement" means any federal, state, local, municipal, foreign, international, multinational, or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty. "Occupational Safety and Health Law" means any Legal Requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards, and any program, whether governmental or private (including those promulgated or sponsored by industry associations 19 and insurance companies), designed to provide safe and healthful working conditions. "Order" means any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator. "Ordinary Course of Business" -- an action taken by a Person will be deemed to have been taken in the "Ordinary Course of Business" only if such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person. "Organizational Documents" mean the articles or certificate of incorporation and the bylaws of a corporation and any amendment to any of the foregoing. "Person" means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body. "Plans" is defined in Section 2.12. "Proceeding" means any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. "Preliminary Balance Sheet" is defined in Section 2.4. "Purchase Price" is defined in Section 1.2. "Related Person" with respect to a particular individual means: (a) each other member of such individual's Family; (b) any Person that is directly or indirectly controlled by such individual or one or more members of such individual's Family; (c) any Person in which such individual or members of such individual's Family hold (individually or in the aggregate) a Material Interest; and (d) any Person with respect to which such individual or one or more members of such individual's Family serves as a director, officer, partner, executor, or trustee (or in a similar capacity). With respect to a specified Person other than an individual: (a) any Person that directly or indirectly controls, is directly or indirectly controlled by, or is directly or indirectly under common control with such specified Person; (b) any Person that holds a Material Interest in such specified Person; (c) each Person that serves as a director, officer, partner, executor, or trustee of such specified Person (or in a similar capacity); (d) any Person in which such specified Person holds a Material Interest; and (e) any Person with respect to which such specified Person serves as a general partner or a trustee (or in a similar capacity). For purposes of this definition, (a) the "Family" of an individual includes (i) the individual, (ii) the individual's spouse, (iii) the individual's brothers, sisters and children, and (iv) any other natural person who resides with such individual, and (b) "Material Interest" means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of voting securities or other voting interests representing at least 10% of the outstanding voting power or equity interests in a Person. "Release"means any spilling, leaking, emitting, discharging, depositing, escaping, leaching, dumping, or other releasing into the Environment, whether intentional or unintentional. 20 "Representative" means with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors. "Securities Act" means the Securities Act of 1933 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "Sellers" is defined in the first paragraph of this Agreement. "Shareholders Agreement" means the Shareholders Agreement to be entered into by Choice, each of the Sellers, Jerry L. Short and Daily Journal at the Closing. "Shares" means the New Shares, the Payton Shares and the Hahm Shares, collectively. "Subsidiary" means with respect to any Person (the "Owner"), any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation's or other Person's board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the Owner or one or more of its Subsidiaries. "Tax Return"means any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax. "Threat of Release"means a substantial likelihood of a Release that may require action in order to prevent or mitigate damage to the Environment that may result from such Release. "Threatened" -- a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (orally or in writing) or any notice has been given (orally or in writing). ARTICLE 7. GENERAL PROVISIONS 7.1 Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants. It is acknowledged and agreed that Choice shall pay any out-of-pocket expenses incurred by Choice or the Sellers prior to the Closing Date in connection with this Agreement, including without limitation attorneys' fees and disbursements; provided, however, that these expenses will be listed as liabilities on the Final Balance Sheet to the extent not paid by Choice as of the Closing Date. In the event of termination of this Agreement, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from a breach of this Agreement by another party. 21 7.2 Public Announcements. Any public announcement or similar publicity with respect to this Agreement or the Contemplated Transactions will be issued, if at all, at such time and in such manner as Daily Journal and the Sellers mutually agree, except as required by Legal Requirements and provided that the Sellers acknowledge that Daily Journal may determine in its sole discretion whether and how to disclose this Agreement and the Contemplated Transactions pursuant to the requirements of the Federal securities laws. Choice and the Sellers shall keep this Agreement strictly confidential and may not make any disclosure of this Agreement to any Person. Choice, the Sellers and Daily Journal will consult with each other concerning the means by which Choice's employees, customers, and suppliers and others having dealings with Choice will be informed of the Contemplated Transactions, and Daily Journal will have the right to be present for any such communication. 7.3 Confidentiality. Daily Journal, Choice and the Sellers will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of Daily Journal and Choice to maintain in confidence, and not use to the detriment of another party any written, oral, or other information obtained in confidence from another party in connection with this Agreement or the Contemplated Transactions, unless (a) such information is already known to such party or to others not bound by a duty of confidentiality or such information is or becomes publicly available through no fault of such party, (b) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the Contemplated Transactions, or (c) the furnishing or use of such information is required by Legal Requirements. If the Contemplated Transactions are not consummated, each party will return or destroy as much of such written information as the other party may reasonably request. 7.4 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): Choice: Choice Information Systems, Inc. 11817 Cannon Boulevard, Suite 404 Newport News, VA 23606 Attention: Michael W. Payton Fax: 757-873-6856 Sellers: Michael W. Payton __________________________________ __________________________________ Terence E. Hahm __________________________________ __________________________________ Daily Journal: Daily Journal Corporation 22 915 E. First Street Los Angeles, CA 90012 Attention: Gerald L. Salzman Fax: 213-330-2666 7.5 Jurisdiction; Service of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties in the courts of the State of California, County of Los Angeles, or, if it has or can acquire jurisdiction, in the United States District Court for the Central District of California, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world. 7.6 Further Assurances; Access to Records. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. After the Closing, the Sellers and their authorized representatives shall have reasonable access to all records and files relating to Choice's business prior to the Closing, upon reasonable notice to Choice, for purposes of (i) considering, defending and resolving and disputes or claims relating to activities conducted prior to the Closing; (ii) preparation of Tax Returns; and (iii) other reasonable and necessary matters related to Choice's operation of its business prior to the Closing. 7.7 Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative, except as expressly stated in this Agreement. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 7.8 Entire Agreement and Modification. This Agreement supersedes all prior agreements between the parties, and any prior understandings or representations, with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. 7.9 Disclosure Letter. The disclosures in the Disclosure Letter, and those in any Supplement thereto, must relate only to the representations and warranties in the Section of the Agreement to which they expressly relate and not to any other representation or warranty in this Agreement, unless and only to the extent such disclosures clearly cross-reference other representations or warranties in this Agreement. In the event of any inconsistency between the statements in the body of this Agreement and those in the Disclosure 23 Letter (other than an exception expressly set forth as such in the Disclosure Letter with respect to a specifically identified representation or warranty), the statements in the body of this Agreement will control. 7.10 Assignments, Successors and Third-Party Rights. Neither party may assign any of its rights under this Agreement without the prior consent of the other parties, except that Daily Journal may assign any of its rights under this Agreement to any Subsidiary of Daily Journal. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns. 7.11 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 7.12 Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 7.13 Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. 7.14 Governing Law. This Agreement will be governed by the laws of the State of California without regard to conflicts of laws principles. 7.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 7.16 Sellers' Release. (a) Each Seller hereby releases and forever discharges Choice and Daily Journal from any and all claims, demands, Proceedings, causes of action, Orders, obligations, Contracts, agreements, indebtedness, and Liabilities whatsoever, whether known or unknown, at law or in equity, which the Seller now has or has ever had against Choice or Daily Journal arising at or prior to the Closing Date or on account of or arising out of any matter, cause or event occurring at or prior to the Closing Date, other than (i) obligations of Choice or Daily Journal to a Seller pursuant to the terms of this Agreement, the Seller's Employment Agreement or the Shareholders Agreement, and (ii) benefits and rights of a Seller in the Seller's capacity as a participant in any Plans of Choice, whether accrued prior to or after the Closing. (b) Each Seller hereby irrevocably covenants to refrain from, directly or indirectly, asserting any claim or demand, or commencing, instituting or causing to be commenced, any Proceeding of any kind against Choice or Daily Journal, based on the matters released hereby. 24 (c) Each Seller hereby waives any rights which may be conferred upon such Seller by virtue of Section 1542 of the Civil Code of the State of California (or any similar statute) which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THIS RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. DAILY JOURNAL CORPORATION By:_____________________________ Name: Title: CHOICE INFORMATION SYSTEMS, INC. By:_____________________________ Name: Title: /s/ Michael W. Payton ________________________________ Michael W. Payton /s/ Terence E. Hahm ________________________________ Terence E. Hahm 25 EX-2.2 3 ASSET PURCHASE AGREEMENT EXHIBIT 2.2 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement is made as of January 22, 1999, by Choice Information Systems, Inc., a Virginia corporation ("Choice"), Quindeca Corporation, a Colorado corporation ("Quindeca"), and Jerry L. Short, an individual resident in Colorado ("Short"). RECITALS Based upon the representations, warranties and agreements of Quindeca and Short contained in this Agreement, Choice wishes to purchase certain assets and assume certain liabilities of Quindeca, and Quindeca wishes to transfer these assets and permit Choice to assume these liabilities, subject to payment of the Purchase Price. Short, as sole shareholder of Quindeca, will be the ultimate recipient of the purchase price hereunder and therefore Short, with Quindeca, makes representations and warranties to Choice and agrees to provide indemnification to Choice as provided in this Agreement. NOW, THEREFORE, in consideration of the premises and of the respective representations, warranties, covenants, agreements and conditions contained herein, the parties hereto hereby agree as follows: AGREEMENT The parties, intending to be legally bound, agree as follows: ARTICLE 1. SALE AND TRANSFER OF SHARES; CLOSING 1.1 Acquired Assets and Assumed Liabilities. On and subject to the terms and conditions of this Agreement, Choice agrees to purchase from Quindeca, and Quindeca agrees to sell, transfer, convey, and deliver to Choice, all of the Acquired Assets at the Closing in consideration for (a) the Purchase Price specified in Section 1.2 and (b) Choice assuming and becoming responsible for all of the Assumed Liabilities at the Closing. Choice will not assume or have any responsibility, however, with respect to any other obligation or liability of Quindeca not included within the definition of Assumed Liabilities, including, without limitation, any liability for sales taxes arising as a result of the transfer of the Acquired Assets by Quindeca to Choice. 1.2 Purchase Price. The purchase price (the "Purchase Price") for the Acquired Assets will be (a) $944,444 payable in cash to Quindeca and (b) a certificate representing 24.75 shares of Choice common stock with an agreed-upon value of $22,455 per share, each delivered at the Closing. 1.3 Closing. The purchase and sale (the "Closing") provided for in this Agreement will take place at the offices of Munger, Tolles & Olson LLP at 355 South Grand Avenue, 35/th/ Floor, Los Angeles, California, at 10:00 a.m. (local time) on the date of this Agreement, or at such other time and place as the parties may agree. 1.4 Purchase Price Allocation. The parties agree to allocate the Purchase Price (and all other capitalizable costs) among the Acquired Assets for all purposes (including financial accounting and tax purposes) in accordance with the allocation schedule attached hereto as Exhibit 1.4. 1 ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF QUINDECA AND SHORT. Quindeca and Short jointly and severally represent and warrant to Choice as follows: 2.1 Organization and Good Standing. Quindeca is a corporation duly organized, validly existing, and in good standing under the laws of the State of Colorado, with full corporate power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, and to perform all its obligations under Applicable Contracts. Quindeca has no Subsidiaries. 2.2 Authority; No Conflict. (a) This Agreement constitutes the legal, valid, and binding obligation of Quindeca and Short, enforceable against each in accordance with its terms. Quindeca and Short have the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement, the Employment Agreement and the Shareholders Agreement (to the extent either is a party thereto) and to perform their respective obligations under this Agreement, the Employment Agreement and the Shareholders Agreement. (b) Except as set forth in Part 2.2 of the Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time): (i) contravene, conflict with, or result in a violation of (A) any provision of the Organizational Documents of Quindeca, or (B) any resolution adopted by the board of directors or the shareholders of Quindeca; (ii) contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which Quindeca, or any of the assets owned or used by Quindeca, may be subject; (iii) contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate, or modify, any material Governmental Authorization that is held by Quindeca or that otherwise relates to the business of, or any of the assets owned or used by, Quindeca; (iv) contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract; or (v) result in the imposition or creation of any Encumbrance upon or with respect to any of the Acquired Assets. As of the date of this Agreement, Quindeca and Short shall have given all notices and obtained all Consents required from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions. 2.3 Title to Properties; Encumbrances. Quindeca owns (with good and marketable title in the case of real property) all Acquired Assets. Except as 2 set forth in Part 2.3 of the Disclosure Letter, all such Acquired Assets are free and clear of all Encumbrances. 2.4 Condition and Sufficiency of Assets. The equipment of Quindeca is in good operating condition and repair, and is adequate for the uses to which it is being put, and none of such equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. The equipment of Quindeca is sufficient for the continued conduct of Quindeca's businesses after the Closing, assuming Quindeca's business is conducted in substantially the same manner after the Closing as it was conducted prior to the Closing. 2.5 No Undisclosed Liabilities. Quindeca has no liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent, or otherwise) except for liabilities or obligations reflected or reserved against in the balance sheet of Quindeca setting forth the financial condition of Quindeca as of December 31, 1997 (the "Balance Sheet") delivered to Choice on or prior to the date hereof, and except for liabilities and obligations incurred by Quindeca in the Ordinary Course of Business since that date. 2.6 Taxes. (a) Quindeca has filed or caused to be filed all Federal and state income Tax Returns and other material Tax Returns that are or were required to be filed by or with respect to it pursuant to applicable Legal Requirements. Quindeca has paid, or made provision for the payment of, all Taxes that have or may have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment, except such Taxes, if any, as are listed in Part 2.6 of the Disclosure Letter and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the Balance Sheet. (b) The charges, accruals, and reserves with respect to Taxes on the respective books of Quindeca are adequate (determined in accordance with GAAP) and are at least equal to Quindeca's liability for Taxes. There exists no proposed tax assessment against Quindeca except as disclosed in the Balance Sheet or in Part 2.6 of the Disclosure Letter. No consent to the application of Section 341(f)(2) of the IRC has been filed with respect to any property or assets held, acquired, or to be acquired by Quindeca. All Taxes that Quindeca is or was required by Legal Requirements to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person. (c) All Tax Returns filed by (or that include on a consolidated basis) Quindeca are true, correct, and complete in all material respects. There is no tax sharing agreement that will require any payment by Quindeca after the date of this Agreement. (d) Quindeca (and any predecessor of Quindeca) has been a validly electing "S" corporation within the meaning of Sections 1361 and 1362 of the IRC at all times during its existence for federal and state tax purposes (that is, with respect to each state in which Quindeca is doing business or is registered to do business), and such election shall remain in effect, and Quindeca will be continue to qualify as an "S" corporation up to and including the Closing Date. (e) Short has included in his Tax Returns filed prior to the date hereof his distributive share of income of Quindeca set forth on the Tax Returns of Quindeca. 3 (f) Quindeca has not in the past ten (10) years (A) acquired assets from another corporation in a transaction in which Quindeca's Tax basis for the acquired assets was determined, in whole or in part, by reference to the Tax basis of the acquired assets (or any other property) in the hands of the transferor or (B) acquired the stock of any corporation which is a qualified subchapter S subsidiary. (g) Nothing in this Section 2.6 is intended to cover Taxes arising from the Contemplated Transactions. 2.7 Compliance with Legal Requirements; Government Authorizations. (a) Quindeca is, and at all times since January 1, 1994 has been, in compliance in all material respects with Legal Requirements that are or were applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets. No event has occurred or circumstance exists that (with or without notice or lapse of time) (i) may constitute or result in a violation in any material respect by Quindeca of, or a failure on the part of Quindeca to comply in any material respect with, any Legal Requirement, or (ii) may give rise to any obligation of Quindeca to undertake, or to bear all or any portion of the cost of, any remedial action of any nature. Except as set forth in Part 2.7(a) of the Disclosure Letter, Quindeca has not received, at any time since January 1, 1994, any notice or other communication from any Governmental Body or any other Person regarding (i) any actual, alleged, possible, or potential violation of, or failure to comply with, any Legal Requirement, or (ii) any actual, alleged, possible, or potential obligation on the part of Quindeca to undertake, or to bear all or any portion of the cost of, any remedial action of any nature. (b) Except as set forth in Part 2.7(b) of the Disclosure Letter, each Governmental Authorization that is held by Quindeca or that otherwise relates to the business of, or to any of the assets owned or used by, Quindeca is valid and in full force and effect. Such Governmental Authorizations collectively constitute all of the Governmental Authorizations necessary to permit Quindeca to lawfully conduct and operate its business in the manner it currently conducts and operates such business and to permit Quindeca to own and use its assets in the manner in which it currently owns and uses such assets. Quindeca is, and at all times since January 1, 1994 has been, in compliance in all material respects with all of the terms and requirements of each Governmental Authorization. Except as set forth in Part 2.7(b) of the Disclosure Letter, Quindeca has not received, at any time since January 1, 1994, any notice or other communication from any Governmental Body or any other Person regarding (A) any actual, alleged, possible, or potential violation of or failure to comply with any term or requirement of any Governmental Authorization, or (B) any actual, proposed, possible, or potential revocation, withdrawal, suspension, cancellation, termination of, or modification to any Governmental Authorization. 2.8 Legal Proceedings; Orders. (a) Part 2.8 of the Disclosure Letter lists all pending Proceedings which have been commenced by or against Quindeca or, to the Knowledge of Quindeca and Short, that otherwise relate to or may affect the business of, or any of the assets owned or used by, Quindeca, or that challenge, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To the Knowledge of Quindeca and Short, (1) no such Proceeding has been Threatened, and (2) no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such Proceeding. The Proceedings listed in Part 2.8 of the Disclosure Letter will not have a material adverse effect on the business, operations, assets, condition, or prospects of Quindeca. 4 (b) There is no Order to which Quindeca, or any of the assets owned or used by it, is subject, and no shareholder of Quindeca is subject to any Order that relates to the business of, or any of the assets owned or used by, Quindeca. (c) As of the date of this Agreement, no Person has made or Threatened any claim asserting that such Person (a) is the holder or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any stock of, or any other voting, equity, or ownership interest in, Quindeca, or (b) is entitled to all or any portion of the Purchase Price payable for the Acquired Assets. 2.9 Contracts; No Defaults. (a) Part 2.9(a) of the Disclosure Letter contains a complete and accurate list, and Quindeca and Short have delivered to Choice true and complete copies, of each of the following that are currently in effect: (i) each Applicable Contract that involves performance of services or delivery of goods or materials by Quindeca of an amount or value in excess of $10,000; (ii) each Applicable Contract that involves performance of services or delivery of goods or materials to Quindeca of an amount or value in excess of $10,000; (iii) each Applicable Contract that was not entered into in the Ordinary Course of Business and that involves expenditures or receipts by Quindeca in excess of $5,000; (iv) each lease, rental or occupancy agreement, license, installment and conditional sale agreement, and other Applicable Contract affecting the ownership of, leasing of, title to, use of, or any leasehold or other interest in, any real or personal property (except personal property leases and installment and conditional sales agreements having a value per item or aggregate payments of less than $1,000 and with terms of less than one year); (v) each licensing agreement or other Applicable Contract with respect to patents, trademarks, copyrights, or other intellectual property, including agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any of the Intellectual Property Assets; (vi) each employment agreement, collective bargaining agreement and other Applicable Contract to or with any employee, labor union or other employee representative of a group of employees; (vii) each joint venture, partnership, and other Applicable Contract (however named) involving a sharing of profits, losses, costs, or liabilities by Quindeca with any other Person; (viii) each Applicable Contract containing covenants that in any way purport to restrict the business activity of Quindeca or any Affiliate of Quindeca or limit the freedom of Quindeca or any Affiliate of Quindeca to engage in any line of business or to compete with any Person; (ix) each Applicable Contract providing for payments to or by any Person based on sales, purchases, or profits, other than direct payments for goods; 5 (x) each power of attorney that is currently effective and outstanding; (xi) each Applicable Contract entered into other than in the Ordinary Course of Business that contains or provides for an express undertaking by Quindeca to be responsible for consequential damages; (xii) each Applicable Contract for capital expenditures in excess of $5,000; (xiii) each written warranty, guaranty, and or other similar undertaking with respect to contractual performance extended by Quindeca other than in the Ordinary Course of Business; and (xiv) each amendment, supplement, and modification (whether oral or written) in respect of any of the foregoing. (b) No shareholder of Quindeca (and no Related Person of any shareholder) has or may acquire any rights under, and no shareholder has or may become subject to any obligation or liability under, any Contract that relates to the business of, or any of the assets owned or used by, Quindeca. (c) Each Contract identified or required to be identified in Part 2.9(a) of the Disclosure Letter is in full force and effect. (d) Quindeca is, and at all times since January 1, 1994 has been, in compliance in all material respects with all applicable terms and requirements of each Contract under which it has or had any obligation or liability or by which it or any of the assets owned or used by it is or was bound. Each other Person that has or had any obligation or liability under any Contract under which Quindeca has or had any rights is, and at all times since January 1, 1994 has been, in compliance in all material respects with all applicable terms and requirements of such Contract. No event has occurred or circumstance exists that (with or without notice or lapse of time) may contravene, conflict with, or result in a material violation of, or breach of, or give Quindeca or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract. Quindeca has not given to or received from any other Person, at any time since January 1, 1994, any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation or breach of, or default under, any Contract. (e) There are no renegotiations of, attempts to renegotiate, or outstanding rights to renegotiate any material amounts paid or payable to Quindeca under current or completed Contracts with any Person and no such Person has made written demand for such renegotiation. (f) The Contracts relating to the sale, design, manufacture, or provision of products or services by Quindeca have been entered into in the Ordinary Course of Business and have been entered into without the commission of any act alone or in concert with any other Person, or any consideration having been paid or promised, that is or would be in violation of any Legal Requirement. 2.10 Environmental Matters. Quindeca is, and at all times has been, in compliance in all material respects with, and has not been and is not in violation of or liable in any material respect under, any Environmental Law. There are no pending or, to the Knowledge of Quindeca and Short, Threatened claims, Encumbrances, or other restrictions of any nature, resulting from any Environmental, Health, and Safety Liabilities or arising under or pursuant to any Environmental Law, with respect to or affecting any of the Facilities or 6 any other properties and assets (whether real, personal, or mixed) in which Quindeca has or had an interest. 2.11 Employees. Quindeca has never been and is not presently a party to any written or oral employment Contract, collective bargaining or other labor Contract. There has not been, there is not presently pending or existing, and there is not Threatened, (a) any strike, slowdown, picketing, work stoppage, or employee grievance process, (b) any Proceeding against or affecting Quindeca relating to the alleged violation of any Legal Requirement pertaining to labor relations or employment matters, including any charge or complaint filed by an employee or union with the National Labor Relations Board, the Equal Employment Opportunity Commission, or any comparable Governmental Body, organizational activity, or other labor or employment dispute against or affecting Quindeca or its premises, or (c) any application for certification of a collective bargaining agent. Quindeca has complied in all material respects with all Legal Requirements relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, occupational safety and health, and plant closing. Quindeca is not liable in any material respect for the payment of any compensation, damages, taxes, fines, penalties, or other amounts, however designated, for failure to comply with any of the foregoing Legal Requirements. 2.12 Intellectual Property. (a) Definition of "Intellectual Property Assets." The term ------------------------------------------- "Intellectual Property Assets" includes: (i) the name "Quindeca" and all other fictional business names, trading names, registered and unregistered trademarks, service marks, and applications owned by Quindeca (collectively, "Marks"); (ii) all patents and patent applications owned by Quindeca (collectively, "Patents"); (iii) all copyrights owned by Quindeca in both published works and unpublished works (collectively, "Copyrights"); (iv) all rights in mask works owned by Quindeca (collectively, "Rights in Mask Works"); and (v) all know-how, trade secrets, confidential information, customer lists, software, technical information, data, process technology, plans, drawings, and blue prints (collectively, "Trade Secrets") owned by Quindeca. Quindeca owns all items of the type described in clauses (i) through (v) above that are used by it in its business other than (A) commercially available software licensed by Quindeca and (B) intellectual property assets provided by Choice. (b) Agreements. Part 2.12(b) of the Disclosure Letter contains a ---------- complete and accurate list and summary description, including any royalties paid or received by Quindeca, of all Contracts relating to the Intellectual Property Assets to which Quindeca is a party or by which Quindeca is bound, except for any license implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value of less than $500 under which Quindeca is the licensee. There are no outstanding and, to the Knowledge of Quindeca and Short, no Threatened disputes or disagreements with respect to any such agreement. 7 (c) Know-How Necessary for the Business. The Intellectual Property ----------------------------------- Assets are all those necessary for the operation of Quindeca's business as it is currently conducted. Except as set forth on Part 2.12(c) of the Disclosure Letter, Quindeca is the owner of all right, title, and interest in and to each of the Intellectual Property Assets, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims, and has the right to use without payment to a third party all of the Intellectual Property Assets. Neither Short nor, to the Knowledge of Quindeca and Short, any other employee of Quindeca has entered into any Contract that restricts or limits in any way the scope or type of work in which the employee may be engaged or requires the employee to transfer, assign, or disclose information concerning his work to anyone other than Quindeca. (d) Patents. Quindeca owns no Patents. To the Knowledge of Quindeca and ------- Short, none of the products sold, nor any process or know-how used, by Quindeca infringes or is alleged to infringe any patent or other proprietary right of any other Person. (e) Trademarks. Part 2.12(e) of Disclosure Letter contains a complete ---------- and accurate list and summary description of all Marks, if any. Except as set forth in Part 2.12(e) of the Disclosure Letter, Quindeca is the owner of all right, title, and interest in and to each of the Marks, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims. All Marks that have been registered with the United States Patent and Trademark Office are currently in compliance with all formal legal requirements (including the timely post-registration filing of affidavits of use and incontestability and renewal applications), are valid and enforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety days after the Closing Date. No Mark has been or is now involved in any opposition, invalidation, or cancellation and, to the Knowledge of the Sellers, no such action is Threatened with the respect to any of the Marks. To the Knowledge of Quindeca and Short, there is no potentially interfering trademark or trademark application of any third party. No Mark is infringed or, to the Knowledge of Quindeca and Short, has been challenged or threatened in any way. None of the Marks owned by Quindeca or, to the Knowledge of Quindeca and Short, licensed or otherwise used by Quindeca, infringes or is alleged to infringe any trade name, trademark, or service mark of any third party. All products and materials containing a Mark that have been registered as described above bear the proper federal registration notice where permitted by law. (f) Copyrights. Part 2.12(f) of the Disclosure Letter contains a ---------- complete and accurate list and summary description of all Copyrights, if any. Quindeca is the owner of all right, title, and interest in and to each of the Copyrights, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims. None of the Copyrights have been registered. All the Copyrights are currently in compliance with formal legal requirements, are valid and enforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety days after the date of Closing. No Copyright is infringed or, to the Knowledge of Quindeca and Short, has been challenged or threatened in any way. None of the subject matter of any of the Copyrights infringes or is alleged to infringe any copyright of any third party or is a derivative work based on the work of a third party. All works encompassed by the Copyrights have been marked with the proper copyright notice. (g) Trade Secrets. With respect to each Trade Secret, the documentation ------------- relating to such Trade Secret is current, accurate, and sufficient in detail and content to identify and explain it and to allow its full and proper use without reliance on the knowledge or memory of any individual. Quindeca has taken all reasonable precautions to protect the secrecy, confidentiality, and value of its Trade Secrets. Quindeca has good 8 title and an absolute (but not necessarily exclusive) right to use the Trade Secrets. The Trade Secrets are not part of the public knowledge or literature, and, to the Knowledge of Quindeca and Short, have not been used, divulged, or appropriated either for the benefit of any Person or to the detriment of Quindeca. No Trade Secret is subject to any adverse claim or has been challenged or threatened in any way. 2.13 Computer Software. (a) Performance. To the Knowledge of Quindeca and Short, each of the ----------- computer software products owned by Quindeca, other than commercially available software programs not marketed by Quindeca (the "Software Products") performs in accordance with specifications, documentation and other written material used in connection with the sale, license, distribution, marketing or use thereof. Part 2.13(a) of the Disclosure Letter contains a complete list of Software Products sold, licensed, distributed or marketed by Quindeca since January 1, 1994. (b) Development. No shareholder or, to the Knowledge of Quindeca and ----------- Short, employee of Quindeca is in default under any employment Contract relating to the Software Products, any noncompetition or confidentiality Contract or any other Contract or restrictive covenant relating to the Software Products or their development or exploitation. The Software Products do not include any inventions of Short made prior to the time such Short became an employee of Quindeca or made outside of the scope of Short's employment, nor any property or any previous employer of Short. To the Knowledge of Quindeca and Short, the Software Products do not include any inventions of any employee other than Short made prior to the time such employee became an employee of Quindeca or made outside of the scope of such employee's employment, nor any property or any previous employer of such employee. (c) Title. All right, title and interest in and to the Software ----- Products owned by Quindeca, is free and clear of all liens. No government funding was utilized in the development of any of the Software Products owned by Quindeca, or, to the Knowledge of Quindeca and Short, any other Software Products. The sale, license, distribution, marketing or use of the Software Products by Quindeca does not violate any rights of any other Person, and Quindeca has not received any communication alleging such violation. Except as set forth in Part 2.13(c) of the Disclosure Letter, Quindeca has no obligation to compensate any Person for the sale, license, distribution, marketing or use of the Software Products. Quindeca has not granted to any other Person any license, option or other right in or to any of the Software Products, except for non-exclusive, royalty-bearing, end-user licenses granted by Quindeca in the Ordinary Course of Business pursuant to license agreements substantially in the form attached in Part 2.13(c) of the Disclosure Letter (the "End-User Licenses"). (d) Maintenance. Quindeca has no obligation to any other Person to ----------- maintain, modify, improve or upgrade any of the Software Products, except for any such obligations set forth in the End-User Licenses or under a maintenance agreement. Certain maintenance agreements are listed in Part 2.13(d) of the Disclosure Letter. (e) Year 2000. The Software Products currently being sold, --------- distributed or marketed by Quindeca (i) include Year 2000 date conversion and capabilities including, but not limited to: date data century recognition, calculations which accommodate same century and multi-century formulas and date values, correct sort ordering, and date data interface values that reflect the century; (ii) automatically compensates for and manages and manipulates data involving dates, including single century formulas and multi-century formulas, and will not cause an abnormal abort within the application 9 or result in the generation of incorrect values or invalid inputs involving such date; (iii) provides that all date-related user interface functionalities and data fields include the indication of the correct century; (iv) provides that all date-related system-to-system or application-to-application data interface functionalities will include the indication of the correct century; and (v) will continue to comply with clauses (i) through (iv) above. All data processing by the Software Products currently being sold, distributed or marketed by Quindeca includes four digit year format and recognizes and correctly processes dates for leap years. Quindeca has no obligation to modify, improve or upgrade any of the Software Products previously sold, distributed or marketed by Quindeca in order to ensure their compliance with the Year 2000 capabilities described in this Section 2.13(e). (f) Protection of the Proprietary Nature of the Software Products. ------------------------------------------------------------- Quindeca has kept secret and has not disclosed the source code for the Software Products to any Person other than certain employees, licensed customers and contractors of Quindeca. Quindeca has taken all reasonable measures to protect the security, confidentiality and value of the Software Products. 2.14 Relationship with Customers. Quindeca has used its reasonable business efforts to maintain, and currently maintains, in all material respects, good working relationships with all of its customers. Each of Quindeca's contracts with its customers and related customer relationships which have been terminated (other than by expiration of its stated term) or canceled during the one year period ended on the Closing Date are set forth and described on Part 2.14 of the Disclosure Letter. During that one year period, none of Quindeca's current customers has given Quindeca written notice terminating, canceling or threatening to terminate or cancel any contract or relationship with Quindeca. 2.15 Certain Payments. Since January 1, 1994, neither Quindeca nor any director, officer, agent, or employee of Quindeca, or to the Knowledge of Quindeca and Short, any other Person associated with or acting for or on behalf of Quindeca, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of Quindeca or any Affiliate of Quindeca, or (iv) in violation of any Legal Requirement, or (b) established or maintained any fund or asset that has not been recorded in the books and records of Quindeca. 2.16 Disclosure. No representation or warranty of Quindeca and Short in this Agreement and no statement in the Disclosure Letter omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. 2.17 Relationships with Related Persons. No shareholder of Quindeca or any Related Person of any shareholder or of Quindeca has, or since January 1, 1994 has had, any interest in any property (whether real, personal, or mixed and whether tangible or intangible), used in or pertaining to Quindeca's business. No shareholder of Quindeca or any Related Person of any shareholder or of Quindeca is, or since January 1, 1994 has owned (of record or as a beneficial owner) an equity interest or any other financial or profit interest in, a Person that has (i) had business dealings or a material financial interest in any transaction with Quindeca other than business dealings or transactions conducted in the Ordinary Course of Business with Quindeca at substantially prevailing market prices and on substantially prevailing market terms, or (ii) engaged in competition with Quindeca with respect to any line of the products or services of Quindeca in any market presently served by 10 Quindeca. Except as set forth in Part 2.17 of the Disclosure Letter, no shareholder of Quindeca or any Related Person of any shareholder or of Quindeca is a party to any Contract with, or has any claim or right against, Quindeca. 2.18 Brokers or Finders. Neither Quindeca nor Short incurred any obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF CHOICE Choice represents and warrants to Quindeca and Short as follows: 3.1 Organization and Good Standing. Choice is a corporation duly organized, validly existing, and in good standing under the laws of the Commonwealth of Virginia. 3.2 Authority; No Conflict. (a) This Agreement constitutes the legal, valid, and binding obligation of Choice, enforceable against Choice in accordance with its terms. Choice has the absolute and unrestricted right, power, and authority to execute and deliver this Agreement, the Employment Agreements and the Shareholders Agreement and to perform its obligations under this Agreement, the Employment Agreements and the Shareholders Agreement. (b) Neither the execution and delivery of this Agreement by Choice nor the consummation or performance of any of the Contemplated Transactions by Choice will give any Person the right to prevent, delay, or otherwise interfere with any of the Contemplated Transactions pursuant to: (i) any provision of Choice's Organizational Documents; (ii) any resolution adopted by the board of directors or the shareholders of Choice; (iii) any Legal Requirement or Order to which Choice may be subject; or (iv) any Contract to which Choice is a party or by which Choice may be bound. Choice is not and will not be required to obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions. 3.3 Certain Proceedings. There is no pending Proceeding that has been commenced against Choice and that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To Choice's Knowledge, no such Proceeding has been Threatened. 3.4 Brokers and Finders. Choice and its officers and agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement and will indemnify and hold Quindeca and Short harmless from any such payment alleged to be due by or through Choice as a result of the action of Choice or its officers or agents. 11 ARTICLE 4. TERMINATION This Agreement may, by notice given prior to or at the Closing, be terminated by either Choice or by both Quindeca and Short at any time after the date of this Agreement if the Closing shall not have occurred on the date of this Agreement. ARTICLE 5. INDEMNIFICATION; REMEDIES 5.1 Survival. All representations, warranties and obligations in this Agreement and the Disclosure Letter will survive the Closing. 5.2 Indemnification and Payment of Damages by Quindeca and Short. Subject to the provisions set forth below, Quindeca and Short, jointly and severally, will indemnify and hold harmless Choice and its Representatives, shareholders and controlling persons (collectively, the "Indemnified Persons") for, and will pay to the Indemnified Persons the amount of, any loss, liability, claim, damage, expense (including costs of investigation and defense and reasonable attorneys' fees) or diminution of value, whether or not involving a third-party claim (collectively, "Damages"), arising, directly or indirectly, from or in connection with: (a) any Breach of any representation or warranty made by Quindeca or Short in this Agreement or the Disclosure Letter; (b) any Breach by Quindeca or Short of any obligation of such Person in this Agreement or the Employment Agreement; (c) any Excluded Liabilities; or (d) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with Quindeca or Short (or any Person acting on their behalf) in connection with any of the Contemplated Transactions. The amount of Damages computed hereunder for an Indemnified Person shall be reduced by the amount of proceeds actually received by the Indemnified Person from any insurance policy covering such Damages. The remedies provided in this Section 5.2 are the sole and exclusive remedy of each Indemnified Person under this Agreement for any of the matters covered by clauses (a) through (d) above, provided that these indemnification provisions are in addition to and not in derogation of any statutory or common law remedy for fraud that may be available to any Indemnified Person. 5.3 Indemnification and Payment of Damages by Choice. Subject to the provisions set forth below, Choice will indemnify and hold harmless Quindeca and Short, and will pay to Quindeca and Short the amount of any Damages arising, directly or indirectly, from or in connection with (a) any Breach of any representation or warranty made by Choice in this Agreement or in any certificate delivered by Choice pursuant to this Agreement, (b) any Breach by Choice of any covenant or obligation of Choice in this Agreement, (c) any liability included within the Assumed Liabilities, or (d) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Choice (or any Person acting on its behalf) in connection with any of the Contemplated Transactions. The amount of Damages computed hereunder for Quindeca and Short shall be reduced by the amount of proceeds actually received by Quindeca or Short from any insurance policy covering such Damages. The remedies provided in this Section 5.3 are the sole and exclusive remedy 12 of Quindeca and Short under this Agreement for any of the matters covered by clauses (a) through (d) above, provided that these indemnification provisions are in addition to and not in derogation of any statutory or common law remedy for fraud that may be available to Quindeca or Short. 5.4 Time Limitations. (a) If the Closing occurs, Quindeca and Short will have no liability (for indemnification or otherwise) with respect to any matters covered by paragraphs (a) or (b) of Section 5.2, or paragraph (c) of Section 5.2, other than those specified in Section 2.6 and for the amount of any Excluded Liabilites paid by any Indemnified Person, unless on or before the date one year after the Closing Date an Indemnified Person notifies Short of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Choice. A claim with respect to the matters covered by Section 2.6, for the amount of any Excluded Liabilities paid by any Indemnified Person, or the matters covered by paragraph (d) of Section 5.2 or any other claim not based upon any matter covered by paragraphs (a), (b) or (c) of Section 5.2 may be made at any time. For the avoidance of doubt, the parties agree that the time limitations decribed in the first sentence above apply to any Damages incurred by any Indemnified Person in connection with the Excluded Liabilities, such as legal costs and expenses, but do not apply to the actual payment of any Excluded Liabilities by any Indemnified Person. (b) If the Closing occurs, Choice will have no liability (for indemnification or otherwise) with respect to any matters covered by paragraphs (a) or (b) of Section 5.3, unless on or before the date one year after the Closing Date Short notifies Choice of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Quindeca and Short. Any other claim with respect to the matters covered by paragraph (c) or (d) of Section 5.3 or any other claim not based upon any matter covered by paragraphs (a) or (b) of Section 5.3 may be made at any time. 5.5 Limitations on Amount--Quindeca and Short. Quindeca and Short will have no liability (for indemnification or otherwise) with respect to the matters described in clause (a) or (b) of Section 5.2, or paragraph (c) of Section 5.2, until the total of all Damages with respect to such matters exceeds $10,000, and then only for the amount by which such Damages exceed $10,000; provided that these limits will not apply to any Breach of any of the representations and warranties of Quindeca and Short of which either Quindeca or Short had Knowledge at any time prior to the date on which such representation and warranty is made or any intentional Breach by Quindeca or Short of any covenant or obligation, and Quindeca and Short will be jointly and severally liable for all Damages with respect to such Breaches. Notwithstanding any other provision of this Agreement, the aggregate liability of Quindeca and Short under this Agreement to Indemnified Persons under paragraphs (a), (b) or (c) of Section 5.2 (other than for Breaches of Section 2.6 and for the amount of any Excluded Liabilities paid by any Indemnified Person) will be limited to $188,889. In any event, the matters excluded from this dollar limitation of $188,889 shall be counted in determining whether this dollar limitation has been exceeded. For the avoidance of doubt, the parties agree that the amount limitations decribed above apply to any Damages incurred by any Indemnified Person in connection with the Excluded Liabilities, such as legal costs and expenses, but do not apply to the actual payment of any Excluded Liabilities by any Indemnified Person. No Indemnified Person will pay any Excluded Liabilities except in compliance with the procedures provided in Section 5.7 of this Agreement. 5.6 Limitations on Amount--Choice. Choice will have no liability (for indemnification or otherwise) with respect to the matters described in clause (a) or (b) of Section 5.3 until the total of all Damages with respect to such matters exceeds $10,000, and then only for the amount by which such Damages 13 exceed $10,000. However, this Section 5.6 will not apply to any Breach of any of Choice's representations and warranties of which Choice had Knowledge at any time prior to the date on which such representation and warranty is made or any intentional Breach by Choice of any covenant or obligation, and Choice will be liable for all Damages with respect to such Breaches. Notwithstanding any other provision of this Agreement, the aggregate liability of Choice under this Agreement to Quindeca and Short under paragraphs (a) and (b) of Section 5.3 will be limited to $188,889. 5.7 Procedure for Indemnification--Third Party Claims. (a) Promptly after receipt by an indemnified party under Section 5.2 or 5.3 of notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party's failure to give such notice. (b) If any Proceeding referred to in Section 5.7(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will, unless the claim involves Federal or state income Taxes of the indemnified party, be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Article 5 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the indemnified party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Proceeding, it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification. Neither the indemnified party nor the indemnifying party may concede, settle or compromise any claim without the consent of the other party, which consent will not be unreasonably withheld. (c) Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld). (d) The parties hereby consent to the non-exclusive jurisdiction of any court in which a Proceeding is brought against any Indemnified Person for purposes of any claim that an Indemnified Person may have under this Agreement with respect to such Proceeding or the matters alleged therein, and agree that process may be served on any party with respect to such a claim anywhere in the world. 14 5.8 Procedure for Indemnification--Other Claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought. 5.9 Other Limitations. Any indemnification payable under Section 5.2 shall be, to the extent permitted by law, an adjustment to the Purchase Price. No indemnification payable under Section 5.2 of this Agreement may be offset in any manner against obligations or amounts owed by Choice to Short under the Employment Agreement, except as specified in the Employment Agreement. Each indemnified person shall have the duty to use its commercially reasonable efforts to mitigate the amount of any Damages that the indemnified person may suffer as a result of or arising out of or relating to any breach of a representation or warranty or failure to perform any covenant under this Agreement, provided that the indemnified party shall be entitled to recover from the indemnifying party mitigation costs incurred by the indemnified party. There shall be no indemnification obligation under this Article 5 for any indirect, special or consequential damages of the indemnified persons. ARTICLE 6. DEFINITIONS For purposes of this Agreement, the following terms have the meanings specified or referred to in this Article 6: "Acquired Assets" means all right, title, and interest in and to all of the assets of Quindeca, including but not limited to all of its (a) real property, leaseholds and subleaseholds therein, improvements, fixtures, and fittings thereon, and easements, rights-of-way, and other appurtenants thereto (such as appurtenant rights in and to public streets), (b) tangible personal property listed in Exhibit 1.4, (c) Intellectual Property Assets, goodwill associated therewith, licenses and sublicenses granted and obtained with respect thereto, and rights thereunder, remedies against infringements thereof, and rights to protection of interests therein under the laws of all jurisdictions, (d) leases, subleases, and rights thereunder, (e) all Applicable Contracts, (f) Governmental Authorizations, and (g) business goodwill of Quindeca, including customer lists, any creative materials, advertising and promotional materials, studies, reports, and other printed or written materials relating to the business of Quindeca; provided, however, that the Acquired Assets shall not include (i) the corporate charter, qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, stock transfer books, blank stock certificates, and other documents relating to the organization, maintenance, and existence of Quindeca as a corporation, (ii) any of the rights of Quindeca under any Plans, (iii) Accounts Receivable, notes receivable and other receivables, (iv) claims, deposits, prepayments, refunds, causes of action, choses in action, rights of recovery, rights of set off, and rights of recoupment (including any such item relating to the payment of Taxes), (v) books of account, records, ledgers, files, documents, correspondence, lists, (vi) all cash and cash equivalents (including securities and short term investments) or (vii) any of the rights of Quindeca under this Agreement. "Applicable Contract" means any Contract (a) under which Quindeca has or may acquire any rights, (b) under which Quindeca has or may become subject to any obligation or liability, or (c) by which Quindeca or any of the assets owned or used by it is or may become bound. "Assumed Liabilities" means all obligations of Quindeca under the Applicable Contracts disclosed in Part 2.9(a) of the Disclosure Letter (except for any liabilities for breach of any Applicable Contract). "Assumed Liabilities" shall not include any other liabilities of Quindeca or Short, 15 including without limitation, (i) any liability of Quindeca or Short for Taxes, (ii) any Liability of Quindeca for the unpaid Taxes of any Person (other than any of Quindeca and its Subsidiaries) under U.S. Treasury Regulations Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise, (iii) any obligation of Quindeca to indemnify any Person (including any shareholder of Quindeca) by reason of the fact that such Person was a director, officer, employee, or agent of any of Quindeca and its Subsidiaries or was serving at the request of any such entity as a partner, trustee, director, officer, employee, or agent of another entity (whether such indemnification is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses, expenses, or otherwise and whether such indemnification is pursuant to any statute, charter document, bylaw, agreement, or otherwise), (iv) any liability shown on the Balance Sheet other than any liability under an Applicable Contract, (v) any liability of Quindeca under any Plan, (vi) any liability of Quindeca for costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby, or (vii) any liability or obligation of Quindeca under this Agreement. "Balance Sheet" is defined in Section 2.5. A "Breach" of a representation, warranty, covenant, obligation, or other provision of this Agreement or any instrument delivered pursuant to this Agreement will be deemed to have occurred if there is or has been any inaccuracy in or breach of, or any failure to perform or comply with, such representation, warranty, covenant, obligation, or other provision. "Closing" is defined in Section 1.3. "Closing Date" is the date and time as of which the Closing actually takes place. "Consent" means any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization). "Contemplated Transactions" mean all of the transactions contemplated by this Agreement, including: (a) the sale of the Acquired Assets by Quindeca to Choice; (b) the assumption by Choice of the Assumed Liabilities; (c) the execution, delivery, and performance of the Employment Agreement and the Shareholders Agreement; (d) the performance by Choice, Quindeca and Short of their respective covenants and obligations under this Agreement; and (e) Choice's acquisition and ownership of the Acquired Assets. "Contract" means any agreement, contract, obligation, promise, or undertaking (whether written or oral and whether express or implied) that is legally binding. "Choice" is defined in the first paragraph of this Agreement. "Damages" is defined in Section 5.2. "Disclosure Letter" means the disclosure letter delivered by Quindeca and Short to Choice concurrently with the execution and delivery of this Agreement. 16 "Employment Agreement" means the Employment Agreement to be entered into by Short with Choice at the Closing. "Encumbrance" means any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership. "Environment" means soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwaters, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource. "Environmental, Health, and Safety Liabilities" mean any cost, damages, expense, liability, obligation, or other responsibility arising from or under Environmental Law or Occupational Safety and Health Law and consisting of or relating to: (a) any environmental, health, or safety matters or conditions (including on-site or off-site contamination, occupational safety and health, and regulation of chemical substances or products); (b) fines, penalties, judgments, awards, settlements, legal or administrative proceedings, damages, losses, claims, demands and response, investigative, remedial, or inspection costs and expenses arising under Environmental Law or Occupational Safety and Health Law; (c) financial responsibility under Environmental Law or Occupational Safety and Health Law for cleanup costs or corrective action, including any investigation, cleanup, removal, containment, or other remediation or response actions ("Cleanup") required by applicable Environmental Law or Occupational Safety and Health Law (whether or not such Cleanup has been required or requested by any Governmental Body or any other Person) and for any natural resource damages; or (d) any other compliance, corrective, investigative, or remedial measures required under Environmental Law or Occupational Safety and Health Law. The terms "removal," "remedial," and "response action," include the types of activities covered by the United States Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. (S) 9601 et seq., as amended ("CERCLA"). "Environmental Law" means any Legal Requirement that is designed to minimize, prevent, punish, or remedy the consequences of actions that damage or threaten the Environment. "ERISA" means the Employee Retirement Income Security Act of 1974 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "Excluded Liabilities" means all liabilities and obligations of Quindeca and Short prior to Closing, other than Assumed Liabilities. "Facilities" mean any real property, leaseholds, or other interests currently or formerly owned or operated by Quindeca and any buildings, plants, structures, or equipment (including motor vehicles, tank cars, and rolling stock) currently or formerly owned or operated by Quindeca. 17 "GAAP" means generally accepted United States accounting principles. "Governmental Authorization" means any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement, other than actions under a Contract with a Governmental Body. "Governmental Body" means any (a) nation, state, county, city, town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi- governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi- national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature. "Intellectual Property Assets" is defined in Section 2.12(a). "IRC" means the Internal Revenue Code of 1986 or any successor law, and regulations issued by the IRS pursuant to the Internal Revenue Code or any successor law. "IRS" means the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury. "Knowledge" -- an individual will be deemed to have "Knowledge" of a particular fact or other matter if such individual is actually aware of such fact or other matter or a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter. A Person (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, partner, executor, or trustee of such Person (or in any similar capacity) has, or at any time had, Knowledge of such fact or other matter. "Legal Requirement" means any federal, state, local, municipal, foreign, international, multinational, or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty. "Occupational Safety and Health Law" means any Legal Requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards, and any program, whether governmental or private (including those promulgated or sponsored by industry associations and insurance companies), designed to provide safe and healthful working conditions. "Order" means any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator. "Ordinary Course of Business" -- an action taken by a Person will be deemed to have been taken in the "Ordinary Course of Business" only if such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person. "Organizational Documents" mean the articles or certificate of incorporation and the bylaws of a corporation and any amendment to any of the foregoing. 18 "Person" means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body. "Plans" means all employee benefit plans (as defined in Section 3(3) of ERISA) and all other profit-sharing, bonus, deferred compensation, stock option, severance pay, "parachute", insurance, short-term or long-term incentive compensation, or retirement plan, program, agreement or arrangement sponsored by Quindeca or to which Quindeca is required to contribute. "Proceeding" means any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. "Purchase Price" is defined in Section 1.2. "Related Person" with respect to a particular individual means: (a) each other member of such individual's Family; (b) any Person that is directly or indirectly controlled by such individual or one or more members of such individual's Family; (c) any Person in which such individual or members of such individual's Family hold (individually or in the aggregate) a Material Interest; and (d) any Person with respect to which such individual or one or more members of such individual's Family serves as a director, officer, partner, executor, or trustee (or in a similar capacity). With respect to a specified Person other than an individual: (a) any Person that directly or indirectly controls, is directly or indirectly controlled by, or is directly or indirectly under common control with such specified Person; (b) any Person that holds a Material Interest in such specified Person; (c) each Person that serves as a director, officer, partner, executor, or trustee of such specified Person (or in a similar capacity); (d) any Person in which such specified Person holds a Material Interest; and (e) any Person with respect to which such specified Person serves as a general partner or a trustee (or in a similar capacity). For purposes of this definition, (a) the "Family" of an individual includes (i) the individual, (ii) the individual's spouse, (iii) the individual's brothers, sisters and children, and (iv) any other natural person who resides with such individual, and (b) "Material Interest" means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of voting securities or other voting interests representing at least 10% of the outstanding voting power or equity interests in a Person. "Release"means any spilling, leaking, emitting, discharging, depositing, escaping, leaching, dumping, or other releasing into the Environment, whether intentional or unintentional. "Representative" means with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors. "Shareholders Agreement" means the Shareholders Agreement to be entered into by Choice, Quindeca, Michael W. Payton, Terence E. Hahm and Daily Journal Corporation at the Closing. "Subsidiary" means with respect to any Person (the "Owner"), any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation's or other Person's board of 19 directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the Owner or one or more of its Subsidiaries. "Tax Return"means any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax. "Threat of Release"means a substantial likelihood of a Release that may require action in order to prevent or mitigate damage to the Environment that may result from such Release. "Threatened" -- a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (orally or in writing) or any notice has been given (orally or in writing). ARTICLE 7. GENERAL PROVISIONS 7.1 Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants. In the event of termination of this Agreement, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from a breach of this Agreement by another party. 7.2 Public Announcements. Any public announcement or similar publicity with respect to this Agreement or the Contemplated Transactions will be issued, if at all, at such time and in such manner as Choice and Quindeca mutually agree, except as may be required by Legal Requirements. Quindeca and Short each acknowledge that, at or subsequent to the Closing Date, Choice's principal shareholder will be Daily Journal Corporation, which may determine in its sole discretion whether and how to disclose this Agreement and the Contemplated Transactions pursuant to the requirements of the Federal securities laws. Quindeca, Short and Choice will consult with each other concerning the means by which Quindeca's employees, customers, and suppliers and others having dealings with Quindeca will be informed of the Contemplated Transactions, and Choice will have the right to be present for any such communication. 7.3 Confidentiality. Choice, Quindeca and Short will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of Choice and Quindeca to maintain in confidence, and not use to the detriment of another party any written, oral, or other information obtained in confidence from another party in connection with this Agreement or the Contemplated Transactions, unless (a) such information is already known to such party or to others not bound by a duty of confidentiality or such information is or becomes publicly available through no fault of such party, (b) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the Contemplated Transactions, or (c) the furnishing or use of such information is required by Legal Requirements. 20 If the Contemplated Transactions are not consummated, each party will return or destroy as much of such written information as the other party may reasonably request. 7.4 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): Quindeca and Short: Quindeca Corporation P.O. Box 16040 Golden, CO 80402 Attention: Jerry L. Short Fax: 888-719-7819 Choice: CHOICE Information Systems, Inc. c/o Daily Journal Corporation 915 E. First Street Los Angeles, CA 90012 Attention: Gerald L. Salzman Fax: 213-330-2666 7.5 Jurisdiction; Service of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties in the courts of the State of California, County of Los Angeles, or, if it has or can acquire jurisdiction, in the United States District Court for the Central District of California, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world. 7.6 Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. 7.7 Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative, except as expressly stated in this Agreement. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be 21 given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 7.8 Entire Agreement and Modification. This Agreement supersedes all prior agreements between the parties, and any prior understandings or representations, with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. 7.9 Disclosure Letter. The disclosures in the Disclosure Letter, and those in any Supplement thereto, must relate only to the representations and warranties in the Section of the Agreement to which they expressly relate and not to any other representation or warranty in this Agreement, unless and only to the extent such disclosures clearly cross-reference other representations or warranties in this Agreement. In the event of any inconsistency between the statements in the body of this Agreement and those in the Disclosure Letter (other than an exception expressly set forth as such in the Disclosure Letter with respect to a specifically identified representation or warranty), the statements in the body of this Agreement will control. 7.10 Assignments, Successors and Third-Party Rights. Neither party may assign any of its rights under this Agreement without the prior consent of the other parties, except that Choice may assign any of its rights under this Agreement to Daily Journal Corporation or to any Subsidiary of Daily Journal Corporation or Choice. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns. 7.11 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 7.12 Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 7.13 Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. 7.14 Governing Law. This Agreement will be governed by the laws of the State of California without regard to conflicts of laws principles. 7.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this 22 Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 7.16 Release. (a) Quindeca and Short hereby release and forever discharge Choice from any and all claims, demands, Proceedings, causes of action, Orders, obligations, Contracts, agreements, indebtedness, and liabilities whatsoever, whether known or unknown, at law or in equity, which Quindeca or Short now have or have ever had against Choice arising at or prior to the Closing Date or on account of or arising out of any matter, cause or event occurring at or prior to the Closing Date, other than sales commissions owed by Choice to Quindeca as of the date of this Agreement and amounts payable by Choice to Quindeca for services as a subcontractor of Choice for customers of Choice from July 1, 1998 through the date of this Agreement, in each case to the extent such amounts are reflected on the Preliminary Balance Sheet or Final Balance Sheet of Choice (each as defined in the Stock Purchase Agreement being entered into as of the date hereof among Choice, Michael W. Payton, Terence E. Hahm and Daily Journal Corporation), and other than obligations of Choice to Quindeca or Short pursuant to the terms of this Agreement, the Employment Agreement or the Shareholders Agreement. (b) Quindeca and Short hereby irrevocably covenant to refrain from, directly or indirectly, asserting any claim or demand, or commencing, instituting or causing to be commenced, any Proceeding of any kind against Choice, based on the matters released hereby. (c) Quindeca and Short hereby waive any rights which may be conferred upon them by virtue of Section 1542 of the Civil Code of the State of California (or any similar statute) which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THIS RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. CHOICE INFORMATION SYSTEMS, INC. By:___________________________________ Name: Title: QUINDECA CORPORATION By:___________________________________ Name: Title: /s/ Jerry L. Short ______________________________________ Jerry L. Short 23 EX-10.1 4 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made as of January 22, 1999 by Choice Information Systems, Inc., a Virginia corporation (the "Employer"), and Michael W. Payton, an individual resident in Virginia (the "Employee"). The parties, intending to be legally bound, agree as follows: SECTION 1. DEFINITIONS For the purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1. "Agreement" means this Employment Agreement, including all exhibits hereto, as amended from time to time. "Benefits" is defined in Section 3.1. "Board of Directors" means the board of directors of the Employer. "Confidential Information" means any and all: (a) trade secrets concerning the business and affairs of the Employer, product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information) of Employer, and any other information of Employer, however documented, that is a trade secret within the meaning of applicable state trade secret law; and (b) information of Employer concerning the business and affairs of the Employer (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and (c) notes, analysis, compilations, studies, summaries, and other material prepared by or for the Employer containing or based, in whole or in part, on any information included in the foregoing. Notwithstanding the foregoing, the term "Confidential Information" does not include information that the Employee demonstrates (i) was or is generally available to the public other than as a result of a disclosure by the Employee or (ii) becomes available after the date of this Agreement to the Employee on a non-confidential basis, but only in the case of (ii) if (A) the source of such information is not bound by any confidentiality agreement with, or confidentiality obligation to, the Employer, or is not otherwise prohibited from transmitting the information to the Employee by a contractual, legal, fiduciary or other legal obligation, and (B) if the Employee receives the information from the source prior to its disclosure to the Employee by the 1 Employer, the Employee notifies the Employer of Employee's prior knowledge promptly after disclosure by the Employer of the information. "Daily Journal" means the Daily Journal Corporation, a South Carolina corporation, together with its subsidiaries and affiliates (other than Employer). "Declining Salary" is defined in Section 4.4. "Disability" is defined in Section 4.2. "Employee Invention" means any idea, invention, technique, modification, process, or improvement (whether patentable or not), any industrial design (whether registerable or not), any mask work, however fixed or encoded, that is suitable to be fixed, embedded or programmed in a semiconductor product (whether recordable or not), and any work of authorship (whether or not copyright protection may be obtained for it) created, conceived, or developed by the Employee, either solely or in conjunction with others, during the Employment Period, or a period that includes a portion of the Employment Period, that relates in any way to the business then being conducted or proposed to be conducted by the Employer during the Employment Period or (if disclosed to Employee during the Employment Period) after the Employment Period, and any such item created by the Employee, either solely or in conjunction with others, following the Termination Date, that is based upon or uses Confidential Information. The term "Employee Invention" includes the inventions, techniques, and specially commissioned works described in Exhibit A. Notwithstanding the foregoing, "Employee Inventions" shall not include software and related consulting services that Employee can demonstrate (a) are not based upon and do not use any Confidential Information, (b) have been developed solely on Employee's own time consistent with his obligations under Section 2.3 of this Agreement, (c) in the case of software, do not perform substantially the same function as any software product developed or marketed by Employer in its business (whether owned or licensed) whether prior to or during the Employment Period, and (d) cannot reasonably be expected to be used in any industry served or, if disclosed to Employee, proposed to be served by Employer during the Employment Period. "Employment Period" means the period of time the Employee is employed by the Employer. "Fiscal Year" means the Employer's fiscal year, as it exists on the date of this Agreement or as changed from time to time. "for Cause" is defined in Section 4.3. "Payment Period" means the Employment Period and any additional period of time during which Employee receives payments from the Employer pursuant to Section 4 of this Agreement following termination of the Employment Period. "person" means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, or governmental body. "Proprietary Items" is defined in Section 5.2(a)(iv). "Salary" is defined in Section 3.1(a). "Stock Purchase Agreement" means that certain Stock Purchase Agreement, dated January 22, 1999, among the Employer, Daily Journal, Employee and Terence E. Hahm. 2 "Termination Date" means the date on which Employee's employment with Employer is terminated pursuant to this Agreement. "Termination Notice" is defined in Section 4.1(d). SECTION 2. EMPLOYMENT TERMS AND DUTIES 2.1 Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment by the Employer, upon the terms and conditions set forth in this Agreement. 2.2 Term. The Employee's term of employment will commence on January 22, 1999 and will end on January 23, 2004 unless earlier terminated pursuant to Section 4 of this Agreement. Upon the termination of Employee's employment with Employer, Employee shall be entitled only to the payments, if any, provided for in Section 4.4 of this Agreement. 2.3 Duties. The Employee will have such duties as are assigned or delegated to the Employee by the Board of Directors or President of the Employer, and will initially serve as Managing Director and Assistant Secretary of the Employer. The Employee will devote his entire business time, attention, skill, and energy exclusively to the business of the Employer. The Employee will (a) use his commercially reasonable efforts to promote the success of the Employer's business, (b) perform his assigned duties diligently, loyally, conscientiously, and with reasonable skill, (c) comply in all material respects with all rules, procedures and standards promulgated from time to time by the Employer with regard to his conduct and his access to and use of the Employer's property, information, equipment and premises, and (d) cooperate fully with the Board of Directors in the advancement of the best interests of the Employer. If the Employee is elected as a director of the Employer or as a director or officer of any of its affiliates, the Employee will fulfill his duties as such director or officer without additional compensation. Employee acknowledges that the Employer retains its full management prerogatives and discretion to manage and direct its business affairs, including the adoption, amendment, reorganization or modification of research, development, production, marketing or organizational decisions as it sees fit, notwithstanding any employee's individual interest in or expectation regarding a particular business program, position or product. SECTION 3. COMPENSATION 3.1 Basic Compensation. The Employee will be paid an annual salary of $375,000, subject to adjustment as provided below (the "Salary"), which will be payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. The Employee will also, during the Employment Period, be permitted to participate in such life insurance, hospitalization, major medical, and other employee benefit plans of the Employer that may be in effect from time to time, to the extent the Employee is eligible under the terms of those plans, and be subject to the vacation, sick leave and holiday policies of Employer as in effect from time to time (collectively, the "Benefits"). Employee acknowledges that Employee's Benefits may be amended, enlarged, diminished or eliminated by Employer in its discretion from time to time. 3.2 Incentive Compensation. As additional compensation for the services to be rendered by the Employee pursuant to this Agreement, the Employee will earn Incentive Compensation as provided in this Section 3.2. (a) Definitions. As used in this Section 3.2, the following terms have ----------- the meanings specified below: 3 (i) "Hurdle Amount" means either $1,000,000 for a full Fiscal Year or, for a partial Fiscal Year, the amount determined by multiplying $1,000,000 by a fraction in which the numerator is the number of days in such partial Fiscal Year and the denominator is three hundred sixty-five (365). (ii) "Pre-Tax Operating Income" means the Employer's income from ordinary business operations (which will not include capital gains and interest or other investment income in excess of interest expense) from sale or rental of software, consulting services and other business operations conducted by Employer, less expenses and other charges (which will include interest expense in excess of interest income and will not include any provision for federal and state income taxes), all as reflected on the Employer's books, and will be calculated in accordance with generally accepted accounting principles as in effect from time to time and without taking the payment of Incentive Compensation to the Employee and Jerry L. Short into account. Pre-Tax Operating Income may be a negative number for any given period. For a partial Fiscal Year, Pre- Tax Operating Income shall be the Pre-Tax Operating Income for the full Fiscal Year multiplied by a fraction in which the numerator is the number of days in such partial Fiscal Year and the denominator is three hundred sixty-five (365). Daily Journal will have the exclusive right, unless otherwise agreed by Daily Journal, to sell and otherwise disseminate any information produced or processed by Employer. It is understood that Employer's business operations will not include such sale and dissemination of information, as distinguished from software and consulting services. (b) Determination of Incentive Compensation. For each Fiscal Year in --------------------------------------- which Employee is eligible to receive Incentive Compensation, Employer shall prepare a schedule detailing the Pre-Tax Operating Income for such Fiscal Year and calculating the Incentive Compensation as follows: FIRST, Employer shall subtract the Hurdle Amount from the Pre-Tax Operating Net Income for the Fiscal Year, with the remaining amount being the "Excess Pre-Tax Operating Income," which can be a negative number; SECOND, Employer shall add the Excess Pre-Tax Operating Income to the total Excess Pre-Tax Operating Income for each Fiscal Year and any partial Fiscal Year from the date of this Agreement through the date on which Incentive Compensation is being determined, with the total amount being the "Cumulative Excess Pre-Tax Operating Income;" THIRD, Employer shall multiply the Cumulative Excess Pre-Tax Operating Income by fifteen percent (15%), with the product being the "Cumulative Incentive Compensation;" FOURTH, the Employer shall subtract from the Cumulative Incentive Compensation the amount of Incentive Compensation previously paid to Employee from the date of this Agreement, leaving an amount equal to the "Incentive Compensation;" and FIFTH, if the Incentive Compensation is a positive number, it shall be paid to Employee as Incentive Compensation for that Fiscal Year. Employer shall deliver the schedule to the Employee, together with any Incentive Compensation due to the Employee, within 90 days following the completion for the Fiscal Year of the annual financial audit of Daily 4 Journal Corporation's consolidated financial statements by its public accounting firm. Workpapers and other relevant documents with respect to the calculation of the Incentive Compensation shall be made available to Employee for inspection, and Employer shall make the persons in charge of the preparation of the financial statements of Employer available for reasonable inquiry by Employee. Employee shall notify Employer in writing within 30 days following receipt of the schedule which shows any Incentive Compensation due if Employee does not agree with the amount of Incentive Compensation or any part of the calculations shown on the schedule. Employer and Employee will use good faith efforts during the 10 day period following delivery of the written notice to Employer to resolve any disputes. If Employer and Employee cannot resolve the disputes within the 10 day period, their disputes shall be promptly submitted to an independent public accounting firm jointly selected by Employer and Employee, which shall conduct such additional review as is necessary to resolve the specific disputes referred to it and, based thereon, shall determine the Incentive Compensation due to the Employee and related calculations. The review of the independent accountant shall be restricted to only those matters that are specifically identified to it by Employer and Employee as being the subject of dispute. The independent accountant's determination described above shall be made no later than 60 days following the selection of the independent accountant, shall be confirmed in writing by the independent accountant and shall be final and binding upon Employer and Employee. The fees and expenses of the independent accountant shall be prorated among Employer and Employee in proportion to the amounts in dispute resolved against each of them. (c) Prorated Incentive Compensation. For the Fiscal Year ended September ------------------------------- 30, 1999 and any subsequent Fiscal Year in which Employee ceases to be eligible to earn Incentive Compensation under this Agreement for any period of time, Employee shall only be eligible to earn Prorated Incentive Compensation. "Prorated Incentive Compensation" is determined by multiplying the Incentive Compensation for a full Fiscal Year by a fraction of which the numerator is the actual number of days during which Employee was eligible to earn Incentive Compensation during such Fiscal Year and the denominator is three hundred sixty-five (365). 3.3 Expense Reimbursement. Employer shall reimburse Employee for business expenses incurred in connection with the performance of Employee's duties under this Agreement in accordance with Employer's business expense reimbursement policies and procedures as in effect from time to time. SECTION 4. TERMINATION 4.1 Events of Termination. The Employment Period, the Employee's Salary, Bonus and Incentive Compensation, and any and all other rights of the Employee under this Agreement or otherwise as an employee of the Employer will terminate: (a) upon the death of the Employee; (b) upon the Disability of the Employee (as defined in Section 4.2) immediately upon notice from either party to the other; (c) by Employer for Cause (as defined in Section 4.3), immediately upon determination by the Board of Directors after providing the notice specified in Section 4.3; or (d) by either party at any time reasonably or unreasonably in the absolute discretion of such party upon at least five (5) days' prior 5 written notice from the terminating party to the other party (a "Termination Notice"). 4.2 Definition of "Disability". For purposes of Section 4.1, the Employee will be deemed to have a "Disability" if, for physical or mental reasons, the Employee is unable to perform the essential functions of the Employee's duties under this Agreement for 60 consecutive days, or 90 days during any twelve month period, as determined in accordance with this Section 4.2. The Disability of the Employee will be determined by a medical doctor selected by written agreement of the Employer and the Employee upon the request of either party by notice to the other. If the Employer and the Employee cannot agree on the selection of a medical doctor, each of them will select a medical doctor and the two medical doctors will select a third medical doctor who will determine whether the Employee has a Disability. The determination of the medical doctor selected under this Section 4.2 will be binding on both parties. The Employee must submit to a reasonable number of examinations by the medical doctor making the determination of Disability under this Section 4.2, and the Employee hereby authorizes the disclosure and release to the Employer of such determination and all supporting medical records. If the Employee is not legally competent, the Employee's legal guardian or duly authorized attorney-in-fact will act in the Employee's stead, under this Section 4.2, for the purposes of submitting the Employee to the examinations, and providing the authorization of disclosure, required under this Section 4.2. 4.3 Definition of "for Cause". For purposes of Section 4.1, the phrase "for Cause" means the good faith determination by the Board of Directors, after notice to the Employee and provision to the Employee of an opportunity to present the Employee's view of the relevant facts and circumstances to the Board of Directors, that the Employee has (a) breached any of the Employee's material fiduciary duties or material legal or contractual obligations to the Employer or any stockholder of the Employer, which breach, if curable, has not been cured by Employee to Employer's reasonable satisfaction within 30 days after notice to Employee by Employer, (b) engaged in gross or persistent misconduct which is materially injurious to the Employer, or (c) has been convicted of or pleaded nolo contendre to (i) any misdemeanor which either (1) relates to the affairs of the Employer and is materially injurious to the Employer or (2) which brings Employee into public disrepute, or (ii) any felony. 4.4 Termination Pay. Effective upon the Termination Date, the Employer will be obligated to pay the Employee (or, in the event of his death, his designated beneficiary as defined below) only such compensation as is provided in this Section 4.4, and in lieu of all other amounts and in settlement and complete release of all claims the Employee may have against the Employer under this Agreement. For purposes of this Section 4.4, the Employee's designated beneficiary will be such individual beneficiary or trust, located at such address, as the Employee may designate by notice to the Employer from time to time or, if the Employee fails to give notice to the Employer of such a beneficiary, the Employee's estate. Notwithstanding the preceding sentence, the Employer will have no duty, in any circumstances, to attempt to open an estate on behalf of the Employee, to determine whether any beneficiary designated by the Employee is alive or to ascertain the address of any such beneficiary, to determine the existence of any trust or to locate or attempt to locate any beneficiary, personal representative, or trustee. 6 (a) Termination upon Death. If this Agreement is terminated because of ---------------------- the Employee's death, the Employee will be entitled to receive his Salary through the end of the calendar month in which his death occurs. The Employee will receive Incentive Compensation for the period ending with the end of the month in which death occurs. (b) Termination upon Disability. If this Agreement is terminated by --------------------------- either party as a result of the Employee's Disability, as determined under Section 4.2, the Employer will pay the Employee his Salary through the remainder of the calendar month during which such termination is effective and for three (3) consecutive months thereafter, less any payment or other compensation made by Employer to Employee for any vacation, holiday, sick leave or other leave. The Employee will also receive Incentive Compensation for the period ending with the end of the third calendar month following the month in which termination for Disability is effective. (c) Termination by the Employer for Cause. If the Employer terminates ------------------------------------- the Employee's employment under this Agreement for Cause, the Employee will be entitled to receive his Salary only through the date such of such termination. The Employee will not earn (i) any Incentive Compensation for the Fiscal Year during which such termination occurs or any subsequent Fiscal Year or (ii) any additional Incentive Compensation whatsoever. (d) Elective Termination by Employer. If Employer terminates this -------------------------------- Agreement under subparagraph 4.1(d), the Employee will be entitled to receive (i) salary at an annual rate of $375,000 through January 3, 2004, payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly, and (ii) his Incentive Compensation for the period ending with the end of the month in which the Termination Date occurs. (e) Elective Termination by Employee. If Employee terminates this -------------------------------- Agreement under subparagraph 4.1(d), the Employee will be entitled to receive: (i) If a notice has not been delivered to Employee under Section 4.3 within six months prior to the date on which a Termination Notice is delivered, the Employee will be entitled to receive his Declining Salary through January 3, 2004 and Incentive Compensation for the period ending with the end of the month in which the Termination Date occurs, or (ii) If a notice has been delivered to Employee under Section 4.3 within six months prior to the date on which a Termination Notice is delivered, the Employee will be entitled to receive his Declining Salary only through the Termination Date. The Employee will not earn (A) any Incentive Compensation for the Fiscal Year during which the Termination Date occurs or any subsequent Fiscal Year or (B) any additional Incentive Compensation whatsoever. Notwithstanding paragraphs (d) and (e) above, Employer shall have no obligation to pay any Salary or Declining Salary after the Termination Date or any Incentive Compensation for any monthly periods following the month during which the Termination Date occurs if prior to the Termination Date Employer has incurred aggregate unreimbursed Damages pursuant to Section 5.2 of the Stock Purchase Agreement which exceed $500,000. For purposes of this Agreement, "Declining Salary" means the following annual salary levels during the period in which the Employee is eligible to receive Declining Salary: 7 During 1999, $375,000 During 2000, $300,000 During 2001, $225,000 During 2002, $175,000 During 2003 and 2004, $150,000. Declining Salary will be payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. The Employee's accrual of, or participation in plans providing for, the Benefits will cease at the Termination Date, and the Employee will be entitled to accrued Benefits pursuant to such plans only as provided in such plans. The Employee will not receive, as part of his termination pay pursuant to this Section 4, any payment or other compensation for any vacation, holiday, sick leave, or other leave unused on the Termination Date. SECTION 5. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS 5.1 Acknowledgments by the Employee. The Employee acknowledges that (a) during the Employment Period and as a part of his employment, the Employee will be afforded access to Confidential Information; (b) public disclosure of such Confidential Information could have an adverse effect on the Employer and its business; (c) because the Employee possesses substantial technical expertise and skill with respect to the Employer's business, the Employer desires to obtain exclusive ownership of each Employee Invention, and the Employer will be at a substantial competitive disadvantage if it fails to acquire exclusive ownership of each Employee Invention; (d) the Employer has required that the Employee make the covenants in this Section 5 as a condition to its purchase of substantially all of the assets of Quindeca Corporation; and (e) the provisions of this Section 5 are reasonable and necessary to prevent the improper use or disclosure of Confidential Information and to provide the Employer with exclusive ownership of all Employee Inventions. 5.2 Agreements of the Employee. In consideration of the compensation and benefits to be paid or provided to the Employee by the Employer under this Agreement, the Employee covenants as follows: (a) Confidentiality. --------------- (i) During and following the Employment Period, the Employee will hold in confidence the Confidential Information and will not disclose it to any person except with the specific prior written consent of the Employer or except as otherwise expressly permitted by the terms of this Agreement. (ii) Any trade secrets of the Employer will be entitled to all of the protections and benefits under any applicable state trade secret law and any other applicable law. If any information that the Employer deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered Confidential Information for purposes of this Agreement. The Employee hereby waives any requirement that the Employer submit proof of the economic value of any trade secret or post a bond or other security. (iii) If the Employee is requested or becomes legally compelled (by oral questions, interrogatories, requests for information or documents, subpoena, civil or criminal investigative demand, or similar process) or is required by a regulatory body to make any disclosure that is prohibited or otherwise constrained by this Agreement, the Employee will provide the Employer with prompt notice 8 of such request so that it may seek an appropriate protective order or other appropriate remedy. Subject to the foregoing, the Employee may furnish that portion (and only that portion) of the Confidential Information that, in the written opinion of its counsel reasonably acceptable to Employer, the Employee is likely legally compelled or is otherwise required to disclose or else stand liable for contempt or suffer other material censure or material penalty; provided, however, that the Employee must use reasonable efforts to obtain reliable assurance that confidential treatment will be accorded any Confidential Information so disclosed. (iv) The Employee will not remove from the Employer's premises (except to the extent such removal is for purposes of the performance of the Employee's duties at home or while traveling, or except as otherwise specifically authorized by the Employer) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form owned, leased or licensed by Employer (collectively, the "Proprietary Items"). The Employee recognizes that, as between the Employer and the Employee, all of the Proprietary Items, whether or not developed by the Employee, are the exclusive property of the Employer. Upon termination of this Agreement by either party, or upon the request of the Employer during the Employment Period, the Employee will return to the Employer all of the Proprietary Items in the Employee's possession or subject to the Employee's control, and the Employee shall not retain any copies, abstracts, sketches, or other physical embodiment of any of the Proprietary Items. (b) Employee Inventions. Each Employee Invention will belong exclusively ------------------- to the Employer. The Employee acknowledges that all of the Employee's writing, works of authorship, specially commissioned works listed in Exhibit A, and other Employee Inventions are works made for hire and the property of the Employer, including any copyrights, patents, or other intellectual property rights pertaining thereto. If it is determined that any such works are not works made for hire, the Employee hereby assigns to the Employer all of the Employee's right, title, and interest, including all rights of copyright, patent, and other intellectual property rights, to or in such Employee Inventions. The Employee covenants that he will promptly: (i) disclose to the Employer in writing any Employee Invention; (ii) assign to the Employer or to a party designated by the Employer, at the Employer's request and without additional compensation, all of the Employee's right to the Employee Invention for the United States and all foreign jurisdictions; (iii) execute and deliver to the Employer such applications, assignments, and other documents as the Employer may request in order to apply for and obtain patents or other registrations with respect to any Employee Invention in the United States and any foreign jurisdictions; (iv) sign all other papers necessary to carry out the above obligations; and (v) at the expense of Employer, give testimony and render any other assistance in support of the Employer's rights to any Employee Invention. 5.3 Disputes or Controversies. The Employee recognizes that should a dispute or controversy arising from or relating to this Agreement be submitted for adjudication to any court, arbitration panel, or other third party, the 9 preservation of the secrecy of Confidential Information may be jeopardized. All pleadings, documents, testimony, and records relating to any such adjudication will be maintained in secrecy and will be available for inspection by the Employer, the Employee, and their respective attorneys and experts, who will agree, in advance and in writing, to receive and maintain all such information in secrecy, except as may be limited by them in writing. SECTION 6. NON-COMPETITION AND NON-INTERFERENCE 6.1 Acknowledgments by the Employee. The Employee acknowledges that: (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character; (b) the Employer's business is national in scope and its products are marketed throughout the United States and Canada; (c) the Employer competes with other businesses that are or could be located in any part of the United States and Canada; (d) the Employer has required that the Employee make the covenants in this Section 6 as a condition to its purchase of substantially all of the assets (including all goodwill) of Quindeca Corporation; and (e) the provisions of this Section 6 are reasonable and necessary to protect the Employer's business. For purposes of this Section 6 only, during the Employment Period "Employer" shall include Daily Journal. 6.2 Covenants of the Employee. In consideration of the acknowledgments by the Employee, and in consideration of the compensation and benefits to be paid or provided to the Employee by the Employer, the Employee covenants that he will not, directly or indirectly: (a) during the Payment Period, except in the course of his employment hereunder, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend the Employee's name or any similar name to, lend Employee's credit to or render services or advice to, any business whose products or activities compete in whole or in part with the products or activities of the Employer anywhere within the United States or Canada; provided, however, that the Employee may purchase or otherwise acquire up to (but not more than) one percent (1%) of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934; (b) whether for the Employee's own account or for the account of any other person, at any time during the Payment Period, solicit business of the same or similar type being carried on by the Employer, from any person known by the Employee to be a customer of the Employer, whether or not the Employee had personal contact with such person during and by reason of the Employee's employment with the Employer; (c) whether for the Employee's own account or the account of any other person (i) at any time during the Payment Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is or was an employee of the Employer at any time during the Employment Period or in any manner induce or attempt to induce any employee of the Employer to terminate his employment with the Employer; or (ii) at any time during the Payment Period, interfere with the Employer's relationship with any person, including any person who at any time during the Employment Period was an employee, contractor, supplier, or customer of the Employer; or 10 (d) at any time during or after the Payment Period, disparage the Employer or any of its shareholders, directors, officers, employees, or agents. Nothing in paragraphs (a) or (b) above shall prevent Employee, following the Employment Period, from engaging or investing in, owning, managing, operating, financing, controlling, or participating in the ownership, management, operation, financing, or control of, being employed by, associated with, or in any manner connected with, lending the Employee's name or any similar name to, lending Employee's credit to or rendering services or advice to, any business which markets or develops software and related consulting services that Employee can demonstrate (i) are not based upon and do not use any Confidential Information or Employee Inventions, (ii) in the case of software, do not perform substantially the same function as any software product owned by or exclusively licensed to Employer, and (iii) is not specifically targeted for any industry served by Employer during the Employment Period or, if disclosed to Employee during the Employment Period, is proposed to be served by the Employer and for which the Employer has taken active steps during the Employment Period. If any covenant in this Section 6.2 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against the Employee. The period of time applicable to any covenant in this Section 6.2 will be extended by the duration of any violation by the Employee of such covenant. The Employee will, while the covenant under this Section 6.2 is in effect, give notice to the Employer, within ten days after accepting any other employment, of the identity of the Employee's employer. Daily Journal or the Employer may notify such employer that the Employee is bound by this Agreement and, at the Employer's election, furnish such employer with a copy of this Agreement or relevant portions thereof. SECTION 7. GENERAL PROVISIONS 7.1 Injunctive Relief and Additional Remedy. The Employee acknowledges that the injury that would be suffered by the Employer as a result of a breach of either Section 5 or 6 of this Agreement would be irreparable and that an award of monetary damages to the Employer for such a breach would be an inadequate remedy. Consequently, the Employer will have the right, in addition to any other rights it may have, to obtain injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of either Section 5 or 6 of this Agreement, and the Employer will not be obligated to post bond or other security in seeking such relief. Without limiting the Employer's rights under this Section 7 or any other remedies of the Employer, if the Employee breaches any of the provisions of Section 5 or 6, the Employer will have the right to cease making any payments otherwise due to the Employee under this Agreement provided that Employer shall remit to Employee such withheld payments upon a final determination that Employee did not engage in a breach of either Section 5 or 6 of this Agreement. 7.2 Covenants of Sections 5 and 6 Are Essential Covenants. The covenants by the Employee in Sections 5 and 6 are essential elements of this Agreement, and without the Employee's agreement to comply with such covenants, the Employer would not have entered into this Agreement or employed or continued the employment of the Employee. The Employer and the Employee have 11 independently consulted their respective counsel and have been advised in all respects concerning the reasonableness and propriety of such covenants, with specific regard to the nature of the business conducted by the Employer. The Employee's covenants in Section 5 are independent covenants and the existence of any claim by the Employee against the Employer under this Agreement or otherwise, or against Daily Journal, will not excuse the Employee's breach of any covenant in Section 5. If the Employee's employment hereunder expires or is terminated for any reason, this Agreement will continue in full force and effect as is necessary or appropriate to enforce the covenants and agreements of the Employee in Sections 5 and 6. 7.3 Representations and Warranties by the Employee. The Employee represents and warrants to the Employer as follows: (a) The execution and delivery by the Employee of this Agreement do not, and the performance by the Employee of the Employee's obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (i) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Employee; or (ii) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Employee is a party or by which the Employee is or may be bound. (b) The Employee has no outstanding commitments inconsistent with any of the terms of this Agreement or the services to be rendered by Employee under this Agreement. 7.4 Representations and Warranties by the Employer. The Employer represents and warrants to the Employee that the execution and delivery by the Employer of this Agreement have been duly authorized by Employer and do not, and the performance by the Employer of the Employer's obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (i) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Employer; or (ii) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Employer is a party or by which the Employer is or may be bound. 7.5 Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by either party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 7.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which the Employer may merge or consolidate or to 12 which all or substantially all of its assets may be transferred. The duties and covenants of the Employee under this Agreement, being personal, may not be delegated. 7.7 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nation-ally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Employer: Choice Information Systems, Inc. c/o Daily Journal Corporation 915 E. First Street Los Angeles, CA 90012 Attn: Gerald L. Salzman Fax: 213-330-2666 If to the Employee: Michael W. Payton _______________________________ _______________________________ Fax: __________________________ 7.8 Entire Agreement; Amendments. This Agreement, the Stock Purchase Agreement, the Shareholders Agreement, and the documents executed in connection with this Agreement, the Stock Purchase Agreement and the Shareholders Agreement, contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the parties hereto with respect to the subject matter hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto. 7.9 Governing Law. This Agreement will be governed by, and construed and enforced in accordance with, the laws of the State of California without regard to conflicts of laws principles. 7.10 Mandatory Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its National Rules for the Resolution of Employment Disputes, and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. Any arbitration under this Agreement shall be adjudicated by three (3) arbitrators, one selected by Employer within fifteen (15) days after the commencement of arbitration, one selected by Employee within fifteen (15) days after the commencement of arbitration and one selected by the two arbitrators within five (5) days after their appointment. If the arbitrators selected by the parties are unable or fail to agree upon a third arbitrator, the third arbitrator shall be selected by the American Arbitration Association. The place of the arbitration shall be at a place within the City of Los Angeles, California. Either party may apply to the arbitrators seeking injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Consistent with the expedited nature of arbitration, each party will, upon the written request of the other party, promptly provide the other with copies of documents relevant to the 13 issued raised by any claim or counterclaim. Any dispute regarding discovery, or the relevance or scope thereof, shall be determined by the arbitrators, which determination shall be conclusive. All discovery shall be completed within forty-five (45) days following the appointment of the third arbitrator. The award shall be by majority vote of the panel and shall be made within six (6) months of the filing of the notice of intention to arbitrate, and the arbitrators shall agree to comply with this schedule before accepting appointment. The arbitration panel's award shall be final. The parties agree and consent that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof. The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the party losing the arbitration shall pay all expenses and fees of the American Arbitration Association, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrators, and the fees, costs, and expenses of the arbitrators. The arbitration panel shall designate the prevailing party for these purposes. Except as may be required by law, neither a party, its counsel and other representatives, nor an arbitrator may disclose the existence, content, or results of any arbitrator hereunder without the prior written consent of both parties. 7.11 No Guarantee. Nothing in this Agreement shall constitute an obligation of Daily Journal, and Employee acknowledges that Daily Journal does not guarantee or otherwise agree to perform any obligations of Employer whether pursuant to this Agreement or otherwise. 7.12 Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 7.13 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 7.14 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 7.15 Indemnification. The Employer shall indemnify Employee for, and provide for advancement of expenses relating to, any proceedings brought or threatened to be brought against Employee by reason of the fact that Employee was an employee, officer or director of Employer or any of its affiliates following the date of this Agreement to the same extent and on the same terms as Daily Journal provides indemnification and expense advancement to its employees, officers and directors from time to time. 14 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above. EMPLOYER: CHOICE INFORMATION SYSTEMS, INC. By:__________________________________ Name: Title: EMPLOYEE: /s/ Michael W. Payton _____________________________________ Michael W. Payton 15 EXHIBIT A List of Employee Inventions --------------------------- All software heretofore invented by Employee or under his direction relating to business heretofore conducted by Employer or Quindeca Corporation. 16 EX-10.2 5 EMPLOYMENT AGREEMENT EXHIBIT 10.2 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made as of January 22, 1999 by Choice Information Systems, Inc., a Virginia corporation (the "Employer"), and Jerry L. Short, an individual resident in Colorado (the "Employee"). The parties, intending to be legally bound, agree as follows: SECTION 1. DEFINITIONS For the purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1. "Agreement" means this Employment Agreement, including all exhibits hereto, as amended from time to time. "Asset Purchase Agreement" means that certain Asset Purchase Agreement, dated January 22, 1999, between Employer, Quindeca Corporation and Employee, pursuant to which Employer purchased substantially all of the assets (including all goodwill) and assumed certain liabilities of Quindeca Corporation. "Benefits" is defined in Section 3.1. "Board of Directors" means the board of directors of the Employer. "Confidential Information" means any and all: (a) trade secrets concerning the business and affairs of the Employer, product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information) of Employer, and any other information of Employer, however documented, that is a trade secret within the meaning of applicable state trade secret law; and (b) information of Employer concerning the business and affairs of the Employer (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and (c) notes, analysis, compilations, studies, summaries, and other material prepared by or for the Employer containing or based, in whole or in part, on any information included in the foregoing. Notwithstanding the foregoing, the term "Confidential Information" does not include information that the Employee demonstrates (i) was or is generally available to the public other than as a result of a disclosure by the Employee or (ii) becomes available after the date of this Agreement to the Employee on a non-confidential basis, but only in the case of (ii) if (A) the source of 1 such information is not bound by any confidentiality agreement with, or confidentiality obligation to, the Employer, or is not otherwise prohibited from transmitting the information to the Employee by a contractual, legal, fiduciary or other legal obligation, and (B) if the Employee receives the information from the source prior to its disclosure to the Employee by the Employer, the Employee notifies the Employer of Employee's prior knowledge promptly after disclosure by the Employer of the information. "Daily Journal" means the Daily Journal Corporation, a South Carolina corporation, together with its subsidiaries and affiliates (other than Employer). "Declining Salary" is defined in Section 4.4. "Disability" is defined in Section 4.2. "Employee Invention" means any idea, invention, technique, modification, process, or improvement (whether patentable or not), any industrial design (whether registerable or not), any mask work, however fixed or encoded, that is suitable to be fixed, embedded or programmed in a semiconductor product (whether recordable or not), and any work of authorship (whether or not copyright protection may be obtained for it) created, conceived, or developed by the Employee, either solely or in conjunction with others, during the Employment Period, or a period that includes a portion of the Employment Period, that relates in any way to the business then being conducted or proposed to be conducted by the Employer during the Employment Period or (if disclosed to Employee during the Employment Period) after the Employment Period, and any such item created by the Employee, either solely or in conjunction with others, following the Termination Date, that is based upon or uses Confidential Information. The term "Employee Invention" includes the inventions, techniques, and specially commissioned works described in Exhibit A. Notwithstanding the foregoing, "Employee Inventions" shall not include software and related consulting services that Employee can demonstrate (a) are not based upon and do not use any Confidential Information, (b) have been developed solely on Employee's own time consistent with his obligations under Section 2.3 of this Agreement, (c) in the case of software, do not perform substantially the same function as any software product developed or marketed by Employer in its business (whether owned or licensed) whether prior to or during the Employment Period, and (d) cannot reasonably be expected to be used in any industry served or, if disclosed to Employee, proposed to be served by Employer during the Employment Period. "Employment Period" means the period of time the Employee is employed by the Employer. "Fiscal Year" means the Employer's fiscal year, as it exists on the date of this Agreement or as changed from time to time. "for Cause" is defined in Section 4.3. "Payment Period" means the Employment Period and any additional period of time during which Employee receives payments from the Employer pursuant to Section 4 of this Agreement following termination of the Employment Period. "person" means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, or governmental body. "Proprietary Items" is defined in Section 5.2(a)(iv). "Salary" is defined in Section 3.1(a). 2 "Stock Purchase Agreement" means that certain Stock Purchase Agreement, dated January 22, 1999, among the Employer, Daily Journal, Michael W. Payton and Terence E. Hahm. "Termination Date" means the date on which Employee's employment with Employer is terminated pursuant to this Agreement. "Termination Notice" is defined in Section 4.1(d). SECTION 2. EMPLOYMENT TERMS AND DUTIES 2.1 Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment by the Employer, upon the terms and conditions set forth in this Agreement. 2.2 Term. The Employee's term of employment will commence on January 22, 1999 and will end on January 23, 2004 unless earlier terminated pursuant to Section 4 of this Agreement. Upon the termination of Employee's employment with Employer, Employee shall be entitled only to the payments, if any, provided for in Section 4.4 of this Agreement. 2.3 Duties. The Employee will have such duties as are assigned or delegated to the Employee by the Board of Directors or President of the Employer, and will initially serve as Managing Director and Assistant Secretary of the Employer. The Employee will devote his entire business time, attention, skill, and energy exclusively to the business of the Employer. The Employee will (a) use his commercially reasonable efforts to promote the success of the Employer's business, (b) perform his assigned duties diligently, loyally, conscientiously, and with reasonable skill, (c) comply in all material respects with all rules, procedures and standards promulgated from time to time by the Employer with regard to his conduct and his access to and use of the Employer's property, information, equipment and premises, and (d) cooperate fully with the Board of Directors in the advancement of the best interests of the Employer. If the Employee is elected as a director of the Employer or as a director or officer of any of its affiliates, the Employee will fulfill his duties as such director or officer without additional compensation. Employee acknowledges that the Employer retains its full management prerogatives and discretion to manage and direct its business affairs, including the adoption, amendment, reorganization or modification of research, development, production, marketing or organizational decisions as it sees fit, notwithstanding any employee's individual interest in or expectation regarding a particular business program, position or product. SECTION 3. COMPENSATION 3.1 Basic Compensation. The Employee will be paid an annual salary of $375,000, subject to adjustment as provided below (the "Salary"), which will be payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. The Employee will also, during the Employment Period, be permitted to participate in such life insurance, hospitalization, major medical, and other employee benefit plans of the Employer that may be in effect from time to time, to the extent the Employee is eligible under the terms of those plans, and be subject to the vacation, sick leave and holiday policies of Employer as in effect from time to time (collectively, the "Benefits"). Employee acknowledges that Employee's Benefits may be amended, enlarged, diminished or eliminated by Employer in its discretion from time to time. 3.2 Incentive Compensation. As additional compensation for the services to be rendered by the Employee pursuant to this Agreement, the Employee will earn Incentive Compensation as provided in this Section 3.2. 3 (a) Definitions. As used in this Section 3.2, the following terms ----------- have the meanings specified below: (i) "Hurdle Amount" means either $1,000,000 for a full Fiscal Year or, for a partial Fiscal Year, the amount determined by multiplying $1,000,000 by a fraction in which the numerator is the number of days in such partial Fiscal Year and the denominator is three hundred sixty-five (365). (ii) "Pre-Tax Operating Income" means the Employer's income from ordinary business operations (which will not include capital gains and interest or other investment income in excess of interest expense) from sale or rental of software, consulting services and other business operations conducted by Employer, less expenses and other charges (which will include interest expense in excess of interest income and will not include any provision for federal and state income taxes), all as reflected on the Employer's books, and will be calculated in accordance with generally accepted accounting principles as in effect from time to time and without taking the payment of Incentive Compensation to the Employee and Michael W. Payton into account. Pre-Tax Operating Income may be a negative number for any given period. For a partial Fiscal Year, Pre-Tax Operating Income shall be the Pre-Tax Operating Income for the full Fiscal Year multiplied by a fraction in which the numerator is the number of days in such partial Fiscal Year and the denominator is three hundred sixty-five (365). Daily Journal will have the exclusive right, unless otherwise agreed by Daily Journal, to sell and otherwise disseminate any information produced or processed by Employer. It is understood that Employer's business operations will not include such sale and dissemination of information, as distinguished from software and consulting services. (b) Determination of Incentive Compensation. For each Fiscal Year in --------------------------------------- which Employee is eligible to receive Incentive Compensation, Employer shall prepare a schedule detailing the Pre-Tax Operating Income for such Fiscal Year and calculating the Incentive Compensation as follows: FIRST, Employer shall subtract the Hurdle Amount from the Pre-Tax Operating Net Income for the Fiscal Year, with the remaining amount being the "Excess Pre-Tax Operating Income," which can be a negative number; SECOND, Employer shall add the Excess Pre-Tax Operating Income to the total Excess Pre-Tax Operating Income for each Fiscal Year and any partial Fiscal Year from the date of this Agreement through the date on which Incentive Compensation is being determined, with the total amount being the "Cumulative Excess Pre-Tax Operating Income;" THIRD, Employer shall multiply the Cumulative Excess Pre-Tax Operating Income by fifteen percent (15%), with the product being the "Cumulative Incentive Compensation;" FOURTH, the Employer shall subtract from the Cumulative Incentive Compensation the amount of Incentive Compensation previously paid to Employee from the date of this Agreement, leaving an amount equal to the "Incentive Compensation;" and FIFTH, if the Incentive Compensation is a positive number, it shall be paid to Employee as Incentive Compensation for that Fiscal Year. 4 Employer shall deliver the schedule to the Employee, together with any Incentive Compensation due to the Employee, within 90 days following the completion for the Fiscal Year of the annual financial audit of Daily Journal Corporation's consolidated financial statements by its public accounting firm. Workpapers and other relevant documents with respect to the calculation of the Incentive Compensation shall be made available to Employee for inspection, and Employer shall make the persons in charge of the preparation of the financial statements of Employer available for reasonable inquiry by Employee. Employee shall notify Employer in writing within 30 days following receipt of the schedule which shows any Incentive Compensation due if Employee does not agree with the amount of Incentive Compensation or any part of the calculations shown on the schedule. Employer and Employee will use good faith efforts during the 10 day period following delivery of the written notice to Employer to resolve any disputes. If Employer and Employee cannot resolve the disputes within the 10 day period, their disputes shall be promptly submitted to an independent public accounting firm jointly selected by Employer and Employee, which shall conduct such additional review as is necessary to resolve the specific disputes referred to it and, based thereon, shall determine the Incentive Compensation due to the Employee and related calculations. The review of the independent accountant shall be restricted to only those matters that are specifically identified to it by Employer and Employee as being the subject of dispute. The independent accountant's determination described above shall be made no later than 60 days following the selection of the independent accountant, shall be confirmed in writing by the independent accountant and shall be final and binding upon Employer and Employee. The fees and expenses of the independent accountant shall be prorated among Employer and Employee in proportion to the amounts in dispute resolved against each of them. (c) Prorated Incentive Compensation. For the Fiscal Year ended ------------------------------- September 30, 1999 and any subsequent Fiscal Year in which Employee ceases to be eligible to earn Incentive Compensation under this Agreement for any period of time, Employee shall only be eligible to earn Prorated Incentive Compensation. "Prorated Incentive Compensation" is determined by multiplying the Incentive Compensation for a full Fiscal Year by a fraction of which the numerator is the actual number of days during which Employee was eligible to earn Incentive Compensation during such Fiscal Year and the denominator is three hundred sixty-five (365). 3.3 Expense Reimbursement. Employer shall reimburse Employee for business expenses incurred in connection with the performance of Employee's duties under this Agreement in accordance with Employer's business expense reimbursement policies and procedures as in effect from time to time. SECTION 4. TERMINATION 4.1 Events of Termination. The Employment Period, the Employee's Salary, Bonus and Incentive Compensation, and any and all other rights of the Employee under this Agreement or otherwise as an employee of the Employer will terminate: (a) upon the death of the Employee; (b) upon the Disability of the Employee (as defined in Section 4.2) immediately upon notice from either party to the other; (c) by Employer for Cause (as defined in Section 4.3), immediately upon determination by the Board of Directors after providing the notice specified in Section 4.3; or 5 (d) by either party at any time reasonably or unreasonably in the absolute discretion of such party upon at least five (5) days' prior written notice from the terminating party to the other party (a "Termination Notice"). 4.2 Definition of "Disability". For purposes of Section 4.1, the Employee will be deemed to have a "Disability" if, for physical or mental reasons, the Employee is unable to perform the essential functions of the Employee's duties under this Agreement for 60 consecutive days, or 90 days during any twelve month period, as determined in accordance with this Section 4.2. The Disability of the Employee will be determined by a medical doctor selected by written agreement of the Employer and the Employee upon the request of either party by notice to the other. If the Employer and the Employee cannot agree on the selection of a medical doctor, each of them will select a medical doctor and the two medical doctors will select a third medical doctor who will determine whether the Employee has a Disability. The determination of the medical doctor selected under this Section 4.2 will be binding on both parties. The Employee must submit to a reasonable number of examinations by the medical doctor making the determination of Disability under this Section 4.2, and the Employee hereby authorizes the disclosure and release to the Employer of such determination and all supporting medical records. If the Employee is not legally competent, the Employee's legal guardian or duly authorized attorney-in-fact will act in the Employee's stead, under this Section 4.2, for the purposes of submitting the Employee to the examinations, and providing the authorization of disclosure, required under this Section 4.2. 4.3 Definition of "for Cause". For purposes of Section 4.1, the phrase "for Cause" means the good faith determination by the Board of Directors, after notice to the Employee and provision to the Employee of an opportunity to present the Employee's view of the relevant facts and circumstances to the Board of Directors, that the Employee has (a) breached any of the Employee's material fiduciary duties or material legal or contractual obligations to the Employer or any stockholder of the Employer, which breach, if curable, has not been cured by Employee to Employer's reasonable satisfaction within 30 days after notice to Employee by Employer, (b) engaged in gross or persistent misconduct which is materially injurious to the Employer, or (c) has been convicted of or pleaded nolo contendre to (i) any misdemeanor which either (1) relates to the affairs of the Employer and is materially injurious to the Employer or (2) which brings Employee into public disrepute, or (ii) any felony. 4.4 Termination Pay. Effective upon the Termination Date, the Employer will be obligated to pay the Employee (or, in the event of his death, his designated beneficiary as defined below) only such compensation as is provided in this Section 4.4, and in lieu of all other amounts and in settlement and complete release of all claims the Employee may have against the Employer under this Agreement. For purposes of this Section 4.4, the Employee's designated beneficiary will be such individual beneficiary or trust, located at such address, as the Employee may designate by notice to the Employer from time to time or, if the Employee fails to give notice to the Employer of such a beneficiary, the Employee's estate. Notwithstanding the preceding sentence, the Employer will have no duty, in any circumstances, to attempt to open an estate on behalf of the Employee, to determine whether any beneficiary designated by the Employee is alive or to ascertain the address of 6 any such beneficiary, to determine the existence of any trust or to locate or attempt to locate any beneficiary, personal representative, or trustee. (a) Termination upon Death. If this Agreement is terminated because ---------------------- of the Employee's death, the Employee will be entitled to receive his Salary through the end of the calendar month in which his death occurs. The Employee will receive Incentive Compensation for the period ending with the end of the month in which death occurs. (b) Termination upon Disability. If this Agreement is terminated by --------------------------- either party as a result of the Employee's Disability, as determined under Section 4.2, the Employer will pay the Employee his Salary through the remainder of the calendar month during which such termination is effective and for three (3) consecutive months thereafter, less any payment or other compensation made by Employer to Employee for any vacation, holiday, sick leave or other leave. The Employee will also receive Incentive Compensation for the period ending with the end of the third calendar month following the month in which termination for Disability is effective. (c) Termination by the Employer for Cause. If the Employer terminates ------------------------------------- the Employee's employment under this Agreement for Cause, the Employee will be entitled to receive his Salary only through the date such of such termination. The Employee will not earn (i) any Incentive Compensation for the Fiscal Year during which such termination occurs or any subsequent Fiscal Year or (ii) any additional Incentive Compensation whatsoever. (d) Elective Termination by Employer. If Employer terminates this -------------------------------- Agreement under subparagraph 4.1(d), the Employee will be entitled to receive (i) salary at an annual rate of $375,000 through January 3, 2004, payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly, and (ii) his Incentive Compensation for the period ending with the end of the month in which the Termination Date occurs. (e) Elective Termination by Employee. If Employee terminates this -------------------------------- Agreement under subparagraph 4.1(d), the Employee will be entitled to receive: (i) If a notice has not been delivered to Employee under Section 4.3 within six months prior to the date on which a Termination Notice is delivered, the Employee will be entitled to receive his Declining Salary through January 3, 2004 and Incentive Compensation for the period ending with the end of the month in which the Termination Date occurs, or (ii) If a notice has been delivered to Employee under Section 4.3 within six months prior to the date on which a Termination Notice is delivered, the Employee will be entitled to receive his Declining Salary only through the Termination Date. The Employee will not earn (A) any Incentive Compensation for the Fiscal Year during which the Termination Date occurs or any subsequent Fiscal Year or (B) any additional Incentive Compensation whatsoever. Notwithstanding paragraphs (d) and (e) above, Employer shall have no obligation to pay any Salary or Declining Salary after the Termination Date or any Incentive Compensation for any monthly periods following the month during which the Termination Date occurs if prior to the Termination Date Employer has incurred aggregate unreimbursed Damages pursuant to Section 5.2 of the Asset Purchase Agreement which exceed $250,000. 7 For purposes of this Agreement, "Declining Salary" means the following annual salary levels during the period in which the Employee is eligible to receive Declining Salary: During 1999, $375,000 During 2000, $300,000 During 2001, $225,000 During 2002, $175,000 During 2003 and 2004, $150,000. Declining Salary will be payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. The Employee's accrual of, or participation in plans providing for, the Benefits will cease at the Termination Date, and the Employee will be entitled to accrued Benefits pursuant to such plans only as provided in such plans. The Employee will not receive, as part of his termination pay pursuant to this Section 4, any payment or other compensation for any vacation, holiday, sick leave, or other leave unused on the Termination Date. SECTION 5. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS 5.1 Acknowledgments by the Employee. The Employee acknowledges that (a) during the Employment Period and as a part of his employment, the Employee will be afforded access to Confidential Information; (b) public disclosure of such Confidential Information could have an adverse effect on the Employer and its business; (c) because the Employee possesses substantial technical expertise and skill with respect to the Employer's business, the Employer desires to obtain exclusive ownership of each Employee Invention, and the Employer will be at a substantial competitive disadvantage if it fails to acquire exclusive ownership of each Employee Invention; (d) the Employer has required that the Employee make the covenants in this Section 5 as a condition to its purchase of substantially all of the assets of Quindeca Corporation; and (e) the provisions of this Section 5 are reasonable and necessary to prevent the improper use or disclosure of Confidential Information and to provide the Employer with exclusive ownership of all Employee Inventions. 5.2 Agreements of the Employee. In consideration of the compensation and benefits to be paid or provided to the Employee by the Employer under this Agreement, the Employee covenants as follows: (a) Confidentiality. --------------- (i) During and following the Employment Period, the Employee will hold in confidence the Confidential Information and will not disclose it to any person except with the specific prior written consent of the Employer or except as otherwise expressly permitted by the terms of this Agreement. (ii) Any trade secrets of the Employer will be entitled to all of the protections and benefits under any applicable state trade secret law and any other applicable law. If any information that the Employer deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered Confidential Information for purposes of this Agreement. The Employee hereby waives any requirement that the Employer submit proof of the economic value of any trade secret or post a bond or other security. (iii) If the Employee is requested or becomes legally compelled (by oral questions, interrogatories, requests for information or 8 documents, subpoena, civil or criminal investigative demand, or similar process) or is required by a regulatory body to make any disclosure that is prohibited or otherwise constrained by this Agreement, the Employee will provide the Employer with prompt notice of such request so that it may seek an appropriate protective order or other appropriate remedy. Subject to the foregoing, the Employee may furnish that portion (and only that portion) of the Confidential Information that, in the written opinion of its counsel reasonably acceptable to Employer, the Employee is likely legally compelled or is otherwise required to disclose or else stand liable for contempt or suffer other material censure or material penalty; provided, however, that the Employee must use reasonable efforts to obtain reliable assurance that confidential treatment will be accorded any Confidential Information so disclosed. (iv) The Employee will not remove from the Employer's premises (except to the extent such removal is for purposes of the performance of the Employee's duties at home or while traveling, or except as otherwise specifically authorized by the Employer) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form owned, leased or licensed by Employer (collectively, the "Proprietary Items"). The Employee recognizes that, as between the Employer and the Employee, all of the Proprietary Items, whether or not developed by the Employee, are the exclusive property of the Employer. Upon termination of this Agreement by either party, or upon the request of the Employer during the Employment Period, the Employee will return to the Employer all of the Proprietary Items in the Employee's possession or subject to the Employee's control, and the Employee shall not retain any copies, abstracts, sketches, or other physical embodiment of any of the Proprietary Items. (b) Employee Inventions. Each Employee Invention will belong ------------------- exclusively to the Employer. The Employee acknowledges that all of the Employee's writing, works of authorship, specially commissioned works listed in Exhibit A, and other Employee Inventions are works made for hire and the property of the Employer, including any copyrights, patents, or other intellectual property rights pertaining thereto. If it is determined that any such works are not works made for hire, the Employee hereby assigns to the Employer all of the Employee's right, title, and interest, including all rights of copyright, patent, and other intellectual property rights, to or in such Employee Inventions. The Employee covenants that he will promptly: (i) disclose to the Employer in writing any Employee Invention; (ii) assign to the Employer or to a party designated by the Employer, at the Employer's request and without additional compensation, all of the Employee's right to the Employee Invention for the United States and all foreign jurisdictions; (iii) execute and deliver to the Employer such applications, assignments, and other documents as the Employer may request in order to apply for and obtain patents or other registrations with respect to any Employee Invention in the United States and any foreign jurisdictions; (iv) sign all other papers necessary to carry out the above obligations; and 9 (v) at the expense of Employer, give testimony and render any other assistance in support of the Employer's rights to any Employee Invention. 5.3 Disputes or Controversies. The Employee recognizes that should a dispute or controversy arising from or relating to this Agreement be submitted for adjudication to any court, arbitration panel, or other third party, the preservation of the secrecy of Confidential Information may be jeopardized. All pleadings, documents, testimony, and records relating to any such adjudication will be maintained in secrecy and will be available for inspection by the Employer, the Employee, and their respective attorneys and experts, who will agree, in advance and in writing, to receive and maintain all such information in secrecy, except as may be limited by them in writing. SECTION 6. NON-COMPETITION AND NON-INTERFERENCE 6.1 Acknowledgments by the Employee. The Employee acknowledges that: (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character; (b) the Employer's business is national in scope and its products are marketed throughout the United States and Canada; (c) the Employer competes with other businesses that are or could be located in any part of the United States and Canada; (d) the Employer has required that the Employee make the covenants in this Section 6 as a condition to its purchase of substantially all of the assets (including all goodwill) of Quindeca Corporation; and (e) the provisions of this Section 6 are reasonable and necessary to protect the Employer's business. For purposes of this Section 6 only, during the Employment Period "Employer" shall include Daily Journal. 6.2 Covenants of the Employee. In consideration of the acknowledgments by the Employee, and in consideration of the compensation and benefits to be paid or provided to the Employee by the Employer, the Employee covenants that he will not, directly or indirectly: (a) during the Payment Period, except in the course of his employment hereunder, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend the Employee's name or any similar name to, lend Employee's credit to or render services or advice to, any business whose products or activities compete in whole or in part with the products or activities of the Employer anywhere within the United States or Canada; provided, however, that the Employee may purchase or otherwise acquire up to (but not more than) one percent (1%) of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934; (b) whether for the Employee's own account or for the account of any other person, at any time during the Payment Period, solicit business of the same or similar type being carried on by the Employer, from any person known by the Employee to be a customer of the Employer, whether or not the Employee had personal contact with such person during and by reason of the Employee's employment with the Employer; (c) whether for the Employee's own account or the account of any other person (i) at any time during the Payment Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is or was an employee of the Employer at any time during the Employment Period or in any manner induce or attempt to induce any employee of the Employer to terminate his employment with the 10 Employer; or (ii) at any time during the Payment Period, interfere with the Employer's relationship with any person, including any person who at any time during the Employment Period was an employee, contractor, supplier, or customer of the Employer; or (d) at any time during or after the Payment Period, disparage the Employer or any of its shareholders, directors, officers, employees, or agents. Nothing in paragraphs (a) or (b) above shall prevent Employee, following the Employment Period, from engaging or investing in, owning, managing, operating, financing, controlling, or participating in the ownership, management, operation, financing, or control of, being employed by, associated with, or in any manner connected with, lending the Employee's name or any similar name to, lending Employee's credit to or rendering services or advice to, any business which markets or develops software and related consulting services that Employee can demonstrate (i) are not based upon and do not use any Confidential Information or Employee Inventions, (ii) in the case of software, do not perform substantially the same function as any software product owned by or exclusively licensed to Employer, and (iii) is not specifically targeted for any industry served by Employer during the Employment Period or, if disclosed to Employee during the Employment Period, is proposed to be served by the Employer and for which the Employer has taken active steps during the Employment Period. If any covenant in this Section 6.2 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against the Employee. The period of time applicable to any covenant in this Section 6.2 will be extended by the duration of any violation by the Employee of such covenant. The Employee will, while the covenant under this Section 6.2 is in effect, give notice to the Employer, within ten days after accepting any other employment, of the identity of the Employee's employer. Daily Journal or the Employer may notify such employer that the Employee is bound by this Agreement and, at the Employer's election, furnish such employer with a copy of this Agreement or relevant portions thereof. SECTION 7. GENERAL PROVISIONS 7.1 Injunctive Relief and Additional Remedy. The Employee acknowledges that the injury that would be suffered by the Employer as a result of a breach of either Section 5 or 6 of this Agreement would be irreparable and that an award of monetary damages to the Employer for such a breach would be an inadequate remedy. Consequently, the Employer will have the right, in addition to any other rights it may have, to obtain injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of either Section 5 or 6 of this Agreement, and the Employer will not be obligated to post bond or other security in seeking such relief. Without limiting the Employer's rights under this Section 7 or any other remedies of the Employer, if the Employee breaches any of the provisions of Section 5 or 6, the Employer will have the right to cease making any payments otherwise due to the Employee under this Agreement provided that Employer shall remit to Employee such withheld payments upon a final determination that Employee did not engage in a breach of either Section 5 or 6 of this Agreement. 11 7.2 Covenants of Sections 5 and 6 Are Essential Covenants. The covenants by the Employee in Sections 5 and 6 are essential elements of this Agreement, and without the Employee's agreement to comply with such covenants, the Employer would not have purchased substantially all of the assets of Quindeca Corporation pursuant to the Asset Purchase Agreement and the Employer would not have entered into this Agreement or employed or continued the employment of the Employee. The Employer and the Employee have independently consulted their respective counsel and have been advised in all respects concerning the reasonableness and propriety of such covenants, with specific regard to the nature of the business conducted by the Employer. The Employee's covenants in Section 5 are independent covenants and the existence of any claim by the Employee against the Employer under this Agreement or otherwise, or against Daily Journal, will not excuse the Employee's breach of any covenant in Section 5. If the Employee's employment hereunder expires or is terminated for any reason, this Agreement will continue in full force and effect as is necessary or appropriate to enforce the covenants and agreements of the Employee in Sections 5 and 6. 7.3 Representations and Warranties by the Employee. The Employee represents and warrants to the Employer as follows: (a) The execution and delivery by the Employee of this Agreement do not, and the performance by the Employee of the Employee's obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (i) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Employee; or (ii) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Employee is a party or by which the Employee is or may be bound. (b) The Employee has no outstanding commitments inconsistent with any of the terms of this Agreement or the services to be rendered by Employee under this Agreement. 7.4 Representations and Warranties by the Employer. The Employer represents and warrants to the Employee that the execution and delivery by the Employer of this Agreement have been duly authorized by Employer and do not, and the performance by the Employer of the Employer's obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (i) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Employer; or (ii) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Employer is a party or by which the Employer is or may be bound. 7.5 Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by either party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right 12 of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 7.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which the Employer may merge or consolidate or to which all or substantially all of its assets may be transferred. The duties and covenants of the Employee under this Agreement, being personal, may not be delegated. 7.7 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nation-ally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Employer: Choice Information Systems, Inc. c/o Daily Journal Corporation 915 E. First Street Los Angeles, CA 90012 Attn: Gerald L. Salzman Fax: 213-330-2666 If to the Employee: Jerry L. Short P.O. Box 16040 Golden, CO 80402 Fax: 888-719-7819 7.8 Entire Agreement; Amendments. This Agreement, the Asset Purchase Agreement and the Shareholders Agreement, and the documents executed in connection with this Agreement, the Asset Purchase Agreement and the Shareholders Agreement, contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the parties hereto with respect to the subject matter hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto. 7.9 Governing Law. This Agreement will be governed by, and construed and enforced in accordance with, the laws of the State of California without regard to conflicts of laws principles. 7.10 Mandatory Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its National Rules for the Resolution of Employment Disputes, and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. Any arbitration under this Agreement shall be adjudicated by three (3) arbitrators, one selected by Employer within fifteen (15) days after the commencement of arbitration, one selected by Employee within fifteen (15) days after the commencement of arbitration and one selected by the two arbitrators within five (5) days after their appointment. If the arbitrators selected by the parties are unable or fail to agree upon a third arbitrator, the third arbitrator shall be selected by the American 13 Arbitration Association. The place of the arbitration shall be at a place within the City of Los Angeles, California. Either party may apply to the arbitrators seeking injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Consistent with the expedited nature of arbitration, each party will, upon the written request of the other party, promptly provide the other with copies of documents relevant to the issued raised by any claim or counterclaim. Any dispute regarding discovery, or the relevance or scope thereof, shall be determined by the arbitrators, which determination shall be conclusive. All discovery shall be completed within forty-five (45) days following the appointment of the third arbitrator. The award shall be by majority vote of the panel and shall be made within six (6) months of the filing of the notice of intention to arbitrate, and the arbitrators shall agree to comply with this schedule before accepting appointment. The arbitration panel's award shall be final. The parties agree and consent that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof. The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the party losing the arbitration shall pay all expenses and fees of the American Arbitration Association, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrators, and the fees, costs, and expenses of the arbitrators. The arbitration panel shall designate the prevailing party for these purposes. Except as may be required by law, neither a party, its counsel and other representatives, nor an arbitrator may disclose the existence, content, or results of any arbitrator hereunder without the prior written consent of both parties. 7.11 No Guarantee. Nothing in this Agreement shall constitute an obligation of Daily Journal, and Employee acknowledges that Daily Journal does not guarantee or otherwise agree to perform any obligations of Employer whether pursuant to this Agreement or otherwise. 7.12 Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 7.13 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 7.14 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 7.15 Indemnification. The Employer shall indemnify Employee for, and provide for advancement of expenses relating to, any proceedings brought or threatened to be brought against Employee by reason of the fact that Employee was an employee, officer or director of Employer or any of its affiliates following the date of this Agreement to the same extent and on the same terms as Daily Journal provides indemnification and expense advancement to its employees, officers and directors from time to time. 14 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above. EMPLOYER: CHOICE INFORMATION SYSTEMS, INC. By:__________________________________ Name: Title: EMPLOYEE: /s/ Jerry L. Short _____________________________________ Jerry L. Short 15 EXHIBIT A List of Employee Inventions --------------------------- All software heretofore invented by Employee or under his direction relating to business heretofore conducted by Employer or Quindeca Corporation. 16 EX-10.3 6 EMPLOYMENT AGREEMENT EXHIBIT 10.3 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made as of January 22, 1999 by Choice Information Systems, Inc., a Virginia corporation (the "Employer"), and Terence E. Hahm, an individual resident in Wisconsin (the "Employee"). The parties, intending to be legally bound, agree as follows: SECTION 1. DEFINITIONS For the purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1. "Agreement" means this Employment Agreement, including all exhibits hereto, as amended from time to time. "Benefits" is defined in Section 3.1. "Board of Directors" means the board of directors of the Employer. "Confidential Information" means any and all: (a) trade secrets concerning the business and affairs of the Employer, product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information) of Employer, and any other information of Employer, however documented, that is a trade secret within the meaning of applicable state trade secret law; and (b) information of Employer concerning the business and affairs of the Employer (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented; and (c) notes, analysis, compilations, studies, summaries, and other material prepared by or for the Employer containing or based, in whole or in part, on any information included in the foregoing. Notwithstanding the foregoing, the term "Confidential Information" does not include information that the Employee demonstrates (i) was or is generally available to the public other than as a result of a disclosure by the Employee or (ii) becomes available after the date of this Agreement to the Employee on a non-confidential basis, but only in the case of (ii) if (A) the source of such information is not bound by any confidentiality agreement with, or confidentiality obligation to, the Employer, or is not otherwise prohibited from transmitting the information to the Employee by a contractual, legal, fiduciary or other legal obligation, and (B) if the Employee receives the information from the source prior to its disclosure to the Employee by the 1 Employer, the Employee notifies the Employer of Employee's prior knowledge promptly after disclosure by the Employer of the information. "Daily Journal" means the Daily Journal Corporation, a South Carolina corporation, together with its subsidiaries and affiliates (other than Employer). "Declining Salary" is defined in Section 4.4. "Disability" is defined in Section 4.2. "Employee Invention" means any idea, invention, technique, modification, process, or improvement (whether patentable or not), any industrial design (whether registerable or not), any mask work, however fixed or encoded, that is suitable to be fixed, embedded or programmed in a semiconductor product (whether recordable or not), and any work of authorship (whether or not copyright protection may be obtained for it) created, conceived, or developed by the Employee, either solely or in conjunction with others, during the Employment Period, or a period that includes a portion of the Employment Period, that relates in any way to the business then being conducted or proposed to be conducted by the Employer during the Employment Period or (if disclosed to Employee during the Employment Period) after the Employment Period, and any such item created by the Employee, either solely or in conjunction with others, following the Termination Date, that is based upon or uses Confidential Information. The term "Employee Invention" includes the inventions, techniques, and specially commissioned works described in Exhibit A. Notwithstanding the foregoing, "Employee Inventions" shall not include software and related consulting services that Employee can demonstrate (a) are not based upon and do not use any Confidential Information, (b) have been developed solely on Employee's own time consistent with his obligations under Section 2.3 of this Agreement, (c) in the case of software, do not perform substantially the same function as any software product developed or marketed by Employer in its business (whether owned or licensed) whether prior to or during the Employment Period, and (d) cannot reasonably be expected to be used in any industry served or, if disclosed to Employee, proposed to be served by Employer during the Employment Period. "Employment Period" means the period of time the Employee is employed by the Employer. "Fiscal Year" means the Employer's fiscal year, as it exists on the date of this Agreement or as changed from time to time. "for Cause" is defined in Section 4.3. "Payment Period" means the Employment Period and any additional period of time during which Employee receives payments from the Employer pursuant to Section 4 of this Agreement following termination of the Employment Period. "person" means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, or governmental body. "Proprietary Items" is defined in Section 5.2(a)(iv). "Salary" is defined in Section 3.1(a). "Stock Purchase Agreement" means that certain Stock Purchase Agreement, dated January 22, 1999, among the Employer, Daily Journal, Michael W. Payton and Employee. 2 "Termination Date" means the date on which Employee's employment with Employer is terminated pursuant to this Agreement. "Termination Notice" is defined in Section 4.1(d). SECTION 2. EMPLOYMENT TERMS AND DUTIES 2.1 Employment. The Employer hereby employs the Employee, and the Employee hereby accepts employment by the Employer, upon the terms and conditions set forth in this Agreement. 2.2 Term. The Employee's term of employment will commence on January 22, 1999 and will end on January 23, 2004 unless earlier terminated pursuant to Section 4 of this Agreement. Upon the termination of Employee's employment with Employer, Employee shall be entitled only to the payments, if any, provided for in Section 4.4 of this Agreement. 2.3 Duties. The Employee will have such duties as are assigned or delegated to the Employee by the Board of Directors or President of the Employer. The Employee will devote his entire business time, attention, skill, and energy exclusively to the business of the Employer. The Employee will (a) use his commercially reasonable efforts to promote the success of the Employer's business, (b) perform his assigned duties diligently, loyally, conscientiously, and with reasonable skill, (c) comply in all material respects with all rules, procedures and standards promulgated from time to time by the Employer with regard to his conduct and his access to and use of the Employer's property, information, equipment and premises, and (d) cooperate fully with the Board of Directors in the advancement of the best interests of the Employer. If the Employee is elected as a director of the Employer or as a director or officer of any of its affiliates, the Employee will fulfill his duties as such director or officer without additional compensation. Employee acknowledges that the Employer retains its full management prerogatives and discretion to manage and direct its business affairs, including the adoption, amendment, reorganization or modification of research, development, production, marketing or organizational decisions as it sees fit, notwithstanding any employee's individual interest in or expectation regarding a particular business program, position or product. SECTION 3. COMPENSATION 3.1 Basic Compensation. The Employee will be paid an annual salary of $250,000, subject to adjustment as provided below (the "Salary"), which will be payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. The Employee will also, during the Employment Period, be permitted to participate in such life insurance, hospitalization, major medical, and other employee benefit plans of the Employer that may be in effect from time to time, to the extent the Employee is eligible under the terms of those plans, and be subject to the vacation, sick leave and holiday policies of Employer as in effect from time to time (collectively, the "Benefits"). Employee acknowledges that Employee's Benefits may be amended, enlarged, diminished or eliminated by Employer in its discretion from time to time. 3.2 Expense Reimbursement. Employer shall reimburse Employee for business expenses incurred in connection with the performance of Employee's duties under this Agreement in accordance with Employer's business expense reimbursement policies and procedures as in effect from time to time. 3 SECTION 4. TERMINATION 4.1 Events of Termination. The Employment Period, the Employee's Salary and Bonus, and any and all other rights of the Employee under this Agreement or otherwise as an employee of the Employer will terminate: (a) upon the death of the Employee; (b) upon the Disability of the Employee (as defined in Section 4.2) immediately upon notice from either party to the other; (c) by Employer for Cause (as defined in Section 4.3), immediately upon determination by the Board of Directors after providing the notice specified in Section 4.3; or (d) by either party at any time reasonably or unreasonably in the absolute discretion of such party upon at least five (5) days' prior written notice from the terminating party to the other party (a "Termination Notice"). 4.2 Definition of "Disability". For purposes of Section 4.1, the Employee will be deemed to have a "Disability" if, for physical or mental reasons, the Employee is unable to perform the essential functions of the Employee's duties under this Agreement for 60 consecutive days, or 90 days during any twelve month period, as determined in accordance with this Section 4.2. The Disability of the Employee will be determined by a medical doctor selected by written agreement of the Employer and the Employee upon the request of either party by notice to the other. If the Employer and the Employee cannot agree on the selection of a medical doctor, each of them will select a medical doctor and the two medical doctors will select a third medical doctor who will determine whether the Employee has a Disability. The determination of the medical doctor selected under this Section 4.2 will be binding on both parties. The Employee must submit to a reasonable number of examinations by the medical doctor making the determination of Disability under this Section 4.2, and the Employee hereby authorizes the disclosure and release to the Employer of such determination and all supporting medical records. If the Employee is not legally competent, the Employee's legal guardian or duly authorized attorney-in-fact will act in the Employee's stead, under this Section 4.2, for the purposes of submitting the Employee to the examinations, and providing the authorization of disclosure, required under this Section 4.2. 4.3 Definition of "for Cause". For purposes of Section 4.1, the phrase "for Cause" means the good faith determination by the Board of Directors, after notice to the Employee and provision to the Employee of an opportunity to present the Employee's view of the relevant facts and circumstances to the Board of Directors, that the Employee has (a) breached any of the Employee's material fiduciary duties or material legal or contractual obligations to the Employer or any stockholder of the Employer, which breach, if curable, has not been cured by Employee to Employer's reasonable satisfaction within 30 days after notice to Employee by Employer, (b) engaged in gross or persistent misconduct which is materially injurious to the Employer, or (c) has been convicted of or pleaded nolo contendre to (i) any misdemeanor which either (1) relates to the affairs of the Employer and is materially injurious to the Employer or (2) which brings Employee into public disrepute, or (ii) any felony. 4 4.4 Termination Pay. Effective upon the Termination Date, the Employer will be obligated to pay the Employee (or, in the event of his death, his designated beneficiary as defined below) only such compensation as is provided in this Section 4.4, and in lieu of all other amounts and in settlement and complete release of all claims the Employee may have against the Employer under this Agreement. For purposes of this Section 4.4, the Employee's designated beneficiary will be such individual beneficiary or trust, located at such address, as the Employee may designate by notice to the Employer from time to time or, if the Employee fails to give notice to the Employer of such a beneficiary, the Employee's estate. Notwithstanding the preceding sentence, the Employer will have no duty, in any circumstances, to attempt to open an estate on behalf of the Employee, to determine whether any beneficiary designated by the Employee is alive or to ascertain the address of any such beneficiary, to determine the existence of any trust or to locate or attempt to locate any beneficiary, personal representative, or trustee. (a) Termination upon Death. If this Agreement is terminated because of ---------------------- the Employee's death, the Employee will be entitled to receive his Salary through the end of the calendar month in which his death occurs. (b) Termination upon Disability. If this Agreement is terminated by --------------------------- either party as a result of the Employee's Disability, as determined under Section 4.2, the Employer will pay the Employee his Salary through the remainder of the calendar month during which such termination is effective and for three (3) consecutive months thereafter, less any payment or other compensation made by Employer to Employee for any vacation, holiday, sick leave or other leave. (c) Termination by the Employer for Cause. If the Employer terminates ------------------------------------- the Employee's employment under this Agreement for Cause, the Employee will be entitled to receive his Salary only through the date such of such termination. (d) Elective Termination by Employer. If Employer terminates this -------------------------------- Agreement under subparagraph 4.1(d), the Employee will be entitled to receive salary at an annual rate of $250,000 through January 3, 2004, payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. (e) Elective Termination by Employee. If Employee terminates this -------------------------------- Agreement under subparagraph 4.1(d), the Employee will be entitled to receive: (i) If a notice has not been delivered to Employee under Section 4.3 within six months prior to the date on which a Termination Notice is delivered, the Employee will be entitled to receive his Declining Salary through January 3, 2004, or (ii) If a notice has been delivered to Employee under Section 4.3 within six months prior to the date on which a Termination Notice is delivered, the Employee will be entitled to receive his Declining Salary only through the Termination Date. Notwithstanding paragraphs (d) and (e) above, Employer shall have no obligation to pay any Salary or Declining Salary after the Termination Date if prior to the Termination Date Employer has incurred aggregate unreimbursed Damages pursuant to Section 5.2 of the Stock Purchase Agreement which exceed $500,000. 5 For purposes of this Agreement, "Declining Salary" means the following annual salary levels during the period in which the Employee is eligible to receive Declining Salary: During 1999, $250,000 During 2000, $200,000 During 2001, $150,000 During 2002, $116,667 During 2003 and 2004, $100,000. Declining Salary will be payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. The Employee's accrual of, or participation in plans providing for, the Benefits will cease at the Termination Date, and the Employee will be entitled to accrued Benefits pursuant to such plans only as provided in such plans. The Employee will not receive, as part of his termination pay pursuant to this Section 4, any payment or other compensation for any vacation, holiday, sick leave, or other leave unused on the Termination Date. SECTION 5. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS 5.1 Acknowledgments by the Employee. The Employee acknowledges that (a) during the Employment Period and as a part of his employment, the Employee will be afforded access to Confidential Information; (b) public disclosure of such Confidential Information could have an adverse effect on the Employer and its business; (c) because the Employee possesses substantial technical expertise and skill with respect to the Employer's business, the Employer desires to obtain exclusive ownership of each Employee Invention, and the Employer will be at a substantial competitive disadvantage if it fails to acquire exclusive ownership of each Employee Invention; (d) the Employer has required that the Employee make the covenants in this Section 5 as a condition to its purchase of substantially all of the assets of Quindeca Corporation; and (e) the provisions of this Section 5 are reasonable and necessary to prevent the improper use or disclosure of Confidential Information and to provide the Employer with exclusive ownership of all Employee Inventions. 5.2 Agreements of the Employee. In consideration of the compensation and benefits to be paid or provided to the Employee by the Employer under this Agreement, the Employee covenants as follows: (a) Confidentiality. --------------- (i) During and following the Employment Period, the Employee will hold in confidence the Confidential Information and will not disclose it to any person except with the specific prior written consent of the Employer or except as otherwise expressly permitted by the terms of this Agreement. (ii) Any trade secrets of the Employer will be entitled to all of the protections and benefits under any applicable state trade secret law and any other applicable law. If any information that the Employer deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered Confidential Information for purposes of this Agreement. The Employee hereby waives any requirement that the Employer submit proof of the economic value of any trade secret or post a bond or other security. (iii) If the Employee is requested or becomes legally compelled (by oral questions, interrogatories, requests for information or 6 documents, subpoena, civil or criminal investigative demand, or similar process) or is required by a regulatory body to make any disclosure that is prohibited or otherwise constrained by this Agreement, the Employee will provide the Employer with prompt notice of such request so that it may seek an appropriate protective order or other appropriate remedy. Subject to the foregoing, the Employee may furnish that portion (and only that portion) of the Confidential Information that, in the written opinion of its counsel reasonably acceptable to Employer, the Employee is likely legally compelled or is otherwise required to disclose or else stand liable for contempt or suffer other material censure or material penalty; provided, however, that the Employee must use reasonable efforts to obtain reliable assurance that confidential treatment will be accorded any Confidential Information so disclosed. (iv) The Employee will not remove from the Employer's premises (except to the extent such removal is for purposes of the performance of the Employee's duties at home or while traveling, or except as otherwise specifically authorized by the Employer) any document, record, notebook, plan, model, component, device, or computer software or code, whether embodied in a disk or in any other form owned, leased or licensed by Employer (collectively, the "Proprietary Items"). The Employee recognizes that, as between the Employer and the Employee, all of the Proprietary Items, whether or not developed by the Employee, are the exclusive property of the Employer. Upon termination of this Agreement by either party, or upon the request of the Employer during the Employment Period, the Employee will return to the Employer all of the Proprietary Items in the Employee's possession or subject to the Employee's control, and the Employee shall not retain any copies, abstracts, sketches, or other physical embodiment of any of the Proprietary Items. (b) Employee Inventions. Each Employee Invention will belong exclusively ------------------- to the Employer. The Employee acknowledges that all of the Employee's writing, works of authorship, specially commissioned works listed in Exhibit A, and other Employee Inventions are works made for hire and the property of the Employer, including any copyrights, patents, or other intellectual property rights pertaining thereto. If it is determined that any such works are not works made for hire, the Employee hereby assigns to the Employer all of the Employee's right, title, and interest, including all rights of copyright, patent, and other intellectual property rights, to or in such Employee Inventions. The Employee covenants that he will promptly: (i) disclose to the Employer in writing any Employee Invention; (ii) assign to the Employer or to a party designated by the Employer, at the Employer's request and without additional compensation, all of the Employee's right to the Employee Invention for the United States and all foreign jurisdictions; (iii) execute and deliver to the Employer such applications, assignments, and other documents as the Employer may request in order to apply for and obtain patents or other registrations with respect to any Employee Invention in the United States and any foreign jurisdictions; (iv) sign all other papers necessary to carry out the above obligations; and (v) at the expense of Employer, give testimony and render any other assistance in support of the Employer's rights to any Employee Invention. 7 5.3 Disputes or Controversies. The Employee recognizes that should a dispute or controversy arising from or relating to this Agreement be submitted for adjudication to any court, arbitration panel, or other third party, the preservation of the secrecy of Confidential Information may be jeopardized. All pleadings, documents, testimony, and records relating to any such adjudication will be maintained in secrecy and will be available for inspection by the Employer, the Employee, and their respective attorneys and experts, who will agree, in advance and in writing, to receive and maintain all such information in secrecy, except as may be limited by them in writing. SECTION 6. NON-COMPETITION AND NON-INTERFERENCE 6.1 Acknowledgments by the Employee. The Employee acknowledges that: (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character; (b) the Employer's business is national in scope and its products are marketed throughout the United States and Canada; (c) the Employer competes with other businesses that are or could be located in any part of the United States and Canada; (d) the Employer has required that the Employee make the covenants in this Section 6 as a condition to its purchase of substantially all of the assets (including all goodwill) of Quindeca Corporation; and (e) the provisions of this Section 6 are reasonable and necessary to protect the Employer's business. For purposes of this Section 6 only, during the Employment Period "Employer" shall include Daily Journal. 6.2 Covenants of the Employee. In consideration of the acknowledgments by the Employee, and in consideration of the compensation and benefits to be paid or provided to the Employee by the Employer, the Employee covenants that he will not, directly or indirectly: (a) during the Payment Period, except in the course of his employment hereunder, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend the Employee's name or any similar name to, lend Employee's credit to or render services or advice to, any business whose products or activities compete in whole or in part with the products or activities of the Employer anywhere within the United States or Canada; provided, however, that the Employee may purchase or otherwise acquire up to (but not more than) one percent (1%) of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934; (b) whether for the Employee's own account or for the account of any other person, at any time during the Payment Period, solicit business of the same or similar type being carried on by the Employer, from any person known by the Employee to be a customer of the Employer, whether or not the Employee had personal contact with such person during and by reason of the Employee's employment with the Employer; (c) whether for the Employee's own account or the account of any other person (i) at any time during the Payment Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is or was an employee of the Employer at any time during the Employment Period or in any manner induce or attempt to induce any employee of the Employer to terminate his employment with the Employer; or (ii) at any time during the Payment Period, interfere with the Employer's relationship with any person, including any person who at 8 any time during the Employment Period was an employee, contractor, supplier, or customer of the Employer; or (d) at any time during or after the Payment Period, disparage the Employer or any of its shareholders, directors, officers, employees, or agents. Nothing in paragraphs (a) or (b) above shall prevent Employee, following the Employment Period, from engaging or investing in, owning, managing, operating, financing, controlling, or participating in the ownership, management, operation, financing, or control of, being employed by, associated with, or in any manner connected with, lending the Employee's name or any similar name to, lending Employee's credit to or rendering services or advice to, any business which markets or develops software and related consulting services that Employee can demonstrate (i) are not based upon and do not use any Confidential Information or Employee Inventions, (ii) in the case of software, do not perform substantially the same function as any software product owned by or exclusively licensed to Employer, and (iii) is not specifically targeted for any industry served by Employer during the Employment Period or, if disclosed to Employee during the Employment Period, is proposed to be served by the Employer and for which the Employer has taken active steps during the Employment Period. If any covenant in this Section 6.2 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against the Employee. The period of time applicable to any covenant in this Section 6.2 will be extended by the duration of any violation by the Employee of such covenant. The Employee will, while the covenant under this Section 6.2 is in effect, give notice to the Employer, within ten days after accepting any other employment, of the identity of the Employee's employer. Daily Journal or the Employer may notify such employer that the Employee is bound by this Agreement and, at the Employer's election, furnish such employer with a copy of this Agreement or relevant portions thereof. SECTION 7. GENERAL PROVISIONS 7.1 Injunctive Relief and Additional Remedy. The Employee acknowledges that the injury that would be suffered by the Employer as a result of a breach of either Section 5 or 6 of this Agreement would be irreparable and that an award of monetary damages to the Employer for such a breach would be an inadequate remedy. Consequently, the Employer will have the right, in addition to any other rights it may have, to obtain injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of either Section 5 or 6 of this Agreement, and the Employer will not be obligated to post bond or other security in seeking such relief. Without limiting the Employer's rights under this Section 7 or any other remedies of the Employer, if the Employee breaches any of the provisions of Section 5 or 6, the Employer will have the right to cease making any payments otherwise due to the Employee under this Agreement provided that Employer shall remit to Employee such withheld payments upon a final determination that Employee did not engage in a breach of either Section 5 or 6 of this Agreement. 7.2 Covenants of Sections 5 and 6 Are Essential Covenants. The covenants by the Employee in Sections 5 and 6 are essential elements of this 9 Agreement, and without the Employee's agreement to comply with such covenants, the Employer would not have entered into this Agreement or employed or continued the employment of the Employee. The Employer and the Employee have independently consulted their respective counsel and have been advised in all respects concerning the reasonableness and propriety of such covenants, with specific regard to the nature of the business conducted by the Employer. The Employee's covenants in Section 5 are independent covenants and the existence of any claim by the Employee against the Employer under this Agreement or otherwise, or against Daily Journal, will not excuse the Employee's breach of any covenant in Section 5. If the Employee's employment hereunder expires or is terminated for any reason, this Agreement will continue in full force and effect as is necessary or appropriate to enforce the covenants and agreements of the Employee in Sections 5 and 6. 7.3 Representations and Warranties by the Employee. The Employee represents and warrants to the Employer as follows: (a) The execution and delivery by the Employee of this Agreement do not, and the performance by the Employee of the Employee's obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (i) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Employee; or (ii) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Employee is a party or by which the Employee is or may be bound. (b) The Employee has no outstanding commitments inconsistent with any of the terms of this Agreement or the services to be rendered by Employee under this Agreement. 7.4 Representations and Warranties by the Employer. The Employer represents and warrants to the Employee that the execution and delivery by the Employer of this Agreement have been duly authorized by Employer and do not, and the performance by the Employer of the Employer's obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (i) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Employer; or (ii) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Employer is a party or by which the Employer is or may be bound. 7.5 Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by either party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 10 7.6 Binding Effect; Delegation of Duties Prohibited. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which the Employer may merge or consolidate or to which all or substantially all of its assets may be transferred. The duties and covenants of the Employee under this Agreement, being personal, may not be delegated. 7.7 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nation-ally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Employer: Choice Information Systems, Inc. c/o Daily Journal Corporation 915 E. First Street Los Angeles, CA 90012 Attn: Gerald L. Salzman Fax: 213-330-2666 If to the Employee: Terence E. Hahm __________________________ __________________________ Fax: _____________________ 7.8 Entire Agreement; Amendments. This Agreement, the Stock Purchase Agreement, the Shareholders Agreement, and the documents executed in connection with this Agreement, the Stock Purchase Agreement and the Shareholders Agreement, contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the parties hereto with respect to the subject matter hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto. 7.9 Governing Law. This Agreement will be governed by, and construed and enforced in accordance with, the laws of the State of California without regard to conflicts of laws principles. 7.10 Mandatory Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its National Rules for the Resolution of Employment Disputes, and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. Any arbitration under this Agreement shall be adjudicated by three (3) arbitrators, one selected by Employer within fifteen (15) days after the commencement of arbitration, one selected by Employee within fifteen (15) days after the commencement of arbitration and one selected by the two arbitrators within five (5) days after their appointment. If the arbitrators selected by the parties are unable or fail to agree upon a third arbitrator, the third arbitrator shall be selected by the American Arbitration Association. The place of the arbitration shall be at a place within the City of Los Angeles, California. Either party may apply to the 11 arbitrators seeking injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved. Consistent with the expedited nature of arbitration, each party will, upon the written request of the other party, promptly provide the other with copies of documents relevant to the issued raised by any claim or counterclaim. Any dispute regarding discovery, or the relevance or scope thereof, shall be determined by the arbitrators, which determination shall be conclusive. All discovery shall be completed within forty-five (45) days following the appointment of the third arbitrator. The award shall be by majority vote of the panel and shall be made within six (6) months of the filing of the notice of intention to arbitrate, and the arbitrators shall agree to comply with this schedule before accepting appointment. The arbitration panel's award shall be final. The parties agree and consent that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof. The prevailing party shall be entitled to recover its costs and reasonable attorneys' fees, and the party losing the arbitration shall pay all expenses and fees of the American Arbitration Association, all costs of the stenographic record, all expenses of witnesses or proofs that may have been produced at the direction of the arbitrators, and the fees, costs, and expenses of the arbitrators. The arbitration panel shall designate the prevailing party for these purposes. Except as may be required by law, neither a party, its counsel and other representatives, nor an arbitrator may disclose the existence, content, or results of any arbitrator hereunder without the prior written consent of both parties. 7.11 No Guarantee. Nothing in this Agreement shall constitute an obligation of Daily Journal, and Employee acknowledges that Daily Journal does not guarantee or otherwise agree to perform any obligations of Employer whether pursuant to this Agreement or otherwise. 7.12 Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 7.13 Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 7.14 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 7.15 Indemnification. The Employer shall indemnify Employee for, and provide for advancement of expenses relating to, any proceedings brought or threatened to be brought against Employee by reason of the fact that Employee was an employee, officer or director of Employer or any of its affiliates following the date of this Agreement to the same extent and on the same terms as Daily Journal provides indemnification and expense advancement to its employees, officers and directors from time to time. 12 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above. EMPLOYER: CHOICE INFORMATION SYSTEMS, INC. By:__________________________________ Name: Title: EMPLOYEE: /s/ Terence E. Hahm _____________________________________ Terence E. Hahm 13 EXHIBIT A List of Employee Inventions --------------------------- All software heretofore invented by Employee or under his direction relating to business heretofore conducted by Employer or Quindeca Corporation. 14 EX-10.4 7 SHAREHOLDERS' AGREEMENT EXHIBIT 10.4 SHAREHOLDERS AGREEMENT DATED JANUARY 22, 1999 BY AND AMONG CHOICE INFORMATION SYSTEMS, INC. MICHAEL W. PAYTON, TERENCE E. HAHM QUINDECA CORPORATION AND DAILY JOURNAL CORPORATION SHAREHOLDERS AGREEMENT OF CHOICE INFORMATION SYSTEMS, INC. THIS AGREEMENT is made and entered into on this day of January 22, 1999, (the "Effective Date") by and among Choice Information Systems, Inc., a Virginia corporation (the "Company"), and Michael W. Payton, Terence E. Hahm, Quindeca Corporation, a Colorado corporation, and Daily Journal Corporation, a South Carolina corporation (each a "Shareholder" and, collectively, the "Shareholders"). RECITALS The Shareholders are owners of outstanding shares of the Company's capital stock. Certain of the parties are concurrently entering into an Asset Purchase Agreement among the Company, Quindeca Corporation and Jerry L. Short and a Stock Purchase Agreement among the Company, the Daily Journal Corporation, Michael W. Payton and Terence E. Hahm. As a condition to the consummation of the transactions contemplated by those agreements, the parties are entering into this Agreement. The purpose of this Agreement is to establish certain rights and certain restrictions regarding the stock of the Company. AGREEMENT In consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the parties hereto agree as follows: Article 1 Definitions As used in this Agreement, the following terms (whether used in singular or plural forms) shall have the following meanings: "Affiliate" of a specified Person means any other Person (1) which, directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified Person, (2) which beneficially owns or holds 50% or more of any class of the voting securities or equity of the specified Person, or (3) 50% or more of the voting securities or equity of which is beneficially owned or held by the specified 1 Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Shareholders Agreement, as executed and as it may be amended from time to time. "Beneficial owner" and "owned beneficially" with respect to any equity or voting interest means any person or entity which directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (a) voting power which includes the power to vote, or to direct the voting of, such interest; and/or (b) investment power which includes the power to dispose, or to direct the disposition of, such interest. A person or entity shall also be deemed to be the beneficial owner of an interest for purposes of this Agreement, if the person or entity has the right to acquire beneficial ownership of such interest, including but not limited to any right through an option, warrant, right to purchase or conversion. When two or more persons or entities act as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding, transferring or voting of interests, such syndicate or group shall be deemed a "person" for purposes of this definition. "Company" means Choice Information Systems, Inc., a Virginia corporation, and any of its successors or assigns. "Disposition" and "disposed of" mean any sale, gift, transfer, assignment, pledge, mortgage, distribution or other form of disposition or conveyance, whether voluntary, involuntary or by operation of law, and whether testamentary or inter vivos, or otherwise, or any attempted disposition, including but not limited to a transfer or attempted transfer pursuant to a court ordered property settlement in connection with a marital dissolution or pursuant to a written separation agreement. For purposes of this Agreement, in the case of Quindeca Corporation as a Shareholder and in the case of a Shareholder which is not a natural person, does not have its equity securities traded on an established public market and beneficially owns Shares constituting more than 10% of the total assets of the Shareholder as shown on its balance sheet after acquisition of the Shares when prepared in accordance with generally accepted accounting principles as then in effect, "disposition" and "disposed of" include a change in control of Quindeca Corporation or that Shareholder, whether through a merger, consolidation, reorganization or a sale of substantially all assets. For purposes of this Agreement, "disposition" and "disposed of" do not include a change in control of (a) Daily Journal Corporation, (b) another entity that becomes a Shareholder and has its equity securities traded on an established public market, or (c) an entity that becomes a Shareholder and beneficially owns Shares constituting 10% or less of the total assets of that Shareholder as shown on its balance sheet after acquisition of the Shares when prepared in accordance with generally accepted accounting principles as then in effect, whether through a merger, consolidation, reorganization or a sale of substantially all assets, whether or not Daily Journal Corporation or such Shareholder is the surviving Person, so long as any Person into which Daily Journal Corporation or such other Shareholder is merged, or any Person formed by any such consolidation, or any Person to whom Daily Journal Corporation or such other Shareholder sells assets which include all or any part of the Shares previously held by Daily Journal Corporation or such other Shareholder accepts the terms and conditions of this Agreement by executing and delivering a Statement of Acceptance in the form attached hereto as Exhibit A. "Original Signatory Party" means each of the four original parties to this Agreement (excluding the Company) as of January 22, 1999. 2 "Permitted Transferee" means (a) an Original Signatory Party, (b) the spouse, children (by blood or adoption) or other descendants (by blood or adoption) of an Original Signatory Party, (c) each trust, corporation, partnership or other entity of which an Original Signatory Party beneficially owns an 80% or more voting interest, (d) a transferee by will or intestacy, (e) a transferee of a bona fide gift, (f) a transferee by disposition in an involuntary manner without the consent of the holder of the Shares, including without limitation dispositions under judicial order relating to bankruptcy, or (g) any pledgee under a pledge that is made pursuant to a bona fide loan transaction, provided that the term Permitted Transferee does not include any pledgee or other Person acquiring Shares due to a default on the loan secured by the pledge. "Person" means any natural person, corporation, limited liability company, partnership, trust or other entity. "Shareholder" or, collectively, "Shareholders" shall mean each of the Original Signatory Parties, as well as subsequent Shareholders who become parties hereto in accordance with this Agreement, including the execution and delivery of an instrument in the form attached hereto as Exhibit A. "Shareholder" shall also mean any successors or assigns of any signatory party in interest or power with respect to any Shares owned beneficially now or in the future by any signatory party and any subsequent successors or assigns with respect to any such Shares; provided, however, that no succession or assignment shall be deemed to be permitted under this Agreement by virtue of this definition. "Shares" means any and all shares of Common Stock of the Company; any and all other equity or voting securities of the Company; any equity or voting securities of the Company for or into which such Common Stock or such other securities (or any successor equity or voting security) is exchanged, reclassified or converted; any options, warrants or other securities which may be converted into or carry rights to acquire equity or voting securities of the Company; and any right or interest with respect thereto. Article 2. Restrictions on Disposition of Shares Section 2.1 Restriction. The Shareholders shall not make or attempt to make a disposition of any Shares owned beneficially now or in the future, unless in compliance with the terms and conditions of this Agreement. Section 2.2 Effect. The restrictions, terms and conditions of this Agreement shall remain in effect as to all Shares owned beneficially now or acquired in the future by a Shareholder, whether or not disposed of in accordance with the terms and conditions of this Agreement and whether or not the Shares are in the hands of an original Shareholder or a subsequent Shareholder, including a Permitted Transferee, regardless of how or when acquired. No disposition of such Shares shall in any way enlarge or limit any rights or obligations under this Agreement. Section 2.3 Statement of Acceptance. No disposition of Shares shall be effective unless in compliance with this Agreement and unless and until the proposed transferee, including a Permitted Transferee and the Transferee's spouse (if any), shall accept the terms and conditions of this Agreement by executing and delivering a Statement of Acceptance in the form attached hereto as Exhibit A. ' Section 2.4 Company's Role. The Company shall not transfer or reissue any of the Shares in violation of this Agreement or without proof of compliance with this Agreement, and the Company shall not transfer or reissue any of the Shares except as the same shall be made subject to this Agreement 3 by acceptance of the terms and conditions hereof by a proposed transferee or recipient, by executing and delivering a Statement of Acceptance in the form attached hereto as Exhibit A. Section 2.5 Legend. The Company and Shareholders shall cause any certificates for Shares subject to this Agreement to be endorsed substantially as follows: "Notice of Restrictions on Disposition This certificate and the shares of stock represented thereby are subject to the provisions of a Shareholders Agreement dated as of January 22, 1999, (as it may be amended from time to time) whereby the disposition of such shares of stock or any interest therein is restricted. A copy of said Agreement is on file at the registered office of the Company where it may be inspected." Further, the Company shall cause all certificates evidencing Shares which are transferred or reissued subsequent to the execution of this Agreement to be endorsed with said notice. Section 2.6 Offer to Company and Shareholders. Except for a disposition to a Permitted Transferee, if a Shareholder (the "Transferring Shareholder") desires to dispose of any of the Shareholder's Shares (those Shares proposed to be disposed of called the "Available Shares"), the Transferring Shareholder shall first offer all Available Shares to the Company and the other Shareholders by written notice (the "Initial Notice") stating the Shares which the Transferring Shareholder desires to dispose of and the proposed price (expressed in dollars) and terms of disposition (which shall be for cash payable upon the transfer). The Company and each of the other Shareholders shall then have 30 days within which to give notice (the "Return Notice") of the maximum number of Available Shares they wish to acquire at the specified price and terms. Copies of each Return Notice shall be sent to the Company, to the Transferring Shareholder and to each other Shareholder. ' The Company shall be entitled to purchase any or all of the Available Shares, subject to the requirement that all Available Shares must be acquired by the Company and other Shareholders in order for the offer of the Transferring Shareholder to be accepted. If the Company elects to purchase fewer than all of the Available Shares, each Shareholder (other than the Transferring Shareholder) shall be entitled to acquire a pro rata portion of the balance of the Available Shares remaining. Pro rata portion for this purpose means the number of shares each Shareholder electing to purchase Available Shares owns as compared to the number of Shares owned by all Shareholders electing to purchase the Available Shares. Section 2.7 Payment. The Company shall, at the close of the 30-day period provided in Section 2.6 for delivery of the Return Notice, confirm by notice the Available Shares to be acquired by each Shareholder and by the Company. Payment for the Available Shares shall be delivered within 30 days thereafter at the price and on the terms specified in the Initial Notice, against receipt from the Transferring Shareholder of certificates for the Available Shares purchased, duly endorsed for transfer, free and clear of all liens, restrictions, claims and encumbrances, except as provided in this Agreement and under applicable securities laws. Section 2.8 Right to Sell. If, at the close of the 30-day period provided in Section 2.6 for delivery of the Return Notice, the Company and the other Shareholders have not sent notice of their intention to acquire, in the aggregate, all of the Available Shares, the Transferring Shareholder shall have 90 days to dispose of the Available Shares specified in the Initial Notice at the price and on the terms set forth in the Initial Notice, or at a higher price than the price specified therein. After the expiration of 90 4 days, the Transferring Shareholder may not dispose of such Shares unless and until they are again offered to the Company and the other Shareholders under the procedures specified in Sections 2.6 through 2.8, where applicable. Section 2.9 Permitted Transferees. Each Shareholder shall have the right to dispose of all or any part of his or her Shares to a Permitted Transferee in compliance with the terms of Sections 2.2, 2.3 and 2.5 and the other Articles of this Agreement. Article 3. Co-Sale Rights Section 3.1 Additional Rights. If any Shareholder or Shareholders desire to dispose of Shares representing more than 50% of the outstanding Shares of the Company, then this Article 3 shall apply to those transactions and Sections 2.6 through 2.8 above, concerning a right of first offer, shall not apply to the proposed dispositions. Section 3.2 Tag-Along Rights. (a) Except for a disposition to a Permitted Transferee, no Shareholder or Shareholders desiring to dispose of Shares representing more than 50% of the outstanding Shares shall, in any one transaction or series of transactions, dispose of or accept an offer to dispose of Shares unless (i) such transferring Shareholder(s) (the "Subject Shareholder") shall have received a bona fide offer for the acquisition of the Shares and (ii) the bona fide offer includes an offer to each nontransferring Shareholder (at its option) to purchase, on the same terms and conditions as have been extended to the Subject Shareholder, the Tag- Along Shares held by such nontransferring Shareholder. For purposes of this Agreement, "Tag-Along Shares" shall mean the number of Shares obtained by multiplying the number of Shares held by a nontransferring Shareholder as of the date of the transfer notice by a fraction, the numerator of which is the number of Shares proposed to be disposed of by the Subject Shareholder and the denominator of which is the total number of Shares held by the Subject Shareholder. A transfer notice must be given by the Subject Shareholder to the nontransferring Shareholders and the Company at least 30 days in advance of the proposed disposition which: (i) sets forth such Subject Shareholder's intention to dispose of its Shares; (ii) specifies the consideration to be received by the Subject Shareholder in exchange for such Shares; (iii) indicates the number of Shares proposed to be disposed of in such transaction or series of related transactions; (iv) identifies the name and address of the proposed transferee; (v) indicates the date on which the proposed transfer is to occur; and (vi) includes a copy of the bona fide offer (and any related correspondence reasonably necessary to understand and evaluate such bona fide offer). The Subject Shareholder shall also provide additional information reasonably requested by other Shareholders with respect to the proposed disposition. Any nontransferring Shareholder may elect to accept the offer to purchase included in the bona fide offer for the Tag-Along Shares by providing written notice of its acceptance of such offer to each of the Company, the proposed transferee and the other Shareholders, on or prior to the 30th day after the delivery of the transfer notice (which transfer by such Shareholder shall not be subject to Sections 2.6 through 2.8). If, within 30 days after the receipt of a transfer notice, a nontransferring Shareholder has not accepted the offer to purchase included in the bona fide offer, such nontransferring Shareholder shall be deemed to have waived any and all rights with respect to the sale or other disposition of Shares described in the transfer notice. ' (b) In the event that the nontransferring Shareholders do not accept the offer from a proposed transferee as specified in Section 3.2(a), the proposed transferee may purchase from the Subject Shareholder or 5 Shareholders the number of Shares of such Shareholders set forth in the transfer notice. (c) In the event that any nontransferring Shareholder elects to accept the offer from such proposed transferee, the proposed transferee shall purchase from the Subject Shareholder the number of Shares set forth in the transfer notice and from each electing nontransferring Shareholder its Tag-Along Shares. Section 3.3 Bring-Along Rights. (a) In the event that one or more Shareholders determine to dispose of Shares representing more than 50% of the outstanding Shares (the "Sellers") to a third Person that is not a Permitted Transferee (a "Buyer") pursuant to a bona fide offer (a "Sale"), each of the other Shareholders shall be obligated to and shall upon the written request of the Sellers: (i) sell, transfer and deliver, or cause to be sold, transferred and delivered, to the Buyer, his or her Shares, on the same terms and conditions applicable to the Sellers (with appropriate adjustments to reflect the relative preferences and priorities of the Shares); and (ii) execute and deliver such instruments of conveyance and transfer and take such other actions, including voting such Shares in favor of any Sale proposed by the Sellers and executing any agreements or related documents, as the Sellers or the Buyer may reasonably require in order to carry out the terms and provisions of this Section 3.3. (b) Not less than 30 days prior to the date proposed for the closing of any Sale, the Sellers shall give written notice to the other Shareholders, setting forth the information required in Section 3.2(a) and stating the interest of the Sellers to exercise their rights pursuant to this Section 3.3. The Sellers shall provide any additional information reasonably requested by other Shareholders with respect to the Sale. Article 4. Preemptive Rights Section 4.1 Notice of Issuance. The Company will give each Shareholder at least 20 days prior written notice of any proposed sale or issuance by the Company of any Shares, except for Exempt Issuances (as defined below). The notice will identify the Shares to be issued, the approximate date of issuance, and the price and other terms and conditions of the issuance. The notice will also include an offer (the "Offer") to transfer to each Shareholder its Proportionate Percentage (as defined below) of such Shares (the "Offered Securities") at the price and on the other terms as are proposed for such sale or issuance. The Offer by its terms shall remain open for a period of 15 days from the date of receipt of such notice and may be accepted by any Shareholder in the Shareholder's sole discretion. The Offer will also specify each Shareholder's Proportionate Percentage. Section 4.2 Acceptance. Each Shareholder shall give notice to the Company of the Shareholder's intention to accept an Offer prior to the end of the 15-day period of the Offer, setting forth the portion of the Offered Securities which the Shareholder elects to purchase and specifying the maximum number of additional Shares the Shareholder is willing to purchase if any other Shareholder declines to purchase all of the other Shareholder's Offered Securities. If any Shareholder fails to subscribe for that Shareholder's Proportionate Percentage of the Offered Securities, the other subscribing Shareholders shall be entitled to purchase Offered Securities as are not subscribed for by such Shareholder, up to the number of additional Shares specified in their notice in the same relative proportion in which they were initially entitled to purchase the Offered Securities. The Company shall notify each Shareholder within five days following the expiration of the 15-day period described above of the additional amount of Offered Securities 6 which each Shareholder may purchase pursuant to the foregoing sentence and each Shareholder shall then have five days from the delivery of such notice to indicate such additional amount, if any, that the Shareholder wishes to purchase. Section 4.3 Sale to Shareholders. Upon the closing of any sale or issuance as to which the Company has given notice under Section 4.1, each of the Shareholders shall purchase from the Company, and the Company shall sell to the Shareholder, the Offered Securities subscribed for by the Shareholder at the price and on the terms specified in the Offer, which shall be the same price and terms at which all other Persons acquire such Shares in connection with such sale or issuance. Section 4.4 Sale to Third Parties. If, but only if, the Shareholders do not subscribe for all of the Offered Securities, the Company shall have 150 days from the end of the foregoing 15- or five-day period, whichever is applicable, to sell all or any part of such Offered Securities as to which Shareholders have not accepted an Offer to any other Persons, at a price and on terms and conditions which are no more favorable to such other Persons or less favorable to the Company than those set forth in the Offer. Any Offered Securities not purchased by the Shareholders or other Persons in accordance with Section 4.3 and Section 4.4 may not be sold or otherwise disposed of until they are again offered to the Shareholders under the procedures specified in this Article 4. Section 4.5 Exempt Issuances; Proportionate Percentage. As used in this Article, "Exempt Issuances" means (a) the issuance of any Shares to any employees of the Company or any wholly-owned subsidiary of the Company, (b) the issuance of any Shares to satisfy any option or warrant rights, conversion rights or other outstanding rights to acquire any Shares as to which rights the Company complied with provisions of this Article 4 or was not required to comply with those provisions, and (c) the issuance of any Shares sold for other than money. "Proportionate Percentage" of a Shareholder means a fraction of which (a) the numerator is the number of then outstanding shares of Common Stock held by such Shareholder and (b) the denominator is the total number of then outstanding shares of Common Stock. Article 5. Transactions with Affiliates 7 Neither the Company nor any entity of the Company of which the Company owns beneficially more than 50% of the outstanding voting or equity securities will enter into any transaction, including without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate of the Company, except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such controlled entity's business and upon commercially reasonable terms no less favorable to the Company or such controlled entity than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. No party to this Agreement may bring any claim against the Company or any Affiliate of the Company alleging a breach of this Article 5, or recover any damages or require specific performance therefor, if either (a) the party previously approved in writing the transaction giving rise to such claim after receiving written notice of the transaction and its material terms and having subsequently being given a reasonable opportunity to question management of the Company regarding the terms of the transaction, or (b) such claim is brought more than one year after the later to occur of (i) the first transaction giving rise to such claim or (ii) the delivery of written notice to the party specifying the material terms of the transaction. The delivery of monthly or quarterly financial statements (prepared as indicated below) or annual financial statements of the Company (prepared in accordance with generally accepted accounting principles as then in effect) shall constitute written notice of material terms of a transaction shown in the financial statements or allocations reflected in the financial statements, so long as the receiving party is given a reasonable opportunity to question management of the Company regarding the terms and other details of the transaction or allocations. The monthly or quarterly financial statements that constitute written notice may be prepared either (a) in accordance with generally accepted accounting principles as then in effect or (b) if annual financial statements of the Company are prepared for the fiscal year containing such month or quarter in accordance with generally accepted accounting principles as then in effect, then in accordance with the Company's books and records. This Article 5 shall not apply to corporate wide programs and plans of the Daily Journal Corporation (for example, health plans) applicable on the same or substantially the same terms and conditions to the Daily Journal Corporation and generally its Affiliates. This Article 5 is also effective only as to and shall only benefit Michael W. Payton, Terence E. Hahm and Quindeca Corporation and shall not benefit any of their successors, assigns or transferees (including Permitted Transferees). Article 6. Specific Enforcement Because of the unique relationship of the Shareholders in the Company and the unique value of their Shares, in addition to any other remedies for breach hereof, this Agreement shall be specifically enforceable. Article 7 Notices All notices required or permitted to be given or made pursuant to this Agreement shall be in writing and shall be deemed given when delivered in person, by overnight delivery service, or by express or certified mail, with postage or other charges prepaid, to the parties at the addresses set forth below their signatures to this Agreement, or such other addresses as may from time to time be designated by notice hereunder. 8 Article 8. Term This Agreement shall continue in effect until the occurrence of any one of the following events, whichever is first to occur: (a) cessation of the Company's business; (b) the insolvency, bankruptcy, receivership or dissolution of the Company; (c) the voluntary written agreement by all Original Signatory Parties or by the voluntary written agreement of the Shareholders who hold all outstanding Shares subject to the terms and conditions of this Agreement; (d) the closing of an underwritten public offering of Common Stock of the Company made pursuant to a registration statement filed by the Company and effective under the Securities Act of 1933 or any successor law; or (e) 21 years after the last death of the Original Signatory Parties who are natural persons. Article 9. Miscellaneous Section 9.1 Entire Agreement; Binding Effect. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior negotiations or agreements, whether written or oral. This Agreement shall be binding upon and inure to the benefit of the parties, their heirs, personal representatives, successors and assigns. Section 9.2 Amendment. This Agreement may be amended only by a writing signed by all then parties. Section 9.3 Assignment. The rights and obligations of the parties pursuant to this Agreement may not be assigned without the express written consent of all other parties. Section 9.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Virginia or, if and when the Company shall reincorporate in any other state, the laws of such state. Section 9.5 Counterparts. This Agreement may be executed in counterparts, in which case all such counterparts shall constitute one and the same agreement. Section 9.6 Attorneys' Fees. In any action at law or in equity to enforce any of the provisions or rights under this Agreement, the unsuccessful party or parties to such litigation, as determined by the court in a final judgment or decree, shall pay the successful party or parties all costs, expenses and reasonable attorneys' fees incurred by the successful party or parties, including, without limitation, such costs, expenses and fees on any appeals. If the successful party or parties shall recover judgment in any action or proceeding, its costs, expenses and attorneys' fees shall be included as part of such judgment. Section 9.7 Enforceability. Should any one or more of the provisions of this Agreement be determined to be illegal or unenforceable, all other 9 provisions shall be given effect separately therefrom and shall not be affected. EXECUTED as of the date first written above. CHOICE INFORMATION SYSTEMS, INC. By: Name: Title: Address: /s/ Michael W. Payton Address: /s/ Terence E. Hahm Address: QUINDECA CORPORATION By: /s/ Jerry L. Short Name: Jerry L. Short Title: President Address: DAILY JOURNAL CORPORATION By: /s/ Gerald L. Salzman Name: Gerald L. Salzman Title: President Address: On the date of the foregoing Agreement, each of the undersigned, being the spouse of a Shareholder who signed the foregoing Agreement, has read and hereby approves of and agrees to the terms and conditions of this Agreement, and consents to each of the transactions contemplated thereby, including but not limited to the restrictions against the transfer of the Shareholder's 10 Shares, including transfers related to a marital dissolution and including any community property interest of such spouse in any Shares. /s/ Amy Louise Payton Address: /s/ Suzanne Marie Hahm Address: 11 Exhibit A STATEMENT OF ACCEPTANCE Reference is made to the Shareholders Agreement effective as of January 22, 1999 as it may be amended from time to time (the "Agreement"), by and among certain Shareholders of Choice Information Systems, Inc., a Virginia corporation, and said Company. As a proposed recipient of Shares covered by the Agreement, the undersigned hereby agrees that such Shares upon receipt shall remain subject to all of the terms and conditions of the Agreement and all rights and obligations thereunder arising prior to such receipt, that upon such receipt the undersigned shall be deemed automatically to have accepted all of the terms and conditions of the Agreement and that the undersigned shall thereafter be deemed to be a signatory party to the Agreement in the position of one of the Shareholders. It is understood that the executed Statement of Acceptance shall be attached to the Agreement and shall form a part thereof without any further action. Dated: SPOUSAL CONSENT The undersigned is a spouse of the person executing the above Statement of Acceptance. The undersigned approves of and agrees to the Statement of Acceptance and accordingly also approves of and agrees to the terms and conditions of the Agreement, including but not limited to restrictions against the transfer of Shares, including transfers related to a marital dissolution and including any community property interest of the undersigned in any Shares. 12 EX-99.1 8 PRESS RELEASE OF DAILY JOURNAL EXHIBIT 99.1 DAILY JOURNAL CORPORATION 355 South Grand Avenue, 34th Floor Los Angeles, California 90071-1560 DAILY JOURNAL CORPORATION INVESTS IN CHOICE INFORMATION SYSTEMS, INC. For Immediate Release Wednesday, January 27, 1999 LOS ANGELES - Daily Journal Corporation (Nasdaq:DJCO) has invested a total of $6.67 million (a) to purchase 80% of the capital stock of CHOICE Information Systems, Inc. from CHOICE and certain of its shareholders, (b) to cause CHOICE to purchase substantially all of the assets of QUINDECA Corporation, the consulting and implementation arm of CHOICE, and (c) to leave approximately $4 million in working capital at CHOICE immediately following these transactions. In addition, CHOICE has entered into employment agreements with the principal owners of CHOICE and QUINDECA, and these officers will continue to own 20% of CHOICE. CHOICE provides the SUSTAIN(R) family of products which consist of technologies and applications to enable justice agencies to automate their operations. The latest product released from CHOICE is the SUSTAIN(R) eCourt(TM) system which is an electronic commerce platform for the justice community and allows users to file cases electronically and publish information on-line. CHOICE has installations in nine states and three countries, and many of its clients have more than a decade of experience with the SUSTAIN(R) product line. In December 1997, Microsoft Corporation announced a strategic alliance with CHOICE to promote electronic commerce in the justice community using the SUSTAIN(R) eCourt(TM) product. CHOICE installations include the Napa Superior Court and Los Angeles Superior Court in California and the Gwinnett County Court in Georgia, all of which license the SUSTAIN(R) Justice Edition(TM) and the SUSTAIN(R) eCourt(TM) products. In addition, the Metropolitan Toronto Court in Canada has been pioneering the use of the SUSTAIN(R) eCourt(TM) product for more than 18 months. This project has resulted in the ability for lawyers to conduct business electronically with the Court and to create an "electronic court record". In November 1998, the Santa Barbara County Trial Courts in California became the newest licensee of SUSTAIN(R). Daily Journal is primarily a gatherer and distributor of information through its publications, including the Los Angeles Daily Journal, the San Francisco Daily Journal, California Lawyer magazine, and specialized information services. 1 -----END PRIVACY-ENHANCED MESSAGE-----