-----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, EPYZwzpdzSaAoqfILALsTENuuokRu4EUUp7LNHhpHWn0Yxl0Iaz4ZpMmikmwgABf R4lsGIyK77i2BMrVRZMVJQ== 0001047469-98-036663.txt : 19981009 0001047469-98-036663.hdr.sgml : 19981009 ACCESSION NUMBER: 0001047469-98-036663 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980922 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981007 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZAMBA CORP CENTRAL INDEX KEY: 0000883741 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 411636021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-22718 FILM NUMBER: 98722331 BUSINESS ADDRESS: STREET 1: 7301 OHMS LANE STE 200 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6128329800 MAIL ADDRESS: STREET 1: 7301 OHMS LANE STREET 2: STE 200 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 FORMER COMPANY: FORMER CONFORMED NAME: RACOTEK INC DATE OF NAME CHANGE: 19931025 8-K 1 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): September 22, 1998 ZAMBA CORPORATION (F/K/A RACOTEK, INC.) (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 0-22718 41-1636021 (Commission File No.) (IRS Employer Identification No.)
7301 OHMS LANE, SUITE 200 MINNEAPOLIS, MINNESOTA 55439 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (612) 832-9800 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. THE CURRENT REPORT ON FORM 8-K CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, RELATED TO ZAMBA CORPORATION (F/K/A RACOTEK, INC.), A DELAWARE CORPORATION ("ZAMBA"), AND ZAMBA'S ACQUISITION OF QUICKSILVER GROUP, INC., A CALIFORNIA CORPORATION ("QUICKSILVER"), THAT MAY INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. THESE UNCERTAINTIES INCLUDE RISKS RELATING TO THE INTEGRATION OF ZAMBA AND QUICKSILVER. ACTUAL RESULTS AND DEVELOPMENTS THEREFORE MAY DIFFER MATERIALLY FROM THOSE DESCRIBED OR INCORPORATED BY REFERENCE IN THIS REPORT. FOR MORE INFORMATION ABOUT ZAMBA AND RISKS ARISING WHEN INVESTING IN ZAMBA, YOU ARE DIRECTED TO ZAMBA'S MOST RECENT REPORTS ON FORM 10-K AND FORM 10-Q, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"). On July 6, 1998, an Agreement and Plan of Merger and Reorganization (the "Original Agreement"), among Zamba, Quicksilver Acquisition Corp., a California corporation ("Merger Sub") and QuickSilver was entered into and, on September 2, 1998, an addendum (the "Addendum") was added to the original agreement (together, the Original Agreement and Addendum constitute the "Agreement"). Pursuant to the Agreement, QuickSilver merged with and into Merger Sub, the separate existence of QuickSilver ceased and Merger Sub continued as the surviving corporation. The terms of the Agreement, including the consideration paid, were determined through arms' length negotiations between Zamba and QuickSilver. Zamba is a customer care consulting company. QuickSilver is a provider of software integration services. The merger of QuickSilver with and into Merger Sub (the "Merger") became effective on September 22, 1998, at the time of the filing of a Certificate of Merger with the California Secretary of State (the "Effective Time"). At the Effective Time: (a) QuickSilver ceased to exist; (b) Merger Sub, the surviving corporation in the Merger, continued to be a wholly-owned subsidiary of Zamba; (c) Zamba paid $500,470 in cash from general corporate funds and $2,161,675 in promissory notes and issued 2,337,992 shares of Common Stock in an exchange, under Regulation D of the Securities Act, for all outstanding shares of QuickSilver capital stock; and (d) the stock options and warrants of QuickSilver outstanding at the Effective Time were converted into options and warrants of Zamba. The Merger is intended to be a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and will be accounted for as a purchase. The foregoing discussion regarding the Agreement and the Merger is qualified in its entirety by reference to the Original Agreement and the Addendum, copies of which are attached hereto as Exhibits 2 and 3, respectively, and which are hereby incorporated by reference. The Merger will result in the integration of two companies that have previously operated independently. As soon as practicable following the Merger, Zamba intends to integrate certain aspects of the operations of QuickSilver. However, there can be no assurance that Zamba will successfully integrate the operations of QuickSilver with those of Zamba or that all of the benefits expected from such integration will be realized. Any delays or unexpected costs incurred in connection with such integration could have an adverse effect on Zamba's business, operating or financial condition. Furthermore, there can be no assurance that the operations, management and personnel of the two companies will be compatible or that Zamba will not experience the loss of key personnel and clients. There can be no assurance that combining the business of Zamba and QuickSilver, even if achieved in an efficient and effective manner, will result in combined results of operations and financial condition superior to what would have been achieved by Zamba or QuickSilver independently. In addition, certain costs are generally associated with transactions such as the Merger. While these costs have not been currently identified, any such costs will adversely affect operating results of Zamba in the period in which they are incurred. Finally, the parties intend that the transaction will be eligible for tax-free treatment, but failure to obtain such status could increase the costs of the transaction. 2 ITEM 5. OTHER EVENTS. As previously reported, the Company transferred certain wireless mobile computing technology and assets to NextNet, Inc. ("NextNet"), a corporation formed to develop this technology, which received $8 million in financing from third-party investors as part of its initial capitalization. The Company obtained 2,400,000 shares of Common Stock of NextNet in exchange for the transfer of its wireless mobile computing technology, representing approximately 44% of the outstanding shares of NextNet. The press release issued by Racotek, Inc. dated September 23, 1998 is incorporated by reference herein. The foregoing discussion regarding NextNet is qualified in its entirety by reference to Exhibits 5 through 9, which are hereby incorporated by reference. Pursuant to a Certificate of Ownership and Merger, which provides for the merger of Zamba Corporation, a Delaware corporation and wholly owned subsidiary of Racotek, Inc., filed with the Delaware Department of Corporations and declared effective on October 5, 1998, the corporate name of Racotek, Inc. has been changed to "Zamba Corporation." All agreements, actions, filings and reports made after October 5, 1998 shall bear the name "Zamba Corporation." The symbol for the Company's common stock as reported on the Nasdaq National Market shall be "ZMBA." ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements QUICKSILVER GROUP, INC. FINANCIAL STATEMENTS AS OF DECEMBER 27, 1996 AND DECEMBER 26, 1997 AND FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 26, 1997 3 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders QuickSilver Group, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity and of cash flows, present fairly, in all material respects, the financial position of QuickSilver Group, Inc. at December 27, 1996 and December 26, 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 26, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 13, subsequent to December 26, 1997, the Company entered into a definitive merger agreement with Racotek, Inc. /s/ PricewaterhouseCoopers LLP August 14, 1998, except for the sixth paragraph of Note 13, as to which the date is September 22, 1998 San Jose, California 4 QUICKSILVER GROUP, INC. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 27, DECEMBER 26, 1996 1997 ------------- ------------- ASSETS Current assets: Cash and cash equivalents.......................................................... $ 179 $ 200 Accounts receivable, net of allowance for bad debt of $12 in 1997.................. 769 1,096 Prepaid expenses and other current assets.......................................... 15 29 ------ ------ Total current assets............................................................. 963 1,325 Property and equipment, net.......................................................... 149 289 Intangible assets, net............................................................... 75 56 Other long-term assets............................................................... 11 27 ------ ------ Total assets..................................................................... $ 1,198 $ 1,697 ------ ------ ------ ------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings.............................................................. $ 150 Current portion of long-term debt.................................................. 57 $ 208 Current portion of amounts due to stockholders..................................... 9 216 Accounts payable................................................................... 150 386 Accrued expenses................................................................... 286 326 Deferred revenue................................................................... 126 67 Deferred income taxes.............................................................. 16 93 ------ ------ Total current liabilities........................................................ 794 1,296 Long-term debt, net of current portion............................................... 65 Amounts due to stockholders, net of current portion.................................. 215 ------ ------ Total liabilities................................................................ 1,074 1,296 ------ ------ Commitments and contingencies (Note 7) Stockholders' equity: Common stock, no par value: Authorized: 4,000 shares; Issued and outstanding: 2,080 shares in 1996, and 2,112 shares in 1997............. 110 578 Deferred stock compensation.......................................................... (378) Retained earnings.................................................................... 14 201 ------ ------ Total stockholders' equity....................................................... 124 401 ------ ------ Total liabilities and stockholders' equity....................................... $ 1,198 $ 1,697 ------ ------ ------ ------
The accompanying notes are an integral part of these financial statements. 5 QUICKSILVER GROUP, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED ---------------------------- DECEMBER 27, DECEMBER 26, 1996 1997 ------------- ------------- Revenues: Services........................................................................... $ 3,532 $ 5,910 ------ ------ Cost and expenses: Cost of services................................................................... 2,092 3,359 General and administrative......................................................... 1,322 1,880 Sales and marketing................................................................ 194 305 ------ ------ 3,608 5,544 ------ ------ Income (loss) from operations........................................................ (76) 366 Interest expense..................................................................... 36 38 ------ ------ Income (loss) before income taxes.................................................... (112) 328 Income tax expense (benefit)......................................................... (36) 141 ------ ------ Net income (loss).................................................................... $ (76) $ 187 ------ ------ ------ ------
The accompanying notes are an integral part of these financial statements. 6 QUICKSILVER GROUP, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 27, 1996 AND DECEMBER 26, 1997 (IN THOUSANDS)
COMMON STOCK ------------------------ DEFERRED STOCK RETAINED SHARES AMOUNT COMPENSATION EARNINGS TOTAL ----------- ----------- --------------- ----------- --------- Balances, December 28, 1995.................................. 2,000 $ 5 $ 90 $ 95 Shares issued in business acquisition...................... 80 105 105 Net loss................................................... (76) (76) ----- ----- ----- --------- Balances, December 27, 1996.................................. 2,080 110 14 124 Shares issued under employee stock purchase plan........... 32 45 45 Deferred stock compensation................................ 423 $ (423) -- Stock compensation expense................................. 45 45 Net income................................................. 187 187 ----- ----- ----- ----- --------- Balances, December 26, 1997.................................. 2,112 $ 578 $ (378) $ 201 $ 401 ----- ----- ----- ----- --------- ----- ----- ----- ----- ---------
The accompanying notes are an integral part of these financial statements. 7 QUICKSILVER GROUP, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED -------------------------------- DECEMBER 27, DECEMBER 26, 1996 1997 --------------- --------------- Cash flows from operating activities: Net income (loss).................................................................. $ (76) $ 187 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization...................................................... 89 183 Provision for bad debts............................................................ 17 Stock based compensation expense................................................... 90 Deferred taxes..................................................................... (37) 63 Changes in operating assets and liabilities: Accounts receivable.............................................................. (578) (344) Prepaid expenses and other assets................................................ 361 (14) Accounts payable and accrued expenses............................................ 187 276 Deferred revenues................................................................ 95 (59) ----- ----- Net cash provided by operating activities...................................... 41 399 ----- ----- Cash flows from investing activities: Acquisition of property and equipment.............................................. (14) (208) Acquisition of intangible assets................................................... (35) Acquisition of other long-term assets.............................................. (2) ----- ----- Net cash used in investing activities.......................................... (14) (245) ----- ----- Cash flows from financing activities: Payment of capital lease obligation................................................ (7) (36) Payment of notes payable........................................................... (41) (75) Proceeds from notes payable to bank................................................ 7 136 Payment of short-term borrowings................................................... (150) Proceeds from short-term borrowings................................................ 66 Payment of amounts due to shareholders............................................. (5) (8) ----- ----- Net cash provided by (used in) financing activities............................ 20 (133) ----- ----- Net increase in cash and cash equivalents............................................ 47 21 Cash and cash equivalents at beginning of year....................................... 132 179 ----- ----- Cash and cash equivalents at end of year............................................. $ 179 $ 200 ----- ----- ----- ----- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest............................................................. $ 36 $ 38 Cash paid for income taxes......................................................... $ 33 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Acquisition of property and equipment through capital leases....................... $ 70 $ 61 Common stock issued in connection with acquisition................................. 105 Common stock-based compensation.................................................... 90
The accompanying notes are an integral part of these financial statements. 8 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS 1. COMPANY BACKGROUND: QuickSilver Group, Inc. (the "Company") is an information technology professional services company. The Company provides solutions for improving customer and technical support to companies in high technology industries throughout the United States. The Company maintains offices in Cupertino, California and Boston, Massachusetts. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION: The Company's fiscal year end is the 52 or 53 week period ending on the last Friday in December. The years ended December 27, 1996 and December 26, 1997 contain 52 weeks. FINANCIAL INSTRUMENTS: The amounts reported for cash and cash equivalents, accounts receivable, other assets, accounts payable and accrued liabilities approximate their fair values due to their short maturities. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalent. INTANGIBLE ASSETS: Intangible assets consists primarily of goodwill and a software license acquired from a third party. Goodwill is the excess of net assets acquired in business combinations over their fair value. Intangible assets are amortized on a straight-line basis over a five-year period. Amortization expense was $19,000 and $54,000 for fiscal years 1996 and 1997, respectively. Amortization expense of $54,000 for fiscal year 1997 included $35,000 resulting from the write-off of a software license originally acquired in 1997. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the assets which is generally three years. Leasehold improvements and assets under capital leases are amortized over the shorter of the asset's related lease term or estimated useful life. Gains and losses on disposal of property and equipment are recognized in the period the assets are disposed of. 9 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) REVENUE RECOGNITION: Revenues from consulting services include systems integration services and training services. Revenues on variable rate contracts are recognized as the services are performed and invoiced. Revenues on fixed rate contracts are deferred and recognized ratably over the contract period in accordance with the performance of the underlying services. ADVERTISING: The Company expenses advertising costs as they are incurred. Advertising expense for fiscal years 1996 and 1997 approximated $41,000 and $68,000, respectively. INCOME TAXES: The Company utilizes the asset and liability method of accounting for income taxes whereby deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense represents taxes payable for the current period, plus the net change in the deferred tax assets and liabilities during the period. CERTAIN RISKS AND CONCENTRATIONS OF CREDIT RISK: The Company markets and sells its services primarily to end-users and to independent software vendors in the software industry. The Company performs ongoing credit evaluations of its customers' financial condition and does not require collateral. The Company maintains an allowance for doubtful accounts based upon the expected collectability of such receivables. At December 27, 1996, 54% of accounts receivable, were due from four customers. At December 26, 1997, 53% of accounts receivable were due from four customers. Four customers accounted for 13%, 13%, 11% and 10% of total revenues in 1996. Three customers accounted for 17%, 14% and 10% of total revenues in 1997. STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company has elected to adopt the disclosure only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation," which requires pro forma disclosures in the financial statements as if the measurement provisions of SFAS 123 had been adopted. Compensation cost for stock options granted to non-employees is measured as the fair value of the option at the date of grant. Such compensation costs, if any, are amortized on a straight-line basis over the underlying option vesting terms. 10 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." This Statement establishes requirements for disclosure of comprehensive income and becomes effective for the Company for its fiscal year 1999, with reclassification of earlier financial statements for comparative purposes. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments or contributions by shareholders. The Company does not expect this pronouncement to materially impact the Company's results of operations. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 ("SOP 98-1") "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company has not yet determined the impact, if any, of adopting this statement. The disclosures prescribed by SOP 98-1 will be effective for the Company's fiscal year 2000. 3. SELECTED BALANCE SHEET INFORMATION (IN THOUSANDS): PROPERTY AND EQUIPMENT:
DECEMBER 27, DECEMBER 26, 1996 1997 --------------- --------------- Computer equipment and purchased software........................ $ 239 $ 402 Furniture and fixtures........................................... 4 82 Leasehold improvements........................................... 1 15 ----- ----- 244 499 Less accumulated depreciation and amortization................... 95 210 ----- ----- $ 149 $ 289 ----- ----- ----- -----
Property and equipment includes equipment under capital leases as follows: INTANGIBLE ASSETS:
DECEMBER 27, DECEMBER 26, 1996 1997 ----------------- ----------------- Goodwill......................................................... $ 94 $ 94 Less accumulated amortization.................................... 19 38 --- --- $ 75 $ 56 --- --- --- ---
11 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SELECTED BALANCE SHEET INFORMATION (IN THOUSANDS): (CONTINUED) ACCRUED EXPENSES:
DECEMBER 27, DECEMBER 26, 1996 1997 --------------- --------------- Compensation..................................................... $ 245 $ 226 Vacation......................................................... 29 55 Other, including income taxes.................................... 12 45 ----- ----- $ 286 $ 326 ----- ----- ----- -----
4. SHORT-TERM BORROWINGS: At December 27, 1996, the Company had a line of credit agreement which expired May 11, 1997 and provided for borrowings of up to $150,000 at the bank's prime rate (8.25% at December 27, 1996) plus 2%. The line of credit was collateralized by substantially all of the Company's assets. Under the terms of the line of credit agreement, the Company was required to comply with certain financial and other covenants, including maintaining minimum levels of net profit, net worth ratio and current ratio. At December 27, 1996, the Company was not in compliance with these financial covenants and ratios. At December 27, 1996, $150,000 was outstanding which was repaid during 1997 and the credit agreement was terminated. In 1997, the Company obtained a line of credit with another financial institution which expires February 4, 1999. The line of credit provides for borrowings of up to $300,000 and is collateralized by substantially all assets of the Company and is guaranteed by two stockholders. The line bears interest at the bank's prime rate (8.5% at December 26, 1997) plus 0.75%. The Company is required to comply with certain financial and other covenants, including maintaining minimum levels of tangible net worth, a quick ratio, a debt service ratio and a liquidity ratio. At December 26, 1997, the Company was not in compliance with these financial covenants and ratios. However, at December 26, 1997, no amounts were outstanding under this credit agreement. 5. LONG-TERM DEBT: Long-term debt consists of the following (IN THOUSANDS):
DECEMBER 27, DECEMBER 26, 1996 1997 --------------- --------------- Notes payable to bank............................................ $ 60 $ 120 Capital lease obligations........................................ 62 88 --- ----- 122 208 Less current portion............................................. (57) (208) --- ----- $ 65 $ -- --- ----- --- -----
At December 27, 1996, the Company had a $60,000 note payable to a bank, collateralized by substantially all of the Company's assets and guaranteed by two shareholders. The note was due September 1998 and bore interest at the bank's prime rate (8.25% at December 27, 1996) plus 2.75%. This note was repaid during 1997. 12 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT (CONTINUED) At December 26, 1997, the Company had two notes payable to a bank, bearing interest at the bank's prime rate (8.5% at December 26, 1997) plus 1.5%. The notes are collateralized by substantially all of the Company's assets and are guaranteed by two shareholders. At December 26, 1997, the amounts outstanding are $84,000 and $36,000, respectively. The notes are payable in monthly installments with the final payment due in June 1999 and March 2000, respectively. The Company is required to comply with certain financial and other covenants, including maintaining certain tangible net worth, quick ratio and minimum debt service ratio. At December 26, 1997, the Company is not in compliance with these financial covenants and, accordingly, all amounts have been included in current liabilities. In January 1996, the Company entered into a master lease agreement with a leasing company to finance the acquisition of computer equipment. Under the terms of the agreement, each draw against the master lease is considered a separate lease with the terms established at the time of the draw. The Company has acquired certain office and computer equipment under capital leases in accordance with the master lease agreement expiring at various dates through 2000. The capital leases, which bear interest in the range of 9.59% to 20.21%, are collateralized by the related assets. As of December 26, 1997, future minimum payments under the notes payable and capital lease obligations are as follows (IN THOUSANDS):
NOTES CAPITAL FISCAL YEAR PAYABLE LEASES TOTAL - ------------------------------------------------------------------- ----------- ----------- --------- 1998............................................................... $ 75 $ 57 $ 132 1999............................................................... 51 39 90 2000............................................................... 5 6 11 --- --- --------- Total future principal and minimum lease payments.................. 131 102 233 Less amount representing interest.................................. (11) (14) (25) --- --- --------- Present value of minimum payments.................................. 120 88 208 --- --- --------- --- --- ---------
6. AMOUNTS DUE TO STOCKHOLDERS: Amounts due to stockholders consist of the following:
DECEMBER 27, DECEMBER 26, 1996 1997 --------------- ------------- Notes payable.................................................... $ 67 $ 59 Deferred compensation............................................ 157 157 ----- ----- 224 216 Less current portion............................................. (9) (216) ----- ----- $ 215 $ -- ----- ----- ----- -----
The notes payable to stockholders bear interest at 10% and are due November 1998. The deferred compensation balance represents compensation and profit-sharing owed to the Company's founders in connection with services performed in 1994 and 1995. The balance is non-interest bearing and is subordinate to all other borrowings. The deferred compensation balance was converted to common stock subsequent to December 26, 1997. 13 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES: The Company leases certain facilities and automobiles under noncancelable operating leases expiring through 2001. Under the terms of the leases, the Company is responsible to pay for its share of any increases in common area expenses. At December 26, 1997, future minimum lease payments are as follows (IN THOUSANDS):
FISCAL YEAR - -------------------------------------------------------------------------------------- 1998.................................................................................. $ 158 1999.................................................................................. 13 2000.................................................................................. 13 2001.................................................................................. 12 --------- Total future minimum lease payments................................................... $ 196 --------- ---------
Rent expense was approximately $100,000 and $144,000 for fiscal years 1996 and 1997, respectively. LICENSE AGREEMENT: In August 1997, the Company entered into an agreement with Montreaux Services, Inc. (Montreaux) whereby the Company was granted a perpetual, exclusive right and license to use all of the proprietary information and trade secrets belonging to Montreaux. Under the terms of the agreement, the Company was required to pay a fixed licensing fee to Montreaux of $70,000 payable in six equal monthly installments commencing September 1, 1997. In fiscal 1997, the Company made three payments totaling $35,000 prior to verbally terminating the agreement with Montreaux's principals. The Company expects to enter into a formal termination agreement with Montreaux eliminating any further obligations by either party under this arrangement. 8. ACQUISITION: On January 2, 1996, the Company acquired certain assets from C.D. Lewis and Associates Ltd. in exchange for 80,000 shares of The Quicksilver Group, Inc. common stock (valued at $105,000). The acquisition was accounted for as a purchase. Accordingly, the purchase price was allocated to the acquired assets based upon their relative fair values. The acquisition also generated $94,000 of goodwill which is being amortized over a period of five years, in accordance with the Company's accounting policies. 9. STOCK SPLIT: On August 21, 1997, the Board of Directors authorized a four-for-one stock split effective September 1, 1997 for the stockholders of record on July 31, 1997. All share data in the accompanying financial statements, including stock option and stock purchase plan information, has been restated to give retroactive recognition to the stock split for all periods presented. 14 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY: 1995 STOCK APPRECIATION RIGHTS PLAN: In May 1995, the Company adopted the QSG Stock Appreciation Rights ("SAR") Plan. The plan provided for the granting of SARs which permit the holders to receive the excess of the fair value per share of common stock on the date a SAR is exercised over the beginning fair value. Under this plan, the Board of Directors may grant SARs at the fair value of the Company's common stock, as determined by the Board of Directors, at the grant date. SARs granted under the plan have a term of ten years and generally become exercisable with respect to 25% of the shares on the first anniversary of the vesting commencement date and thereafter at the rate of 25% of the shares per year. At December 27, 1996, 302,000 shares were outstanding. During 1996, a pre-tax charge of $23,019 was incurred related to SARs due to an increase in the value of the Company's stock and the increased number of outstanding SARs. During 1997, 169,200 SARs were issued to employees. In July 1997, the Company terminated the 1995 Stock Appreciation Rights Plan and adopted the 1997 Stock Option Plan ("the Plan"). All SARs outstanding were terminated during fiscal 1997 and reissued as stock option grants under the Plan. As discussed below, these stock options were granted with exercise prices less than fair value. 1997 STOCK OPTION PLAN: At December 26, 1997, the Company had reserved 500,000 shares of common stock for issuance under it's Stock Option Plan. Under the Plan, the Board of Directors may award options to employees, directors and consultants of the Company. Incentive stock options may be granted at prices not less than 85% of the value of the Company's common stock at the date of grant, as determined by the Board of Directors. Options granted under the 1997 Stock Option Plan have a term of ten years and become exercisable at least 20% per year over five years from the date the options are granted. As discussed below, stock options granted during 1997 were granted with exercise prices less than fair value. Activity under the Company's stock option plan is set forth below:
OUTSTANDING OPTIONS --------------------------------------- WEIGHTED SHARES NUMBER AVERAGE AVAILABLE OF EXERCISE PRICE AGGREGATE FOR GRANT SHARES PER SHARE PRICE ----------- ---------- --------------- ---------- Shares reserved........................... 500,000 Options granted........................... (477,200) 477,200 $ 1.26 $ 602,800 Options canceled.......................... 27,000 (27,000) $ 1.67 (45,100) ----------- ---------- ----- ---------- Balances, December 26, 1997............... 49,800 450,200 $ 1.24 $ 557,700 ----------- ---------- ----- ---------- ----------- ---------- ----- ----------
15 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY: (CONTINUED) The following table summarizes information about stock options outstanding at December 26, 1997:
OPTIONS OUTSTANDING OPTIONS VESTED ------------------------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OF SHARES LIFE PRICE OF SHARES PRICE - ----------------------------------- ----------- ----------- ----------- ----------- ----------- $0.43 - $0.63...................... 154,000 9.75 years $ 0.53 54,500 $ 0.53 $1.00 - $1.25...................... 149,200 9.75 years 1.16 13,000 1.00 $2.25.............................. 147,000 9.78 years 2.25 -- -- ----------- ----------- $0.43 - $2.25...................... 450,200 9.76 years $ 1.31 67,500 $ 0.62 ----------- ----------- ----------- -----------
DEFERRED STOCK COMPENSATION: The stock options issued to employees under the 1997 Stock Option Plan were made at exercise prices below the estimated market value of the Company's common stock at the date of grant. In accordance with the requirements of APB 25, the Company has recorded deferred compensation for the difference between the exercise price of the stock options and the fair value of the Company's stock at the date of grant. This deferred compensation is amortized to expense over the period during which the options become exercisable, generally over periods up to four years. At December 26, 1997, the Company recorded deferred compensation related to these options in the total amount of $423,250, of which $45,477 was amortized to expense during fiscal 1997. EMPLOYEE STOCK PURCHASE PLAN: During 1996, the Company adopted an Employee Stock Purchase Agreement (the Agreement) under which 60,000 shares of common stock have been reserved for issuance. The Agreement allows employees to receive a portion of their bi-annual profit sharing payments in common stock. Employees can elect to take their profit-sharing contribution in the form of cash, stock or a combination of cash and stock. Under the Agreement, 31,596 shares of common stock with an estimated market value of $45,000 were issued in fiscal year 1997. PRO FORMA STOCK COMPENSATION: Had compensation cost been determined based on the fair value at the grant date for awards 1997 consistent with the provisions of SFAS 123, the Company's net income for the year ended December 1997 would have been as follows (IN THOUSANDS):
1997 --------- Net income--as reported............................................................... $ 187 --------- Net income--pro forma................................................................. $ 180 --------- ---------
Such pro forma disclosures may not be representative of future pro-forma compensation cost because options vest over several years and additional grants are made each year. 16 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY: (CONTINUED) In accordance with the provisions of SFAS 123, the fair value of each option is estimated using the minimum value option pricing method allowable for non-public companies and using the following assumptions for option grants during fiscal year 1997; dividend yield of 0%, risk-free interest rates of between 5.72% to 5.98% at the date of grant, and an expected term of periods up to four years. Of the options granted during fiscal year 1997, options to purchase 147,000 shares of the Company's common stock, with a weighted-average exercise price of $2.25 per share and a weighted-average fair value of $0.15 per share, were granted with exercise prices equal to the estimated fair value at the date of grant; 303,200 options with a weighted-average exercise price of $0.85 and a weighted-average fair value of $0.09 per share were granted with an exercise price below the estimated fair value at the date of grant. 11. INCOME TAXES: The provision for (benefit from) income taxes consists of the following (IN THOUSANDS):
FEDERAL STATE TOTAL ----------- ----- --------- 1997: Current............................................................. $ 53 $ 25 $ 78 Deferred............................................................ 48 15 63 ----- --- --------- $ 101 $ 40 $ 141 ----- --- --------- ----- --- --------- 1996: Current............................................................. $ -- $ 1 $ 1 Deferred............................................................ (29) (8) (37) ----- --- --------- $ (29) $ (7) $ (36) ----- --- --------- ----- --- ---------
The components of the net deferred tax liabilities are as follows (IN THOUSANDS):
DECEMBER 27, DECEMBER 26, 1996 1997 --------------- --------------- Deferred tax assets: Depreciation and amortization expense.......................... $ 3 $ 15 Net operating loss carryforwards............................... 9 -- State taxes.................................................... 1 9 ----- ----- Gross deferred tax assets.................................... 13 24 ----- ----- Deferred tax liabilities Accrual to cash conversion..................................... (27) (101) ----- ----- Net deferred tax liabilities................................. $ (14) $ (77) ----- ----- ----- -----
As of December 27, 1996, the Company has net operating loss (NOL) carryforwards of approximately $23,000 for federal income tax purposes to reduce future taxable income. These carryforwards expire at various dates through 2011 if not utilized. In addition, the Company has NOL carryforwards for state purposes of approximately $12,000 to reduce future taxable income. These carryforwards expire at various dates through 2011 if not utilized. The Company utilized all NOL carryforwards in fiscal 1997. 17 QUICKSILVER GROUP, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES: (CONTINUED) The Company's ability to use its net operating loss carryforwards and credits to offset future taxable income is subject to restrictions attributable to equity transactions that result in changes in ownership as defined by the Internal Revenue Code. The Company's effective tax rate differs from the U.S. federal statutory tax rate as follows:
DECEMBER 27, DECEMBER 26, 1996 1997 --------------- ------------- Federal statutory tax rate....................................... (34.0)% 34.0% State taxes, net of federal tax benefit.......................... 5.0 8.1 Non-deductible expenses and other................................ (3.1) 0.8 ----- ------ (32.1)% 42.9% ----- ------ ----- ------
12. EMPLOYEE BENEFIT PLANS: The Company maintains the QuickSilver Group, Inc. 401(k) Savings Plan for all of its U.S. employees. Employees are immediately eligible to participate in the Plan and may voluntarily contribute up to 15% of their annual compensation. Under the Plan the Company may make discretionary matching contributions. The Company has not made any contributions to the Plan as of December 26, 1997. 13. SUBSEQUENT EVENTS: On February 20, 1998, the Company entered into a note payable agreement to borrow $2,000,000 from a lender. The note bears interest at 13% and matures February 2003. In addition, the Company issued warrants to purchase 9% of the Company's fully diluted common stock. The warrants are exercisable beginning in February 2001 and expire at maturity or when the loan is repaid. The note is collateralized by an interest in substantially all of the Company's assets and is subordinated to all other debt. On March 6, 1998, the Company expanded its office space in Cupertino, California and amended its existing lease agreement. The lease amendment is effective May 1, 1998 for a term of 3 years with monthly lease payments of $17,430. On March 23, 1998, the Company entered into a lease agreement for additional office space in Burlington, Massachusetts. The lease commences May 1, 1998 for a term of five years with average monthly lease payments of $9,362. In June 1998, the Company modified the terms of a stock option purchase agreement with a director of the Company to fully vest the 24,000 options held by such director, resulting in approximately $16,200 of compensation expense. On July 6, 1998, the Board of Directors approved the conversion of the deferred compensation balances due to shareholders to common stock. In connection with the conversion, 37,396 shares of common stock were issued to the two founders of the Company in relief of the outstanding liability of $157,000 at December 26, 1997. On June 12, 1998, the Company signed a letter of intent to merge with Racotek, Inc. Racotek, Inc. provides enterprise customer management system integration services to clients throughout the United States. The parties closed a definitive merger agreement effective September 22, 1998. 18 (b) Pro Forma Financial Information ZAMBA AND QUICKSILVER UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS The accompanying unaudited pro forma condensed financial statements give effect to the merger of Zamba Corporation (f/k/a Racotek, Inc.) and QuickSilver Group, Inc., a California corporation, ("QuickSilver"), using the purchase method of accounting. The unaudited pro forma condensed financial statements are derived from and should be read in conjunction with Zamba Corporation's (Zamba) historical financial statements provided in Zamba's most recent reports on Form 10-K and Form 10-Q, and QuickSilver's financial statements which are included in Item 7(a) of this Form 8-K, and in the notes hereto. The unaudited pro forma condensed balance sheet combines Zamba's June 30, 1998 unaudited condensed balance sheet with QuickSilver's June 30, 1998 unaudited condensed balance sheet. The unaudited pro forma condensed statements of operations combine Zamba's historical condensed statements of operations for fiscal year 1997 and the unaudited six-month period ended June 30, 1998 with the corresponding QuickSilver historical condensed statements of operations for fiscal year 1997 and the six-month period ended June 30, 1998, respectively. The pro forma adjustments have been applied to the financial information derived from the financial statements of Zamba and QuickSilver to account for the merger as a purchase; accordingly, assets acquired and liabilities assumed are reflected at their estimated fair values which are subject to further refinement. The unaudited pro forma condensed financial statements have been prepared on the basis of assumptions described in the notes thereto and include assumptions relating to the allocation of the consideration paid for the assets and liabilities of QuickSilver based on preliminary estimates of their fair value. The actual allocation of such consideration may differ from that reflected in the unaudited pro forma condensed financial statements after certain decisions are made, and after certain procedures to be performed after the closing of the merger are completed. In the opinion of Zamba, all adjustments necessary to present fairly such unaudited pro forma condensed financial statements have been made based on the proposed terms and structure of the merger. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the merger had been consummated at the beginning of the periods presented, nor is it necessarily indicative of future operating results or financial position. 19 ZAMBA CORPORATION (F/K/A RACOTEK, INC.) AND QUICKSILVER GROUP PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR 1997 (UNAUDITED)
ZAMBA THE QUICKSILVER (IN THOUSANDS, EXCEPT PER SHARE DATA) CORPORATION GROUP ADJUSTMENTS PRO FORMA ----------- --------------- ----------- ----------- Net revenues: Services............................................... $ 4,744 $ 5,910 $ 10,654 Products............................................... 876 -- 876 ----------- ------ ----------- 5,620 5,910 11,530 Costs and expenses: Cost of services....................................... 4,227 3,359 7,586 Cost of products....................................... 1,266 -- 1,266 Research and development............................... 3,286 -- 3,286 Sales and marketing.................................... 4,149 305 4,454 General and administrative............................. 2,463 1,880 867(A) 5,337 127(B) ----------- ------ ----------- ----------- Income (loss) from operations............................ (9,771) 366 (994) (10,399) Other, net............................................... 427 (38) (151)(C) 202 (36)(D) ----------- ------ ----------- ----------- Income (loss) before provision for income taxes.......... (9,344) 328 (1,181) (10,197) Provision for income taxes............................... -- 141 (141)(E) -- ----------- ------ ----------- ----------- $ (9,344) $ 187 $ (1,040) $ (10,197) ----------- ------ ----------- ----------- ----------- ------ ----------- ----------- Net loss per share--basic and diluted.................... $ (0.37) $ (0.37) ----------- ----------- ----------- ----------- Weighted average common shares outstanding............... 24,932 2,338(F) 27,270 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the pro forma condensed financial statements. (A) Represents the amortization of estimated fair value of identifiable intangible assets (assembled workforce) on a straight-line basis over 4 years and goodwill on a straight-line basis over 10 years. (B) Represents increased compensation expense resulting from changes to the executive compensation agreements for the principals of QuickSilver made in connection with the acquisition. These changes adjust compensation arrangements for the former principals of QuickSilver to be consistent with those comparable Zamba employees. (C) Represents additional interest expense associated with the notes payable issued to the stockholders of QuickSilver. (D) Represents the estimated decrease in interest income resulting from the decrease in cash and cash equivalents due to the use of cash to acquire QuickSilver. (E) Represents the QuickSilver income tax provision which would not have been recognized due to Zamba's net operating losses since inception. (F) Represents additional weighted average common shares outstanding as a result of common shares issued to the stockholders of QuickSilver. 20 ZAMBA CORPORATION (F/K/A RACOTEK, INC.) AND QUICKSILVER GROUP PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
ZAMBA THE QUICKSILVER (IN THOUSANDS, EXCEPT PER SHARE DATA) CORPORATION GROUP ADJUSTMENTS PRO FORMA ----------- --------------- ------------- ----------- Net revenues: Services................................................ $ 2,719 $ 3,919 $ 6,638 Products................................................ 95 -- 95 ----------- ------ ----------- 2,814 3,919 6,733 Costs and expenses: Cost of services........................................ 1,462 2,535 3,997 Cost of products........................................ 16 -- 16 Research and development................................ 905 -- 905 Sales and marketing..................................... 1,057 379 1,436 General and administrative.............................. 491 1,477 433(A) 2,465 64(B) ----------- ------ ------ ----------- Loss from operations...................................... (1,117) (472) (497) (2,086) Other, net................................................ 132 (272) (76)(C) (234) (18)(D) ----------- ------ ------ ----------- Loss before benefit for income taxes...................... (985) (744) (591) (2,320) Benefit for income taxes.................................. (222) 222(E) -- ----------- ------ ------ ----------- Net loss.................................................. $ (985) $ (522) $ (813) $ (2,320) ----------- ------ ------ ----------- ----------- ------ ------ ----------- Net loss per share--basic and diluted..................... ($ 0.04) ($ 0.08) ----------- ----------- ----------- ----------- Weighted average common shares outstanding................ 25,025 2,338(F) 27,363 ----------- ------ ----------- ----------- ------ -----------
- ------------------------ (A) Represents the amortization of estimated fair value of identifiable intangible assets (assembled workforce) on a straight-line basis over 4 years and goodwill on a straight-line basis over 10 years. (B) Represents increased compensation expense resulting from changes to the executive compensation agreements for the principals of QuickSilver made in connection with the acquisition. These changes adjust compensation arrangements for the former principals of QuickSilver to be consistent with those of comparable Zamba employees. (C) Represents additional interest expense associated with the notes payable issued to the stockholders of QuickSilver. (D) Represents the estimated decrease in interest income resulting from the decrease in cash and cash equivalents due to the use of cash to acquire QuickSilver. (E) Represents the QuickSilver income tax benefit which would not have been recognized due to Zamba's net operating losses since inception. (F) Represents additional weighted average common shares outstanding as a result of common shares issued to the stockholders of QuickSilver. 21 ZAMBA CORPORATION (F/K/A RACOTEK, INC.) AND QUICKSILVER GROUP PRO FORMA CONDENSED BALANCE SHEET AS OF JUNE 30, 1998 (UNAUDITED)
ZAMBA THE QUICKSILVER (IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) CORPORATION GROUP ADJUSTMENTS PRO FORMA ----------- --------------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents.............................. $ 3,145 $ 1,898 ($ 800)(A) $ 4,243 Short-term investments................................. 1,002 -- 1,002 Accounts receivable, net............................... 678 1,089 1,767 Prepaid expenses and other current assets.............. 110 90 200 ----------- ------ ----------- ----------- Total current assets............................... 4,935 3,077 (800) 7,212 Property and equipment, net.............................. 578 445 1,023 Restricted cash.......................................... 355 -- 355 Intangible assets and goodwill........................... -- 47 7,615(A) 7,662 Other long-term assets................................... 27 91 118 ----------- ------ ----------- ----------- Total assets....................................... $ 5,895 $ 3,660 $ 6,815 $ 16,370 ----------- ------ ----------- ----------- ----------- ------ ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings.................................. $ 104 $ 104 Current portion of long-term debt...................... 44 44 Accounts payable....................................... $ 81 318 399 Accrued expenses....................................... 387 698 1,085 Current portion of amounts due to shareholders......... -- 4 4 Deferred income taxes.................................. -- 91 91 Deferred revenue....................................... 1 137 138 ----------- ------ ----------- ----------- Total current liabilities.......................... 469 1,396 1,865 ----------- ------ ----------- ----------- Long-term debt, less current portion..................... -- 1,420 2,162(A) 4,136 554(C) Amounts due to shareholders.............................. -- 159 159 ----------- ------ ----------- ----------- Total long-term liabilities........................ -- 1,579 2,716 4,295 ----------- ------ ----------- ----------- Total liabilities.................................. 469 2,975 2,716 6,160 ----------- ------ ----------- ----------- Stockholders' equity: Common stock--Zamba.................................... 251 -- 23(A) 274 Common stock--QuickSilver.............................. -- 1,383 (1,383)(B) -- Additional paid-in capital--Zamba...................... 71,398 -- 4,761(A) 76,159 Deferred stock compensation............................ (370) 370(B) Accumulated deficit--Zamba............................. (66,073) -- (66,073) Accumulated deficit--QuickSilver....................... -- (328) 328(B) -- Promissory note receivable from stockholder............ (150) -- (150) ----------- ------ ----------- ----------- Total stockholders' equity......................... 5,426 685 4,099 10,210 ----------- ------ ----------- ----------- Total liabilities and stockholders' equity......... $ 5,895 $ 3,660 $ 6,815 $ 16,370 ----------- ------ ----------- ----------- ----------- ------ ----------- -----------
The accompanying notes are an integral part of the pro forma condensed financial statements. 22 ZAMBA CORPORATION (F/K/A RACOTEK, INC.) AND QUICKSILVER GROUP NOTES TO THE PRO FORMA CONDENSED BALANCE SHEET AS OF JUNE 30, 1998 (A) The Pro Forma Financial Statements assume a purchase price of $7,746 which consists of the following: Issuance of 2,337,992 restricted common shares...................... $ 3,397 Issuance of convertible promissory notes............................ 2,162 Issuance of stock options with exercise prices below market value... 506 Issuance of warrant with exercise price below market value.......... 881 Cash paid, including transaction costs.............................. 800 --------- $ 7,746 --------- ---------
The purchase price will increase by $257 if the stock options granted to former QuickSilver employees vest. At the time of vesting, the purchase price increase will be reflected as an increase in additional paid-in capital and goodwill. The above purchase price computation assumes a fair value of $1.45 per share of common stock, which reflects a 25% discount, due to restrictions on the trading of these shares. (B) To eliminate the QuickSilver Group's historical equity. (C) To increase the carrying value of the QuickSilver debt to its estimated fair value. 23 (c) Exhibits
EXHIBIT NO. DESCRIPTION - --------------- ----------------------------------------------------------------------------------------------------- 2 Agreement and Plan of Merger and Reorganization dated as of July 6, 1998, among Zamba Corporation, a Delaware corporation, Quicksilver Acquisition Corp., a California corporation and QuickSilver Group, Inc., a California corporation, and Certain Designated Shareholders with Exhibit A only. (Omitted exhibits shall be furnished to the Commission upon request). 3 Addendum to the Agreement and Plan of Merger and Reorganization among Zamba Corporation, a Delaware corporation, Quicksilver Acquisition Corp., a California corporation and QuickSilver Group, Inc., a California corporation , and Certain Designated Shareholders, dated as of September 2, 1998. 4 Certificate of Ownership and Merger, Merging Zamba Corporation, a Delaware corporation into Racotek, Inc., a Delaware corporation, dated October 5, 1998. 5 Series A Preferred Stock Purchase Agreement by and between NetNext, Inc., a Delaware corporation and Zamba Corporation, a Delaware corporation, dated as of September 21, 1998. 6 Series B Preferred Stock Purchase Agreement by and between NextNet, Inc., a Delaware corporation and certain designated investors, dated as of September 21, 1998. 7 Investors' Rights Agreement by and among NextNet, Inc., a Delaware corporation, Zamba Corporation, a Delaware corporation, certain designated investors, and Isaac Shpantzer, Vladi Kelman, and Beverly Waldorf, dated as of September 21, 1998. 8 Right of First Refusal Agreement by and among Zamba Corporation, NextNet, Inc., a Delaware corporation and certain holders of Series B Preferred Stock of NextNet, Inc., dated as of September 21, 1998. 9 Voting Agreement by and among NextNet, Inc., a Delaware corporation, Zamba Corporation, a Delaware corporation, Isaac Shpantzer, Vladi Kelman, Beverly Waldorf, Eric Dunn, Stuart Froelich, Kerry Shore and Tony Klein, and certain designated holders of shares of Series B Preferred Stock, dated as of September 21, 1998. 99 Press Release dated September 23, 1998.
24 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. ZAMBA CORPORATION By: /s/ MICHAEL A. FABIASCHI ----------------------------------------- Michael A. Fabiaschi PRESIDENT, CHIEF EXECUTIVE OFFICER AND Dated: October 7, 1998 ACTING CHIEF FINANCIAL OFFICER
25 EX-2 2 EXHIBIT 2 Exhibit 2 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER AND REORGANIZATION among: RACOTEK, INC., a Delaware corporation; QUICKSILVER ACQUISITION CORP., a California corporation; QUICKSILVER GROUP, INC. a California corporation; and CERTAIN DESIGNATED SHAREHOLDERS Dated as of July 6, 1998 ___________________________ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE 1. DESCRIPTION OF TRANSACTION........................................... 1 1.1 Merger of QSG into Merger Sub................................. 1 1.2 Effect of the Merger.......................................... 1 1.3 Closing; Effective Time....................................... 1 1.4 Articles of Incorporation and Bylaws; Directors and Officers.. 2 1.5 Consideration................................................. 2 1.6 Employee Stock Options........................................ 3 1.7 Warrants...................................................... 3 1.8 Closing of QSG's Transfer Books............................... 3 1.9 Exchange of Certificates...................................... 4 1.10 Dissenting Shares............................................. 5 1.11 Tax Consequences.............................................. 6 1.12 Accounting Treatment.......................................... 6 1.13 Escrow........................................................ 6 1.14 Further Action................................................ 6 2. REPRESENTATIONS AND WARRANTIES OF QSG AND EACH SHAREHOLDER........... 6 2.1 Due Organization; No Subsidiaries; Etc........................ 6 2.2 Articles of Incorporation and Bylaws; Records................. 7 2.3 Capitalization, Etc........................................... 7 2.4 Financial Statements.......................................... 8 2.5 Absence of Changes............................................ 9 2.6 Title to Assets............................................... 11 2.7 Bank Accounts; Receivables.................................... 11 2.8 Equipment; Leasehold.......................................... 11 2.9 Proprietary Assets............................................ 12 2.10 Contracts..................................................... 13 2.11 Liabilities................................................... 15 2.12 Compliance with Legal Requirements............................ 15 2.13 Governmental Authorizations................................... 15 2.14 Tax Matters................................................... 15 2.15 Employee and Labor Matters; Benefit Plans..................... 17 2.16 Environmental Matters......................................... 19 2.17 Insurance..................................................... 19
i TABLE OF CONTENTS (CONTINUED)
PAGE 2.18 Related Party Transactions.................................... 20 2.19 Legal Proceedings; Orders..................................... 20 2.20 Authority; Binding Nature of Agreement........................ 20 2.21 Non-Contravention; Consents................................... 21 2.22 Full Disclosure............................................... 22 2.23 Brokers....................................................... 22 3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SHAREHOLDERS......................................................... 22 3.1 Requisite Power and Authority................................. 22 3.2 Title to Shares............................................... 22 3.3 No Violation, Conflict, Etc................................... 22 3.4 No Injunctions, Orders, Etc................................... 23 4. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.............. 23 4.1 SEC Filings; Financial Statements............................. 23 4.2 Authority; Binding Nature of Agreement........................ 24 4.3 Capitalization................................................ 24 4.4 Valid Issuance................................................ 24 4.5 No Material Adverse Change.................................... 24 4.6 Form S-8 and S-3 Eligibility; Current Public Information...... 24 5. COVENANTS OF QSG AND THE SHAREHOLDERS................................ 24 5.1 Access and Investigation...................................... 24 5.2 Conduct of QSG's Business..................................... 25 5.3 Approval by QSG's Shareholders................................ 26 5.4 Necessary Consents and Other Actions.......................... 27 5.5 Notification; Updates to Disclosure Schedule.................. 27 5.6 No Negotiation................................................ 27 5.7 FIRPTA Matters................................................ 28 6. ADDITIONAL COVENANTS OF THE PARTIES.................................. 28 6.1 Filings and Consents.......................................... 28 6.2 Agreement To Vote Shares...................................... 28
ii TABLE OF CONTENTS (CONTINUED)
PAGE 6.3 Confidentiality; Public Announcements......................... 29 6.4 Stock Options................................................. 29 6.5 Form S-8...................................................... 30 6.6 Reservation of Shares......................................... 30 6.7 Lock-Up Agreement............................................. 30 6.8 Affiliate Agreements.......................................... 30 6.9 Employment and Noncompetition Agreements...................... 30 6.10 Release....................................................... 30 6.11 Best Efforts.................................................. 30 6.12 Continuity of Enterprise...................................... 31 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB......... 31 7.1 Accuracy of Representations................................... 31 7.2 Performance of Covenants...................................... 31 7.3 Approval by the Shareholders.................................. 31 7.4 Consents...................................................... 31 7.5 No Material Adverse Change.................................... 31 7.6 Certain Changes in QSG's Working Capital and Net Worth........ 31 7.7 Agreements and Documents...................................... 31 7.8 FIRPTA Compliance............................................. 33 7.9 Legal Investment.............................................. 33 7.10 Information Statement......................................... 33 7.11 No Restraints................................................. 33 7.12 No Legal Proceedings.......................................... 33 7.13 Employees..................................................... 33 7.14 Actions Satisfactory.......................................... 33 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF QSG AND THE SHAREHOLDERS...... 33 8.1 Accuracy of Representations................................... 34 8.2 Performance of Covenants...................................... 34 8.3 Documents..................................................... 34 8.4 No Restraints................................................. 34
iii TABLE OF CONTENTS (CONTINUED)
PAGE 8.5 No Legal Proceedings.......................................... 34 8.6 Legal Investment.............................................. 34 8.7 Board of Directors............................................ 35 8.8 Actions Satisfactory.......................................... 35 8.9 No Material Adverse Change.................................... 35 9. INDEMNIFICATION, ETC................................................. 35 9.1 Survival of Representations, Etc.............................. 35 9.2 Indemnification by QSG and each Shareholder................... 36 9.3 Satisfaction of Indemnification Claim......................... 36 9.4 No Contribution............................................... 37 9.5 Defense of Third Party Claims................................. 37 9.6 Exercise of Remedies by Indemnitees Other Than Parent......... 37 10. TERMINATION AND ABANDONMENT.......................................... 38 10.1 Termination................................................... 38 10.2 Procedure Upon Termination.................................... 38 10.3 Effect of Termination......................................... 39 11. REGISTRATION RIGHTS.................................................. 39 11.1 Registration.................................................. 39 11.2 Indemnification............................................... 40 11.3 Current Public Information.................................... 42 11.4 Termination of Registration Rights............................ 42 11.5 Transferability of Registration Rights........................ 42 11.6 Delay of Registration......................................... 42 12. MISCELLANEOUS PROVISIONS............................................. 42 12.1 Further Assurances............................................ 42 12.2 Fees and Expenses............................................. 43 12.3 Attorneys' Fees............................................... 43 12.4 Notices....................................................... 43 12.5 Time of the Essence........................................... 44 12.6 Headings...................................................... 44
iv TABLE OF CONTENTS (CONTINUED)
PAGE 12.7 Counterparts.................................................. 44 12.8 Governing Law................................................. 44 12.9 Successors and Assigns........................................ 44 12.10 Remedies Cumulative; Specific Performance..................... 44 12.11 Waiver........................................................ 45 12.12 Amendments.................................................... 45 12.13 Severability.................................................. 45 12.14 Parties in Interest........................................... 45 12.15 Entire Agreement.............................................. 45 12.16 Construction.................................................. 45
v AGREEMENT AND PLAN OF MERGER AND REORGANIZATION THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made and entered into as of July 6, 1998, by and among: RACOTEK, INC., a Delaware corporation ("Parent"); QUICKSILVER ACQUISITION CORP., a California corporation and a wholly-owned subsidiary of Parent ("Merger Sub"); QUICKSILVER GROUP, INC., a California corporation (the "QSG"); and CERTAIN SHAREHOLDERS OF QSG IDENTIFIED ON EXHIBIT B (each a "Shareholder" and collectively, the "Shareholders"). Certain other capitalized terms used in this Agreement are defined in EXHIBIT A. RECITALS A. Parent, Merger Sub and QSG intend to effect a merger of QSG with and into Merger Sub in accordance with this Agreement and the California General Corporation Law (the "Merger"). Upon consummation of the Merger, QSG will cease to exist, and Merger Sub will be a wholly owned subsidiary of Parent. B. It is intended that the Merger qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). For accounting purposes, it is intended that the Merger be accounted for as a purchase. C. This Agreement has been approved by the respective boards of directors of Parent, Merger Sub and QSG. D. The Shareholders own a total of 2,038,694 shares of the Common Stock, no par value, of QSG ("QSG Common Stock"), which constitutes approximately 94% of the outstanding capital stock of the QSG. Contemporaneously with the execution and delivery of this Agreement, each of Thomas W. Minick and Todd Fitzwater is executing and delivering to Parent a Voting Agreement and Irrevocable Proxy of even date herewith. AGREEMENT The parties to this Agreement, intending to be legally bound, agree as follows: 1. DESCRIPTION OF TRANSACTION. 1.1 MERGER OF QSG INTO MERGER SUB. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined in Section 1.3), QSG shall be merged with and into Merger Sub, and the separate existence of QSG shall cease. Merger Sub will continue as the surviving corporation in the Merger (the "Surviving Corporation"). 1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the California General Corporation Law. 1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Cooley Godward LLP, Five Palo 1. Alto Square, Palo Alto, California 94036 at 9:00 a.m. within two (2) business days after satisfaction or waiver of all conditions set forth in Sections 7 and 8 (the "Closing Date"). Contemporaneously with the Closing, a properly executed agreement of merger conforming to the requirements of the California General Corporation Law shall be filed with the Secretary of State of the State of California. The Merger shall become effective at the time such agreement of merger is filed with and accepted by the Secretary of State of the State of California the (the "Effective Time"). 1.4 ARTICLES OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS. Unless otherwise determined by Parent and QSG prior to the Effective Time: (a) the Articles of Incorporation of Merger Sub shall be the Articles of Incorporation of the Surviving Corporation; (b) the Bylaws of Merger Sub shall be the Bylaws of the Surviving Corporation; (c) the directors and officers of Merger Sub shall be the directors and officers of the Surviving Corporation immediately after the Effective Time. 1.5 CONSIDERATION. (a) Subject to Section 1.10 and 1.14, at the Effective Time, by virtue of the Merger and without any further action on the part of Parent, Merger Sub, QSG or any shareholder of QSG, each share of QSG Common Stock outstanding on the Closing Date shall be converted into the right to receive (i) the "Applicable Fraction" (as defined in Section 1.5(b)(i)) of a share of the common stock, par value $.01 per share, of Parent ("Parent Common Stock"); (ii) $0.2302 per share of QSG Common Stock to be paid in cash; and (iii) $0.9943 per share of QSG Common Stock payable in Notes, in the form attached hereto as EXHIBIT C (the "Notes"). The consideration set forth in Sections 1.5(a)(ii) and 1.5(a)(iii) are referred to herein as the "Other Merger Consideration" and, together with the consideration set forth in Section 1.5(a)(i), are referred to herein as the "Merger Consideration". The Other Merger Consideration shall be denominated in United States Dollars (US$) and shall be paid when due by check, wire transfer or other immediately available funds. For purposes of this Agreement: (i) The "Applicable Fraction" shall be the fraction: (A) having a numerator equal to Six Million Six Hundred Twenty-One Thousand Ninety-Six and 30/100 Dollars (6,621,096.30) and (B) having a denominator equal to the amount determined by multiplying (1) the QSG Share Amount (as defined in Section 1.5(b)(ii)) by (2) $2.8781. (ii) The "QSG Share Amount" shall be the aggregate number of shares of QSG Common Stock outstanding on the Closing Date, including such shares that are subject to a repurchase option or risk of forfeiture or other similar conditions under any restricted stock purchase agreement or other agreement. (b) If any shares of QSG Common Stock outstanding immediately prior to the Effective Time are unvested or are subject to a repurchase option, risk of forfeiture or other 2. condition (each a "Stock Restriction") under any applicable restricted stock purchase agreement or other agreement with QSG (a "Restricted Stock Agreement"), then the shares of Parent Common Stock issued in exchange for such shares of QSG Common Stock will also be unvested and subject to the Stock Restrictions; the repurchase price with respect to any shares of QSG Common Stock shall be appropriately adjusted; and the certificates representing such shares of Parent Common Stock may accordingly be marked with appropriate legends. Notwithstanding the foregoing, to the extent that any shares of QSG Common Stock are subject to a Stock Restriction which, pursuant to the applicable Restricted Stock Agreement, terminates upon an initial public offering of QSG's Common Stock or upon QSG's Common Stock being publicly traded on an established securities market (A "Private Company Stock Restriction"), such Private Company Stock Restriction shall not apply to shares of Parent Common Stock issued in exchange for such QSG Common Stock. 1.6 EMPLOYEE STOCK OPTIONS. On the Closing Date, each stock option issued by QSG that is then outstanding under QSG's 1997 Stock Option Plan for Key Employees, Consultants and Director (the "Option Plan"), whether vested or unvested (a "QSG Option"), shall be assumed by Parent in accordance with Section 6.4 hereof. 1.7 WARRANTS. On the Closing Date, the warrant issued by QSG to Petra Capital, LLC (the "QSG Warrant"), shall be cancelled and shall cease to be outstanding. All rights with respect to the securities underlying such QSG Warrant shall thereupon terminate and shall cease to be of any force and effect. On the Closing Date, the holder of such QSG Warrant shall be issued a warrant, in the form attached hereto as EXHIBIT D ("Parent Warrant"). The Parent Warrant issued pursuant to this Section 1.7 shall represent the right to receive the number of shares of Parent Common Stock equal to the number of shares of QSG Common Stock subject to such QSG Warrant on the Closing Date multiplied by 1.4849, rounding down to the nearest whole share (with cash, less the applicable exercise price, being payable for any fraction of a share). The per share exercise price under such Parent Warrant shall be the result of dividing the per share exercise price under such QSG Warrant by 1.4849 and rounding up to the nearest whole cent. Any restriction on the exercise of such QSG Warrant shall continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such QSG Warrant shall otherwise remain unchanged. 1.8 CLOSING OF QSG'S TRANSFER BOOKS. At the Effective Time, holders of certificates representing shares of QSG's capital stock that were outstanding immediately prior to the Effective Time shall cease to have any rights as shareholders of QSG, and the stock transfer books of QSG shall be closed with respect to all shares of such capital stock outstanding immediately prior to the Effective Time. No further transfer of any such shares of QSG's capital stock shall be made on such stock transfer books after the Effective Time. If, after the Effective Time, a valid certificate previously representing any of such shares of QSG's capital stock (a "QSG Stock Certificate") is presented to the Surviving Corporation or Parent, such QSG Stock Certificate shall be canceled and shall be exchanged as provided in Section 1.9. 3. 1.9 EXCHANGE OF CERTIFICATES. (a) At or as soon as practicable after the Effective Time, Parent will send to the holders of QSG Stock Certificates (i) a letter of transmittal in customary form and containing such provisions as Parent may reasonably specify, and (ii) instructions for use in effecting the surrender of QSG Stock Certificates in exchange for the Merger Consideration. Upon surrender of a QSG Stock Certificate to Parent for exchange, together with a duly executed letter of transmittal and such other documents as may be reasonably required by Parent, the holder of such QSG Stock Certificate shall be entitled to receive in exchange therefor the Merger Consideration that such holder has the right to receive of this Section 1, and QSG Stock Certificate so surrendered shall be canceled. Until surrendered as contemplated by this Section 1.9, and subject to Section 1.10 with respect to "dissenting shares," each QSG Stock Certificate shall be deemed, from and after the Effective Time, to represent only the right to receive upon such surrender a certificate representing shares of Parent Common Stock (and cash in lieu of any fractional share of Parent Common Stock) and such Other Merger Consideration as contemplated by this Section 1. If any QSG Stock Certificate shall have been lost, stolen or destroyed, Parent may, in its discretion and as a condition precedent to the payment of any the Merger Consideration, require the owner of such lost, stolen or destroyed QSG Stock Certificate to provide an appropriate affidavit with respect to such QSG Stock Certificate. (b) No dividends or other distributions declared or made with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered QSG Stock Certificate with respect to the shares of Parent Common Stock represented thereby, and no cash payment in lieu of any fractional share shall be paid to any such holder, until such holder surrenders such QSG Stock Certificate in accordance with this Section 1.9 (at which time such holder shall be entitled to receive all such dividends and distributions and such cash payment). (c) No fractional shares of Parent Common Stock shall be issued in connection with the Merger, and no certificates for any such fractional shares shall be issued. In lieu of such fractional shares, any holder of capital stock of QSG who would otherwise be entitled to receive a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock issuable to such holder) shall, upon surrender of such holder's QSG Stock Certificate(s), be paid in cash the dollar amount (rounded to the nearest whole cent), without interest, determined by multiplying such fraction by $2.8781. (d) Parent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable to any holder or former holder of capital stock of QSG pursuant to this Agreement such amounts as Parent or the Surviving Corporation may be required to deduct or withhold therefrom under the Code or under any provision of state, local or foreign tax law. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid. (e) Neither Parent nor the Surviving Corporation shall be liable to any holder or former holder of capital stock of QSG for any shares of Parent Common Stock (or dividends 4. or distributions with respect thereto), or other Merger Consideration, or for any cash amounts, delivered to any public official pursuant to any applicable abandoned property, escheat or similar law. (f) The shares of Parent Common Stock, Parent Warrants and Notes to be issued pursuant to this Section 1 shall not have been registered and shall be characterized as "Restricted Securities" under the federal securities laws, and under such laws such shares may be resold without registration under the Securities Act of 1933, as amended (the "Securities Act"), only in certain limited sets of circumstances. Each certificate evidencing shares of Parent Common Stock, each Parent Warrant and each Note to be issued pursuant to this Section 1 shall bear the following legend: "THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION TO THE EFFECT THAT REGISTRATION UNDER SAID ACT IS NOT REQUIRED. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SECURITIES MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION." Parent may provide stop transfer instructions to its transfer agent and require compliance with the foregoing legend prior to any transfer of Parent Common Stock , Parent Warrant and Note to be issued pursuant to this Section 1. (g) The shares of Parent Common Stock issued or issuable to the Shareholders pursuant to this Section 1 shall be subject to a lock-up agreement in substantially the form attached as EXHIBIT G (the "Lock-Up Agreement"). 1.10 DISSENTING SHARES. (a) Notwithstanding anything to the contrary contained in this Agreement, any shares of capital stock of QSG that, as of the Effective Time, are or may become "dissenting shares" within the meaning of Section 1300(b) of the California Corporations Code shall not be converted into or represent the right to receive Merger Consolidation in accordance with Section 1.5 (or cash in lieu of fractional shares in accordance with Section 1.5(c)), and the holder or holders of such shares shall be entitled only to such rights as may be granted to such holder or holders in Chapter 13 of the California General Corporation Law; PROVIDED, HOWEVER, that if the status of any such shares as "dissenting shares" shall not be perfected, or if any such shares shall lose their status as "dissenting shares," then, as of the later of the Effective Time or the time of the failure to perfect to such status or the loss of such status, such shares shall automatically be converted into and shall represent only the right to receive (upon the surrender of the certificate or certificates representing such shares) Merger Consideration in accordance with Section 1.5 (and cash in lieu of fractional shares in accordance with Section 1.5(c)). 5. (b) QSG shall give Parent (i) prompt notice of any written demand received by QSG prior to the Effective Time to require QSG to purchase shares of capital stock of QSG pursuant to Chapter 13 of the California General Corporation Law and of any other demand, notice or instrument delivered to QSG prior to the Effective Time pursuant to the California General Corporation Law, and (ii) the opportunity to participate in all negotiations and proceedings with respect to any such demand, notice or instrument. QSG shall not make any payment or settlement offer prior to the Effective Time with respect to any such demand unless Parent shall have consented in writing to such payment or settlement offer. 1.11 TAX CONSEQUENCES. For federal income tax purposes, the Merger is intended to constitute a reorganization within the meaning of Section 368 of the Code. The parties to this Agreement hereby adopt this Agreement as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations. 1.12 ACCOUNTING TREATMENT. For accounting purposes, the Merger is intended to be accounted for as a purchase. 1.13 ESCROW. On the Effective Date, 10% of the shares of Parent Common Stock and warrants to purchase Parent Common Stock to be issued to the Shareholders in the Merger (the "Escrow Shares") shall be deposited with a Person selected by Parent and reasonably acceptable to the Shareholders (the "Escrow Agent"), such deposit to constitute an escrow fund (the "Escrow Fund") to be governed by the terms set forth herein and the Escrow Agreement of even date herewith and in the form of EXHIBIT E (the "Escrow Agreement"). The Escrow Fund shall be available to satisfy claims of indemnification by the Indemnitees as provided in Section 9 and shall be held pursuant to the terms and conditions of such Escrow Agreement. 1.14 FURTHER ACTION. If, at any time after the Effective Time, any further action is determined by Parent or Merger Sub to be necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation or Parent with full right, title and possession of and to all rights and property of Merger Sub and/or QSG, the officers and directors of the Surviving Corporation and Parent shall be fully authorized (in the name of Merger Sub and/or in the name of QSG) to take such action. 2. REPRESENTATIONS AND WARRANTIES OF QSG AND EACH SHAREHOLDER. QSG and each Shareholder, jointly and severally, represents and warrants as follows: 2.1 DUE ORGANIZATION; NO SUBSIDIARIES; ETC. (a) QSG is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all necessary power and authority: (i) to conduct its business in the manner in which its business is currently being conducted; (ii) to own and use its assets in the manner in which its assets are currently owned and used; and (iii) to perform its obligations under all QSG Contracts. 6. (b) QSG has not conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other name, other than the name "The Quicksilver Group, Inc." (c) QSG is not and has not been required to be qualified, authorized, registered or licensed to do business as a foreign corporation in any jurisdiction other than the jurisdictions identified in Part 2.1 of the Disclosure Schedule, except where the failure to be so qualified, authorized, registered or licensed has not had and will not have a Material Adverse Effect on QSG. QSG is in good standing as a foreign corporation in each of the jurisdictions identified in Part 2.1 of the Disclosure Schedule. (d) Part 2.1 of the Disclosure Schedule accurately sets forth (i) the names of the members of QSG's board of directors, (ii) the name of the members of each committee of QSG's board of directors, and (iii) the names and titles of QSG's officers. (e) QSG does not own any controlling interest in any Entity and QSG has never owned, beneficially or otherwise, any shares or other securities of, or any direct or indirect equity interest in, any Entity. QSG has not agreed and is not obligated to make any future investment in or capital contribution to any Entity. QSG has not guaranteed and is not responsible or liable for any obligation of any of the Entities in which it owns or has owned any equity interest. 2.2 ARTICLES OF INCORPORATION AND BYLAWS; RECORDS. QSG has delivered or will deliver to Parent within five business days after the date of this Agreement accurate and complete copies of: (1) QSG's articles of incorporation and bylaws, including all amendments thereto; (2) the stock records of QSG; and (3) the minutes and other records of the meetings and other proceedings (including any actions taken by written consent or otherwise without a meeting) of the shareholders of QSG and the board of directors of QSG. There have been no formal meetings or actions by written consent of the shareholders of QSG and the board of directors of QSG that are not fully reflected in such minutes or other records. There has not been any violation of any of the provisions of QSG's articles of incorporation or bylaws, and QSG has not taken any action that is inconsistent in any material respect with any resolution adopted by QSG's shareholders and QSG's board of directors. The books of account, stock records, minute books and other records of QSG are accurate, up-to-date and complete in all material respects, and have been maintained in accordance with prudent business practices. 2.3 CAPITALIZATION, ETC. (a) The authorized capital stock of QSG consists of 4,000,000 shares of QSG Common Stock, of which 2,171,567 shares (assuming exercise by Steven Stolle of his option to purchase 8,000 shares of QSG Common Stock) have been issued and are outstanding as of the date of this Agreement. All of the outstanding shares of QSG Common Stock have been duly authorized and validly issued, and are fully paid and non-assessable. Part 2.3 of the Disclosure Schedule accurately sets forth the name and address of each shareholder of QSG immediately prior to the Effective Time, the number of shares of QSG Common Stock held by such person, and provides an accurate and complete description of the terms of each repurchase option held 7. by QSG with respect to such shares and any other condition giving rise to a risk of forfeiture to which any of such shares are subject. (b) QSG has reserved 1,000,000 shares of QSG Common Stock for issuance under its Option Plan, of which options to purchase 631,700 shares are outstanding as of the date of this Agreement (assuming exercise by Steven Stolle of his option exercise to purchase 8,000 shares of QSG Common Stock). QSG has reserved 307,965 shares of QSG Common Stock for issuance in connection with the exercise of QSG Warrants. Part 2.3 of the Disclosure Schedule accurately sets forth, with respect to each QSG Option or QSG Warrant that is outstanding as of the date of this Agreement: (i) the name of the holder of such QSG Option or QSG Warrant; (ii) the total number of shares and class of QSG capital stock that are subject to such QSG Option or QSG Warrant and the number of shares of QSG capital stock with respect to which such QSG Option or QSG Warrant is immediately exercisable; (iii) the date on which such QSG Option or QSG Warrant was granted and the term of such QSG Option or QSG Warrant; (iv) the vesting schedule for such QSG Option or QSG Warrant; (v) the exercise price per share of QSG Common Stock purchasable under such QSG Option or QSG Warrant; and (vi) whether such QSG Option has been designated an "incentive stock option" as defined in Section 422 of the Code. Except for rights granted under this Agreement, QSG Options and QSG Warrants, there is no: (i) outstanding subscription, option, call, put, warrant or right (whether or not currently exercisable) to acquire from QSG any shares of its capital stock or other securities; (ii) stock option plan, employee stock purchase plan, stock issuance plan or other similar plan of QSG; (iii) outstanding security, instrument, obligation or right (including any stock appreciation right or right to acquire any shares of capital stock of QSG pursuant to any plan, security or right listed in clause (i) or (ii) above) that is or may become convertible into or exchangeable for any shares of the capital stock or other securities of QSG; (iv) Contract under which QSG is or may become obligated to sell or otherwise issue any shares of its capital stock or any other securities; or (v) to the Knowledge of QSG and the Shareholders, condition or circumstance that may give rise to or provide a basis for the assertion of a claim by any Person to the effect that such Person is entitled to acquire or receive from QSG any shares of capital stock or other securities of QSG. (c) All outstanding shares of QSG Common Stock have been issued and granted in compliance with (i) all applicable securities laws and other applicable Legal Requirements and (ii) all requirements set forth in applicable QSG Contracts. (d) Except as set forth in Part 2.3 of the Disclosure Schedule, QSG has never repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities of QSG. All securities so reacquired by QSG were reacquired in compliance with (i) the applicable provisions of the California General Corporation Law and all other applicable Legal Requirements, and (ii) all requirements set forth in applicable restricted stock purchase agreements and other applicable Contracts. 2.4 FINANCIAL STATEMENTS. (a) QSG has delivered to Parent the following financial statements and notes (collectively, the "QSG Financial Statements"): 8. (i) the audited balance sheet of QSG as of December 31, 1997 (the "Balance Sheet Date") and December 31, 1996, and the related audited income statement, statement of shareholders' equity and statement of cash flows of QSG for the year then ended, together with the notes thereto and the unqualified report and opinion of Shilling and Kenyon relating thereto; and (ii) the unaudited balance sheet of QSG (the "Unaudited Interim Balance Sheet") as of June 30, 1998 (the "Statement Date"), and the related unaudited income statement, statement of shareholders' equity and statement of cash flows of QSG for the six months then ended. (b) The QSG Financial Statements are accurate and complete in all material respects and present fairly the financial position of QSG as of the respective dates thereof and the results of operations and (in the case of the financial statements referred to in Section 2.4(a)(i)) cash flows of QSG for the periods covered thereby. The QSG Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered (except that the financial statements referred to in Section 2.4(a)(ii) do not contain footnotes or statements of cash flows and are subject to normal and recurring year-end audit adjustments). 2.5 ABSENCE OF CHANGES. Except as set forth in Part 2.5 of the Disclosure Schedule, since the Balance Sheet Date: (a) there has not been any material adverse change in QSG's business, condition, assets, liabilities, operations, financial performance or prospects, and no event has occurred that will, or could reasonably be expected to, have a Material Adverse Effect on QSG; (b) there has not been any material loss, damage or destruction to, or any material interruption in the use of, any of QSG's assets (whether or not covered by insurance); (c) QSG has not declared, accrued, set aside or paid any dividend or made any other distribution in respect of any shares of capital stock, and has not repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities; (d) QSG has not sold, issued or authorized the issuance of (i) any capital stock or other security, (ii) any option or right to acquire any capital stock or any other security or (iii) any instrument convertible into or exchangeable for any capital stock or other security; (e) QSG has not amended or waived any of its rights under, or permitted the acceleration of vesting under, (i) any provision of its Option Plan, (ii) any provision of any agreement evidencing any outstanding QSG Option or QSG Warrant, or (iii) any restricted stock purchase agreement; (f) there has been no amendment to QSG's articles of incorporation or bylaws, and QSG has not effected or been a party to any Acquisition Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction; 9. (g) QSG has not formed any subsidiary or acquired any equity interest or other interest in any other Entity; (h) QSG has not made any capital expenditure which, when added to all other capital expenditures made on behalf of QSG since the Balance Sheet Date, exceeds $10,000; (i) QSG has not (i) entered into or permitted any of the assets owned or used by it to become bound by any Contract that is or would constitute a Material Contract (as defined in Section 2.10(a)) or (ii) amended or prematurely terminated, or waived any material right or remedy under, any such Material Contract; (j) QSG has not (i) acquired, leased or licensed any right or other asset from any other Person, (ii) sold or otherwise disposed of, or leased or licensed, any right or other asset to any other Person, or (iii) waived or relinquished any right, except for rights or other assets acquired, leased, licensed or disposed of in the ordinary course of business and consistent with QSG's past practices; (k) QSG has not written off as uncollectible, or established any extraordinary reserve with respect to, any account receivable or other indebtedness; (l) QSG has not made any pledge of any of its assets or otherwise permitted any of its assets to become subject to any Encumbrance, except for pledges of assets made in the ordinary course of business and consistent with QSG's past practices; (m) QSG has not (i) lent money to any Person (other than pursuant to routine travel advances made to employees in the ordinary course of business) or (ii) incurred or guaranteed any indebtedness for borrowed money; (n) QSG has not (i) established or adopted any equity incentive, stock option, stock purchase, stock bonus, stock appreciation right or similar plan, or established or adopted any employee benefit plan, (ii) paid any bonus or made any profit-sharing or similar payment to, or increased the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees, (iii) entered into new employment agreements or modified existing employment agreements or (iv) hired any new employee; (o) QSG has not changed any of its methods of accounting or accounting practices in any respect; (p) QSG has not made any Tax election; (q) QSG has not commenced or settled any Legal Proceeding; (r) QSG has not entered into any material transaction or taken any other material action outside the ordinary course of business or inconsistent with its past practices; and 10. (s) QSG has not agreed or committed to take any of the actions referred to in clauses "(c)" through "(r)" above. 2.6 TITLE TO ASSETS. (a) Part 2.6 of the Disclosure Schedule identifies all assets that are material to the business of QSG and owned by it as of the date hereof. None of the assets set forth in Part 2.6 of this Disclosure Schedule has been disposed of. Except as set forth in Part 2.6 of the Disclosure Schedule, QSG owns, and has good, valid and marketable title to, all assets purported to be owned by it, including: (i) all assets reflected on the Unaudited Interim Balance Sheet; (ii) all assets referred to in Parts 2.7(b) and 2.9 of the Disclosure Schedule and all of QSG's rights under the Contracts identified in Part 2.10 of the Disclosure Schedule; and (iii) all other assets reflected in QSG's books and records as being owned by QSG. Except as set forth in Part 2.6 of the Disclosure Schedule, all of said assets are owned by QSG free and clear of any liens or other Encumbrances, except for (x) any lien for current taxes not yet due and payable, and (y) minor liens that have arisen in the ordinary course of business and that do not (in any case or in the aggregate) materially detract from the value of the assets subject thereto or materially impair the operations of QSG. (b) Part 2.6 of the Disclosure Schedule identifies all assets that are material to the business of QSG and that are being leased or licensed to QSG. 2.7 BANK ACCOUNTS; RECEIVABLES. (a) Part 2.7(a) of the Disclosure Schedule provides accurate information with respect to each account maintained by or for the benefit of QSG at any bank or other financial institution. (b) Part 2.7(b) of the Disclosure Schedule provides an accurate and complete breakdown and aging of all accounts receivable, notes receivable and other receivables of QSG as of the Statement Date. All existing accounts receivable of QSG (including those accounts receivable reflected on the Unaudited Interim Balance Sheet that have not yet been collected and those accounts receivable that have arisen since the Statement Date and have not yet been collected) (i) represent valid obligations of customers of QSG arising from bona fide transactions entered into in the ordinary course of business and (ii) are current and will be collected in full when due, without any counterclaim or set off (net of an allowance for doubtful accounts not to exceed $10,000 in the aggregate). 2.8 EQUIPMENT; LEASEHOLD. (a) All material items of equipment and other tangible assets owned by or leased to QSG are adequate for the uses to which they are being put, are in good condition and repair (ordinary wear and tear excepted) and are adequate for the conduct of QSG's business in the manner in which such business is currently being conducted. 11. (b) QSG does not own any real property or any interest in real property, except for the leasehold created under the real property lease identified in Part 2.10 of the Disclosure Schedule. 2.9 PROPRIETARY ASSETS. (a) Part 2.9(a)(i) of the Disclosure Schedule sets forth, with respect to each QSG Proprietary Asset registered with any Governmental Body or for which an application has been filed with any Governmental Body, (i) a brief description of such Proprietary Asset, and (ii) the names of the jurisdictions covered by the applicable registration or application. Part 2.9(a)(ii) of the Disclosure Schedule identifies and provides a brief description of all other QSG Proprietary Assets owned by QSG. Part 2.9(a)(iii) of the Disclosure Schedule identifies and provides a brief description of each Proprietary Asset licensed to QSG by any Person and identifies the license agreement under which such Proprietary Asset is being licensed to QSG. Except as set forth in Part 2.9(a)(iv) of the Disclosure Schedule, QSG has good, valid and marketable title to all of QSG Proprietary Assets identified in Parts 2.9(a)(i) and 2.9(a)(ii) of the Disclosure Schedule, free and clear of all liens and other Encumbrances, and has a valid right to use all Proprietary Assets identified in Part 2.9(a)(iii) of the Disclosure Schedule. Except as set forth in Part 2.9(a)(v) of the Disclosure Schedule, QSG is not obligated to make any payment to any Person for the use of any QSG Proprietary Asset. Except as set forth in Part 2.9(a)(vi) of the Disclosure Schedule, QSG has not developed jointly with any other Person any QSG Proprietary Asset with respect to which such other Person has any rights. (b) QSG has taken all measures and precautions reasonably necessary to protect and maintain the confidentiality and secrecy of all QSG Proprietary Assets (except QSG Proprietary Assets whose value would be unimpaired by public disclosure) and otherwise to maintain and protect the value of all QSG Proprietary Assets. (c) None of QSG Proprietary Assets infringes or conflicts with any Proprietary Asset owned or used by any other Person, including, without limitation, any former employers of the Shareholder. QSG is not infringing, misappropriating or making any unlawful use of, and QSG has not at any time infringed, misappropriated or made any unlawful use of, or received any notice or other communication (in writing or otherwise) of any actual, alleged, possible or potential infringement, misappropriation or unlawful use of, any Proprietary Asset owned or used by any other Person. To the Knowledge of QSG and the Shareholders, no other Person is infringing, misappropriating or making any unlawful use of, and no Proprietary Asset owned or used by any other Person infringes or conflicts with, any QSG Proprietary Asset. (d) Each QSG Proprietary Asset conforms in all material respects with any specification, documentation, performance standard, representation or statement made or provided with respect thereto by or on behalf of QSG, and there has not been any claim by any customer or other Person alleging that any QSG Proprietary Asset (including each version thereof that has ever been licensed or otherwise made available by QSG to any Person) does not conform in all material respects with any specification, documentation, performance standard, representation, warranty or statement made or provided by or on behalf of QSG, and, to the Knowledge of QSG and the Shareholder, there is no basis for any such claim. 12. (e) QSG Proprietary Assets constitute all the Proprietary Assets necessary to enable QSG to conduct its business in the manner in which such business has been and is being conducted. Except as set forth on Part 2.9(e) of the Disclosure Schedule, QSG has not (i) licensed any of QSG Proprietary Assets to any Person on an exclusive basis or (ii) entered into any covenant not to compete or Contract limiting its ability to exploit fully any of its Proprietary Assets or to transact business in any market or geographical area or with any Person. (f) All current and former employees of QSG have executed and delivered to QSG an agreement (containing no exceptions to or exclusions from the scope of its coverage) that is identical in all material respects to the form of Confidential Information and Invention Assignment Agreement previously delivered to Parent; and, all current and former consultants and independent contractors to QSG have executed and delivered to QSG an agreement (containing no exceptions to or exclusions from the scope of its coverage) that is identical in all material respects to the form of Consultant Confidential Information and Invention Assignment Agreement previously delivered to Parent. 2.10 CONTRACTS. (a) Part 2.10(a) of the Disclosure Schedule identifies: (i) each QSG Contract relating to the employment of, or the performance of services by, any employee, consultant or independent contractor; (ii) each QSG Contract relating to the acquisition, transfer, use, development, sharing or license of any technology or any Proprietary Asset; (iii) each QSG Contract imposing any restriction on QSG's right or ability (A) to compete with any other Person, (B) to acquire any product or other asset or any services from any other Person, to sell any product or other asset to or perform any services for any other Person or to transact business or deal in any other manner with any other Person, or (C) to develop or distribute any technology; (iv) each QSG Contract creating or involving any agency relationship, distribution arrangement or franchise relationship; (v) each QSG Contract relating to the acquisition, issuance or transfer of any securities; (vi) each QSG Contract relating to the creation of any Encumbrance with respect to any asset of QSG; (vii) each QSG Contract involving or incorporating any guaranty, any pledge, any performance or completion bond, any indemnity or any surety arrangement; (viii) each QSG Contract creating or relating to any partnership or joint venture or any sharing of revenues, profits, losses, costs or liabilities; 13. (ix) each QSG Contract relating to the purchase or sale of any product or other asset by or to, or the performance of any services by or for, any Related Party (as defined in Section 2.18); (x) each QSG Contract constituting or relating to a Government Contract or Government Bid; (xi) any other QSG Contract that was entered into outside the ordinary course of business or was inconsistent with QSG's past practices; (xii) any other QSG Contract that has a term of more than 60 days and that may not be terminated by QSG (without penalty) within 60 days after the delivery of a termination notice by QSG; and (xiii) any other active QSG Contract that contemplates or involves (A) the payment or delivery of cash or other consideration in an amount or having a value in excess of $25,000 in the aggregate, or (B) the performance of services having a value in excess of $25,000 in the aggregate. (Contracts in the respective categories described in clauses "(i)" through "(xiii)" above are referred to in this Agreement as "Material Contracts.") (b) QSG has delivered to Parent accurate and complete copies of all Material Contracts, including all amendments thereto. Part 2.10(b) of the Disclosure Schedule provides an accurate description of the terms of each Material Contract that is not in written form. Each Material Contract is valid and in full force and effect and is enforceable by QSG in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. (c) Except as set forth in part 2.10 of the Disclosure Schedule (i) QSG has not violated or breached, or committed any default under, any Material Contract, and to QSG's and the Shareholder's Knowledge no other Person has violated or breached, or committed any default under, any Material Contract; (ii) no event has occurred, and to QSG's and the Shareholders' Knowledge no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, (A) result in a violation or breach of any of the provisions of any Material Contract, (B) give any Person the right to declare a default or exercise any remedy under any Material Contract, (C) give any Person the right to accelerate the maturity or performance of any Material Contract, or (D) give any Person the right to cancel, terminate or modify any Material Contract; (iii) QSG has not received any notice or other communication regarding any actual or possible violation or breach of, or default under, any Material Contract; and 14. (iv) QSG has not waived any of its material rights under any Material Contract. (d) No Person is renegotiating, or has a right pursuant to the terms of any Material Contract to renegotiate, any amount paid or payable to QSG under any Material Contract or any other material term or provision of any Material Contract. (e) The Contracts identified in Part 2.10(a) of the Disclosure Schedule collectively constitute all of the Contracts necessary to enable QSG to conduct its business in the manner in which its business is currently being conducted. 2.11 LIABILITIES. QSG has no accrued, and no contingent or other liabilities of any nature, either matured or unmatured (whether or not required to be reflected in financial statements in accordance with GAAP, and whether due or to become due), except for: (a) liabilities identified as such in the "liabilities" column of the Unaudited Interim Balance Sheet; (b) accounts payable or accrued salaries that have been incurred by QSG since the Statement Date in the ordinary course of business and consistent with QSG's past practices; (c) liabilities under Material Contracts, to the extent the nature and magnitude of such liabilities can be specifically ascertained by reference to the text of such Material Contracts; and (d) the liabilities identified in Part 2.11 of the Disclosure Schedule. 2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. QSG is, and has at all times since its formation been, in compliance with all applicable Legal Requirements, except where the failure to comply with such Legal Requirements has not had and will not have a Material Adverse Effect on QSG. Except as set forth in Part 2.12 of the Disclosure Schedule, QSG has not received any notice or other communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any Legal Requirement. 2.13 GOVERNMENTAL AUTHORIZATIONS. Part 2.13 of the Disclosure Schedule identifies each material Governmental Authorization held by QSG, and QSG has delivered to Parent accurate and complete copies of all Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule. The Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule are valid and in full force and effect, and collectively constitute all Governmental Authorizations necessary to enable QSG to conduct its business in the manner in which its business is currently being conducted. QSG is, and at all times since its formation has been, in compliance with all material terms and requirements of the respective Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule. QSG has not received any notice or other communication from any Governmental Body regarding (a) any actual or possible violation of or failure to comply with any term or requirement of any Governmental Authorization, or (b) any actual or possible revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization. 2.14 TAX MATTERS. (a) All Tax Returns required to be filed by or on behalf of QSG with any Governmental Body with respect to any taxable period ending on or before the Closing Date (the 15. "QSG Returns") (i) have been or will be filed on or before the applicable due date (including any extensions of such due date), and (ii) have been, or will be when filed, accurately and completely prepared in all material respects in compliance with all applicable Legal Requirements. All amounts shown on QSG Returns to be due on or before the Closing Date have been or will be paid on or before the Closing Date. QSG has delivered to Parent accurate and complete copies of all QSG Returns filed by QSG which have been requested by Parent. (b) QSG Financial Statements fully accrue all actual and reasonably anticipated contingent liabilities for Taxes with respect to all periods through the dates thereof in accordance with GAAP. QSG will establish, in the ordinary course of business and consistent with its past practices, reserves adequate for the payment of all Taxes for the period from the Statement Date through the Closing Date, and Part 2.14(b) of the Disclosure Schedule sets forth the estimated dollar amount of such reserves as of the Closing Date. (c) No QSG Return relating to income Taxes has ever been examined or audited by any Governmental Body. There have been no examinations or audits of any QSG Return. QSG has delivered to Parent accurate and complete copies of all audit reports and similar documents (to which QSG has access) relating to QSG Returns. No extension or waiver of the limitation period applicable to any of QSG Returns has been granted (by QSG or any other Person), and no such extension or waiver has been requested from QSG. (d) No claim or Proceeding is pending or has been threatened against or with respect to QSG in respect of any Tax. There are no unsatisfied liabilities for Taxes (including liabilities for interest, additions to tax and penalties thereon and related expenses) with respect to any notice of deficiency or similar document received by QSG with respect to any Tax (other than liabilities for Taxes asserted under any such notice of deficiency or similar document which are being contested in good faith by QSG and with respect to which adequate reserves for payment have been established). There are no liens for Taxes upon any of the assets of QSG except liens for current Taxes not yet due and payable. QSG has not entered into or become bound by any agreement or consent pursuant to Section 341(f) of the Code. QSG has not been, and QSG will not be, required to include any adjustment in taxable income for any tax period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions or events occurring, or accounting methods employed, prior to the Closing. (e) There is no agreement, plan, arrangement or other Contract covering any employee or independent contractor or former employee or independent contractor of QSG that, considered individually or considered collectively with any other such Contracts, will, or could reasonably be expected to, give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 280G or Section 162 of the Code. QSG is not, and has never been, a party to or bound by any tax indemnity agreement, tax sharing agreement, tax allocation agreement or similar Contract. 16. 2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS. (a) Part 2.15(a) of the Disclosure Schedule identifies each incentive compensation, stock option, severance pay, termination pay, hospitalization, medical, life or other insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plan, program or agreement (collectively, the "Plans") sponsored, maintained, contributed to or required to be contributed to by QSG for the benefit of any employee of QSG ("Employee"), except for Plans which would not require QSG to make payments or provide benefits having a value in excess of $10,000 in the aggregate. (b) QSG does not maintain, sponsor or contribute to, and, to the Knowledge of QSG and the Shareholder, has not at any time in the past maintained, sponsored or contributed to, any employee pension benefit plan (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not excluded from coverage under specific Titles or Merger Subtitles of ERISA) for the benefit of Employees or former Employees (a "Pension Plan"). (c) QSG maintains, sponsors or contributes only to those employee welfare benefit plans (as defined in Section 3(1) of ERISA, whether or not excluded from coverage under specific Titles or Merger Subtitles of ERISA) for the benefit of Employees or former Employees which are described in Part 2.15(c) of the Disclosure Schedule (the "Welfare Plans"), none of which is a multiemployer plan (within the meaning of Section 3(37) of ERISA). (d) With respect to each Plan, QSG has delivered to Parent: (i) an accurate and complete copy of such Plan (including all amendments thereto); (ii) an accurate and complete copy of the annual report, if required under ERISA, with respect to such Plan for the last two (2) years; (iii) an accurate and complete copy of the most recent summary plan description, together with each Summary of Material Modifications, if required under ERISA, with respect to such Plan, and all material employee communications relating to such Plan; (iv) if such Plan is funded through a trust or any third party funding vehicle, an accurate and complete copy of the trust or other funding agreement (including all amendments thereto) and accurate and complete copies the most recent financial statements thereof; (v) accurate and complete copies of all Contracts relating to such Plan, including service provider agreements, insurance contracts, minimum premium contracts, stop-loss agreements, investment management agreements, subscription and participation agreements and recordkeeping agreements; and 17. (vi) an accurate and complete copy of the most recent determination letter received from the Internal Revenue Service with respect to such Plan (if such Plan is intended to be qualified under Section 401(a) of the Code). (e) QSG is not required to be, and, to the Knowledge of QSG and the Shareholder, has never been required to be, treated as a single employer with any other Person under Section 4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the Code. QSG has never been a member of an "affiliated service group" within the meaning of Section 414(m) of the Code. To the Knowledge of QSG and the Shareholder, QSG has never made a complete or partial withdrawal from a multiemployer plan, as such term is defined in Section 3(37) of ERISA, resulting in "withdrawal liability," as such term is defined in Section 4201 of ERISA (without regard to subsequent reduction or waiver of such liability under either Section 4207 or 4208 of ERISA). (f) QSG does not have any plan or commitment to create any additional Welfare Plan or any Pension Plan, or to modify or change any existing Welfare Plan or Pension Plan (other than to comply with applicable law) in a manner that would affect any Employee. (g) No Welfare Plan provides death, medical or health benefits (whether or not insured) with respect to any current or former Employee after any such Employee's termination of service (other than (i) benefit coverage mandated by applicable law, including coverage provided pursuant to Section 4980B of the Code, (ii) deferred compensation benefits accrued as liabilities on the Unaudited Interim Balance Sheet, and (iii) benefits the full cost of which are borne by current or former Employees (or the Employees' beneficiaries)). (h) With respect to each of the Welfare Plans constituting a group health plan within the meaning of Section 4980B(g)(2) of the Code, the provisions of Section 4980B of the Code ("COBRA") have been complied with in all material respects. (i) Each of the Plans has been operated and administered in all material respects in accordance with applicable Legal Requirements, including but not limited to ERISA and the Code. (j) Each of the Plans intended to be qualified under Section 401(a) of the Code has received a favorable determination from the Internal Revenue Service, and neither of QSG or the Shareholder has Knowledge of any reason why any such determination letter should be revoked. (k) Neither the execution, delivery or performance of this Agreement, nor the consummation of the Merger or any of the other transactions contemplated by this Agreement, will result in any payment (including any bonus, golden parachute or severance payment) to any current or former Employee or director of QSG (whether or not under any Plan), or materially increase the benefits payable under any Plan, or result in any acceleration of the time of payment or vesting of any such benefits. (l) Part 2.15(l) of the Disclosure Schedule contains a list of all salaried employees of QSG as of the date of this Agreement, and correctly reflects, in all material 18. respects, their dates of employment and their positions. QSG is not a party to any collective bargaining contract or other Contract with a labor union involving any of its Employees. Pursuant to California law, all of QSG's employees are "at will" employees. (m) Part 2.15(m) of the Disclosure Schedule identifies each Employee who is not fully available to perform work because of disability or other leave and sets forth the basis of such leave and the anticipated date of return to full service. (n) QSG is in compliance in all material respects with all applicable Legal Requirements and Contracts relating to employment, employment practices, wages, bonuses and terms and conditions of employment, including employee compensation matters. (o) Based on a reasonable and good faith inquiry or investigation, neither QSG nor the Shareholders have Knowledge that (i) the consummation of the Merger or any of the other transactions contemplated by this Agreement will have a Material Adverse Effect on QSG's labor relations, or (ii) any of QSG's employees intends to terminate his or her employment with QSG. 2.16 ENVIRONMENTAL MATTERS. QSG is in compliance in all material respects with all applicable Environmental Laws, which compliance includes the possession by QSG of all permits and other Governmental Authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof. QSG has not received any notice or other communication (in writing or otherwise), whether from a Governmental Body, citizens group, employee or otherwise, that alleges that QSG is not in compliance with any Environmental Law, and, to the Knowledge of QSG and the Shareholders, there are no circumstances that may prevent or interfere with QSG's compliance with any Environmental Law in the future. To the Knowledge of QSG and the Shareholders, no current or prior owner of any property leased or controlled by QSG has received any notice or other communication (in writing or otherwise), whether from a Government Body, citizens group, employee or otherwise, that alleges that such current or prior owner or QSG is not in compliance with any Environmental Law. All Governmental Authorizations currently held by QSG pursuant to Environmental Laws are identified in Part 2.16 of the Disclosure Schedule. (For purposes of this Section 2.16: (i) "Environmental Law" means any federal, state, local or foreign Legal Requirement relating to pollution or protection of human health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including any law or regulation relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern; and (ii) "Materials of Environmental Concern" include chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and petroleum products and any other substance that is now or hereafter regulated by any Environmental Law or that is otherwise a danger to health, reproduction or the environment.) 2.17 INSURANCE. Part 2.17 of the Disclosure Schedule identifies all insurance policies maintained by, at the expense of or for the benefit of QSG and identifies any material claims made thereunder, and QSG has delivered to Parent accurate and complete copies of the insurance policies identified in Part 2.17 of the Disclosure Schedule. Each of the insurance policies 19. identified in Part 2.17 of the Disclosure Schedule is in full force and effect. QSG has not received any notice or other communication regarding any actual or possible (a) cancellation or invalidation of any insurance policy, (b) refusal of any coverage or rejection of any claim under any insurance policy, or (c) material adjustment in the amount of the premiums payable with respect to any insurance policy. 2.18 RELATED PARTY TRANSACTIONS. Except as set forth in Part 2.18 of the Disclosure Schedule: (a) no Related Party has, and no Related Party has at any time had, any direct or indirect interest in any material asset used in or otherwise relating to the business of QSG; (b) no Related Party is, or has at any time since January 1, 1996 been, indebted to QSG; (c) no Related Party has entered into, or has had any direct or indirect (other than as a shareholder of QSG) financial interest in, any Material Contract, transaction or business dealing involving QSG; (d) no Related Party is competing, or has at any time competed, directly or indirectly, with QSG; and (e) no Related Party has any claim or right against QSG (other than rights as a shareholder, director or officer of QSG and rights to receive compensation for services performed as an employee of QSG). (For purposes of the Section 2.18 each of the following shall be deemed to be a "Related Party": (i) either Shareholder; (ii) each individual who is, or who has at any time been, an officer of QSG; (iii) each member of the immediate family of each of the individuals referred to in clauses "(i)" and "(ii)" above; and (iv) any trust or other Entity (other than QSG) in which any one of the individuals referred to in clauses "(i)", "(ii)" and "(iii)" above holds (or in which more than one of such individuals collectively hold), beneficially or otherwise, a material voting, proprietary or equity interest.) 2.19 LEGAL PROCEEDINGS; ORDERS. (a) There is no pending Legal Proceeding, and no Person has threatened to commence any Legal Proceeding: (i) that involves QSG or any of the assets owned or used by QSG or any Person whose liability QSG has assumed, either contractually or by operation of law; or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Merger or any of the other transactions contemplated by this Agreement. No event has occurred, no claim has been made, and to QSG's and the Shareholders' Knowledge no dispute or other condition or circumstance exists, that will, or that could reasonably be expected to, give rise to the commencement of any such Legal Proceeding. (b) Part 2.19(b) of the Disclosure Schedule describes each Legal Proceeding that has ever been commenced by or has ever been pending against QSG. (c) There is no order, writ, injunction, judgment or decree to which QSG, or any of the assets owned or used by QSG, is subject. The Shareholder is not subject to any order, writ, injunction, judgment or decree that relates to QSG's business or to any of the assets owned or used by QSG. No officer or other employee of QSG is subject to any order, writ, injunction, judgment or decree that prohibits such officer or other employee from engaging in or continuing any conduct, activity or practice relating to QSG's business. 2.20 AUTHORITY; BINDING NATURE OF AGREEMENT. QSG has the right, power and authority to enter into and to perform its obligations under this Agreement; and the execution, 20. delivery and performance by QSG of this Agreement have been duly authorized by all necessary action on the part of QSG and its board of directors. This Agreement constitutes the legal, valid and binding obligation of QSG, enforceable against QSG in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, (ii) rules of law governing specific performance, injunctive relief and other equitable remedies and, (iii) with respect to the consummation of the Merger, the approval of this Agreement and the Merger by the shareholders of QSG in accordance with the California General Corporation Law and QSG's articles of incorporation. 2.21 NON-CONTRAVENTION; CONSENTS. Subject, with respect to the consummation of the Merger, to the approval of this Agreement and the Merger by the shareholders of QSG in accordance with the California General Corporation Law and QSG's articles of incorporation, neither (1) the execution, delivery or performance of this Agreement or any of the other agreements referred to in this Agreement, nor (2) the consummation of the Merger or any of the other transactions contemplated by this Agreement, will directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with or result in a violation of (i) any of the provisions of QSG's articles of incorporation or bylaws, or (ii) any resolution adopted by QSG's shareholders or QSG's board of directors; (b) contravene, conflict with or result in a violation of any Legal Requirement or any order, writ, injunction, judgment or decree to which QSG, or any of the assets owned or used by QSG, is subject; (c) contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by QSG or that otherwise relates to QSG's business or to any of the assets owned or used by QSG; (d) contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Material Contract, or give any Person the right to (i) declare a default or exercise any remedy under any such Material Contract, (ii) accelerate the maturity or performance of any such Material Contract, or (iii) cancel, terminate or modify any such Material Contract; or (e) result in the imposition or creation of any lien or other Encumbrance upon or with respect to any asset owned or used by QSG (except for minor liens that will not, in any case or in the aggregate, materially detract from the value of the assets subject thereto or materially impair the operations of QSG). Except as otherwise provided in this Agreement, QSG is not and will not be required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with (x) the execution, delivery or performance of this Agreement or any of the other agreements referred to in this Agreement, or (y) the consummation of the Merger or any of the other transactions contemplated by this Agreement. 21. 2.22 FULL DISCLOSURE. This Agreement (including the Disclosure Schedule) does not, and the Closing Certificates (as defined in Section 7.5(m) below) will not, (i) contain any representation, warranty or information that is false or misleading with respect to any material fact, or (ii) omit to state any material fact or necessary in order to make the representations, warranties and information contained and to be contained herein and therein (in the light of the circumstances under which such representations, warranties and information were or will be made or provided) not false or misleading. 2.23 BROKERS. QSG has not become obligated to pay, nor has QSG taken any action that might result in any Person claiming to be entitled to received, any brokerage commission, finders fee or similar commission or fee in connection with any of the transactions contemplated by this Agreement. 3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SHAREHOLDERS. Each Shareholder hereby, severally and not jointly, represents, warrants and covenants as follows (such representations and warranties do not lessen or obviate the representations and warranties of QSG and the Shareholders set forth in Section 2 of this Agreement). 3.1 REQUISITE POWER AND AUTHORITY. Such Shareholder has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and to carry out its provisions. All action on such Shareholder's part required for the lawful execution and delivery of this Agreement has been or will be effectively taken prior to the Closing. Upon execution and delivery, this Agreement will be the valid and binding obligation of such Shareholder, enforceable in accordance with its terms. 3.2 TITLE TO SHARES. Such Shareholder is the beneficial and record owner of that number of shares of QSG Common Stock as is set forth opposite such Shareholder's name on EXHIBIT B and has good and marketable title to such shares of QSG Common Stock, free and clear of any Encumbrances. Such Shareholder has the legal right to sell and deliver such shares of QSG Common Stock pursuant to this Agreement. The shares of QSG Common Stock being exchanged in connection with the Merger by the Shareholders at the Closing include all of the shares of QSG Common Stock owned beneficially or of record by such Shareholder, and each such Shareholder owns no other securities of QSG. Except for this Agreement and as set forth in Part 3.2 of the Disclosure Schedule, the shares of QSG Common Stock exchanged in connection with the Merger by such Shareholder are not subject to any proxy, voting trust agreement or other contract, agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of such shares. Except as set forth in Part 3.2 of the Disclosure Schedule, such Shareholder has not issued (and is not committed to issue) any option, warrant or other right to subscribe for or purchase any capital stock of QSG or securities convertible into or exchangeable for any capital stock of QSG. 3.3 NO VIOLATION, CONFLICT, ETC. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, by such Shareholder does not and will not violate, conflict with, result in a breach of, or constitute a default or result in or permit 22. any acceleration of any obligation under (i) any law, ordinance or governmental rule or regulation to which such Shareholder is subject, (ii) any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or regulatory official, body or authority which is applicable to such Shareholder, or (iii) any mortgage, indenture, agreement, contract, commitment, lease, license, or other instrument or document, oral or written, to which such Shareholder is a party, or by which any of the shares of QSG Common Stock of such Shareholder may be bound, except where a waiver with respect hereto has been or will, prior to the Closing, be obtained or except for such violation, default or conflict that could not reasonably be expected to materially affect the ability of either Shareholder to consummate the transactions provided for in this Agreement. 3.4 NO INJUNCTIONS, ORDERS, ETC. There is no injunction, order or decree of any court or administrative agency or any action or proceeding pending or, to such Shareholder's Knowledge, threatened against such Shareholder to restrain or prohibit the consummation of the transactions contemplated hereby. 4. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB. Parent and Merger Sub jointly and severally represent to QSG and each of the Shareholders as follows: 4.1 SEC FILINGS; FINANCIAL STATEMENTS. (a) Parent has delivered to QSG accurate and complete copies (excluding copies of exhibits) of each report, registration statement (including such registration statements on Form S-8) and definitive proxy statement filed by Parent with the SEC between January 1, 1998 and the date of this Agreement (the "Parent SEC Documents"). As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing): (i) each of the Parent SEC Documents complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be); and (ii) none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements contained in the Parent SEC Documents: (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with GAAP applied on a consistent basis throughout the periods covered, except as may be indicated in the notes to such financial statements and (in the case of unaudited statements) as permitted by Form 10-Q of the SEC, and except that unaudited financial statements may not contain footnotes and are subject to normal and recurring year-end audit adjustments which will not, individually or in the aggregate, be material in magnitude; and (iii) fairly present the financial position of Parent as of the respective dates thereof and the results of operations of Parent for the periods covered thereby. 23. 4.2 AUTHORITY; BINDING NATURE OF AGREEMENT. Parent and Merger Sub have the right, power and authority to perform their obligations under this Agreement; and the execution, delivery and performance by Parent and Merger Sub of this Agreement (including the contemplated issuance of Parent Common Stock, Notes and Parent Warrant in the Merger in accordance with this Agreement) have been duly authorized by all necessary action on the part of Parent and Merger Sub and their respective boards of directors. No vote of Parent's stockholders is needed to approve the Merger. This Agreement constitutes the legal, valid and binding obligation of Parent and Merger Sub, enforceable against them in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. 4.3 CAPITALIZATION. The authorized capital stock of Parent consists of 35,000,000 shares of Common Stock, of which 25,079,857 shares have been issued and are outstanding as of June 30, 1998. The authorized capital stock of Merger Sub consists of 4,000,000 shares of Common Stock, of which 1,000 shares have been issued and outstanding as of the date of this Agreement. All outstanding shares of Common Stock of Parent and Merger Sub have been duly authorized, validly issued and are fully paid and nonassessable. 4.4 VALID ISSUANCE. The Parent Common Stock to be issued in the Merger will, when issued in accordance with the provisions of this Agreement, be validly issued, fully paid and nonassessable. The Parent Common Stock to be issued upon conversion of the Notes and upon exercise of the Warrants will, when issued in accordance with the provisions hereof, be validly issued, fully paid and nonassessable. 4.5 NO MATERIAL ADVERSE CHANGE. Since the date of the most recent Parent SEC Filing, there has not been any material adverse change in Parent's business, condition, assets, liabilities, operations, financial performance or prospects, and no event has occurred that will, or could reasonably be expected to, have a Material Adverse Effect on Parent. 4.6 FORM S-8 AND S-3 ELIGIBILITY; CURRENT PUBLIC INFORMATION. Parent is eligible to register shares of Parent Common Stock for resale on Form S-3 under the Securities Act, and to register shares of Parent Common Stock for issuance pursuant to Parent's employee and consultant stock plans on Form S-8 under the Securities Act. Parent is currently in compliance with the "current public information" requirements set forth in Rule 144(c) under the Securities Act. 5. COVENANTS OF QSG AND THE SHAREHOLDERS. 5.1 ACCESS AND INVESTIGATION. During the period from the date of this Agreement through the Effective Time (the "Pre-Closing Period"), QSG shall, and shall cause its Representatives to: (a) provide Parent and Parent's Representatives with reasonable access to QSG's Representatives, personnel and assets and to all existing books, records, Tax Returns, work papers 24. and other documents and information relating to QSG; and (b) provide Parent and Parent's Representatives with copies of such existing books, records, Tax Returns, work papers and other documents and information relating to QSG, and with such additional financial, operating and other data and information regarding QSG, as Parent may reasonably request. 5.2 CONDUCT OF QSG'S BUSINESS. During the Pre-Closing Period, QSG will conduct, and each Shareholder will cause QSG to conduct, its business and affairs only in the ordinary course, consistent in all material respects with prior practice. Without limiting the generality of the foregoing, during the Pre-Closing Period, QSG will not, and each Shareholder will cause QSG not to, without Parent's prior written approval or except as expressly provided for in this Agreement: (a) declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of capital stock, and shall not repurchase, redeem or otherwise reacquire any shares of capital stock or other securities (except that QSG may repurchase QSG Common Stock from former employees pursuant to the terms of existing restricted stock purchase agreements); (b) sell, grant, issue or authorize the issuance of (i) any capital stock or other security, (ii) any option or right to acquire any capital stock or other security, or (iii) any instrument convertible into or exchangeable for any capital stock or other security (except that QSG shall be permitted (x) to issue QSG Common Stock to employees upon the exercise of outstanding QSG Options and (y) to issue QSG Common Stock upon the exercise of outstanding QSG Warrants); (c) amend or waive any of its rights under, or permit the acceleration of vesting under, (i) any provision of any agreement evidencing any outstanding subscription, option, call, warrant or right (whether or not currently exercisable) to acquire from QSG any shares of the capital stock or other securities of QSG or (ii) any provision of any restricted stock purchase agreement; (d) amend or permit the adoption of any amendment to QSG's articles of incorporation or bylaws, or effect or permit QSG to become a party to any Acquisition Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction; (e) form any subsidiary or acquire any equity interest or other interest in any other Entity; (f) make any capital expenditure, except for capital expenditures that, when added to all other capital expenditures made on behalf of QSG during the Pre-Closing Period, do not exceed $20,000 per month; (g) (i) enter into, or permit any of the assets owned or used by it to become bound by, any Contract that is or would constitute a Material Contract, or (ii) amend or prematurely terminate, or waive any material right or remedy under, any such Contract; (h) (i) acquire, lease or license any right or other asset from any other Person, (ii) sell or otherwise dispose of, or lease or license, any right or other asset to any other Person, 25. or (iii) waive or relinquish any right, except for assets acquired, leased, licensed or disposed of by QSG pursuant to Contracts that are not Material Contracts; (i) (i) lend money to any Person (except that QSG may make routine travel advances to employees in the ordinary course of business), or (ii) incur or guarantee any indebtedness for borrowed money; (j) (i) establish, adopt or amend any equity incentive, stock option, stock purchase, stock bonus, stock appreciation right or similar plan, or established or adopted any employee benefit plan (ii) pay any bonus or make any profit-sharing payment, cash incentive payment or similar payment to, or increase the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration (other than bonuses, profit-sharing and salary increases approved prior to the date of this Agreement and specifically disclosed in Section 2.5(n) of the Disclosure Schedule) payable to, any of its directors, officers or employees, (iii) enter into new employment agreements or modify existing employment agreements, or (iv) hire any new employee whose aggregate annual compensation is expected to exceed $75,000; (k) change any of its methods of accounting or accounting practices in any material respect; (l) make any Tax election; (m) commence or settle any material Legal Proceeding; (n) agree or commit to take any of the actions described in clauses "(a)" through "(m)" above. QSG agrees to use its best efforts consistent with past practice and policies to preserve intact its present business organizations, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers and others having business dealings with it, to the end that its goodwill and ongoing businesses shall be unimpaired at the Effective Time. 5.3 APPROVAL BY QSG'S SHAREHOLDERS. QSG shall, in accordance with its articles of incorporation and bylaws and the applicable requirements of the California General Corporation Law, promptly following the execution of this Agreement, call and hold a regular or special meeting of QSG's shareholders or solicit the written consent of QSG's shareholders for the purpose of (a) permitting QSG's shareholders to consider and vote upon this Agreement and the Merger, (b) obtaining all requisite shareholder approval of this Agreement and the transactions contemplated hereby including the Merger. QSG shall take all necessary or appropriate actions to cause this Agreement and the Merger to be duly submitted to such shareholders for approval in accordance with the California General Corporation Law. Parent and its counsel shall be provided a reasonable opportunity to review and comment on any proxy statement or other solicitation materials (including any information statement prepared and delivered to QSG's shareholders pursuant to Regulation D under the Securities Act), if any, to be sent to the Shareholders prior to the Closing. 26. 5.4 NECESSARY CONSENTS AND OTHER ACTIONS. Prior to the Closing, QSG will use its reasonable best efforts to obtain such written consents and take such other actions as may be necessary or appropriate to allow the consummation of the transactions contemplated hereby and to allow the Surviving Corporation to carry on QSG's business after the Closing. 5.5 NOTIFICATION; UPDATES TO DISCLOSURE SCHEDULE. (a) During the Pre-Closing Period, QSG shall promptly notify Parent in writing of: (i) the discovery by QSG of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes an inaccuracy in or breach of any representation or warranty made by QSG or the Shareholders in this Agreement; (ii) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that would cause or constitute an inaccuracy in or breach of any representation or warranty made by QSG or the Shareholders in this Agreement if (A) such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition, fact or circumstance, or (B) such event, condition, fact or circumstance had occurred, arisen or existed on or prior to the date of this Agreement; (iii) any breach of any covenant or obligation of QSG or the Shareholders; and (iv) any event, condition, fact or circumstance that would make the timely satisfaction of any of the covenants or conditions set forth in Section 6 or Section 7 impossible or unlikely. (v) If any event, condition, fact or circumstance that is required to be disclosed pursuant to Section 5.5(a) requires any change in the Disclosure Schedule, or if any such event, condition, fact or circumstance would require such a change assuming the Disclosure Schedule were dated as of the date of the occurrence, existence or discovery of such event, condition, fact or circumstance, then QSG shall promptly deliver to Parent an update to the Disclosure Schedule specifying such change. No such update shall be deemed to supplement or amend the Disclosure Schedule for the purpose of (i) determining the accuracy of any of the representations and warranties made by QSG or the Shareholders in this Agreement, or (ii) determining whether any of the conditions set forth in Section 6 has been satisfied. 5.6 NO NEGOTIATION. During the Pre-Closing Period, neither QSG nor the Shareholders shall, directly or indirectly: (a) solicit or encourage the initiation of any inquiry, proposal or offer from any Person (other than Parent) relating to a possible Acquisition Transaction; 27. (b) participate in any discussions or negotiations or enter into any agreement with, or provide any non-public information to, any Person (other than Parent) relating to or in connection with a possible Acquisition Transaction; or (c) consider, entertain or accept any proposal or offer from any Person (other than Parent) relating to a possible Acquisition Transaction. QSG shall promptly notify Parent in writing of any material inquiry, proposal or offer relating to a possible Acquisition Transaction that is received by QSG or the Shareholders during the Pre-Closing Period. 5.7 FIRPTA MATTERS. At the Closing, (a) QSG shall deliver to Parent a statement (in such form as may be reasonably requested by counsel to Parent) conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the United States Treasury Regulations, and (b) QSG shall deliver to the Internal Revenue Service, if applicable, the notification required under Section 1.897 - - 2(h)(2) of the United States Treasury Regulations. 6. ADDITIONAL COVENANTS OF THE PARTIES. 6.1 FILINGS AND CONSENTS. From and after the date hereof and prior to the Closing, each party to this Agreement (a) shall make all filings (if any) and give all notices (if any) required to be made and given by such party in connection with the Merger and the other transactions contemplated by this Agreement, and (b) shall use all commercially reasonable efforts to obtain all Consents (if any) required to be obtained (pursuant to any applicable Legal Requirement or Contract, or otherwise) by such party in connection with the Merger and the other transactions contemplated by this Agreement. Each Party shall (upon request) promptly deliver to the other party a copy of each such filing made, each such notice given and each such Consent obtained during the Pre-Closing Period. 6.2 AGREEMENT TO VOTE SHARES. In consideration of Parent, QSG and Merger Sub taking further actions necessary to effect the Merger, each of Thomas W. Minick and Todd Fitzwater hereby agrees, intending to be bound hereby, to vote all of his or her shares of QSG Common Stock, pursuant to the terms and conditions of the Voting Agreement and Irrevocable Proxy in the form of EXHIBIT P, in favor of the Merger on terms substantially as set forth in this Agreement, as modified in any manner that may be necessary to preserve the essential features of the transaction. In addition, each Shareholder further agrees to take all such other actions and to execute such documents as may be reasonably necessary to effect the Merger and the transactions contemplated herein, including without limitation, execution of any documents or certificates that may be reasonably required to preserve desired tax and accounting treatment and to ensure compliance with applicable federal and state securities laws. Each Shareholder understands that in reliance on the foregoing agreements, Parent, QSG and Merger Sub have executed this Agreement and will proceed to take other actions that will involve considerable expense to such companies. 28. 6.3 CONFIDENTIALITY; PUBLIC ANNOUNCEMENTS. (a) QSG, its Board of Directors and each Shareholder will hold in confidence all discussions and negotiations with Parent relating to the acquisition of the assets or any equity interest in QSG by Parent except for disclosure of such discussions and negotiations to its employees, customers and suppliers, legal counsel, accountants and other advisors necessary in connection with such acquisition and except for such disclosure as may be necessary pursuant to applicable securities laws or as may be required of, or advisable for, QSG's officers and directors to make in the exercise of their fiduciary duties, as advised by QSG's counsel. In addition, from the date of this Agreement until the Closing Date, QSG, each Shareholder and their respective representatives will hold in confidence and not use any information obtained from Parent that is not publicly available except for disclosures of such information to sources of financing necessary in connection with this Agreement, which disclosures shall only be made subject to a reasonable form of confidentiality agreement customary in the industry. In the event that this Agreement is terminated, all information obtained by QSG, each Shareholder and their respective Representatives from Parent that is not publicly available will be returned to Parent and will continue to be kept in confidence and not used by QSG, each Shareholder and their respective Representatives; and all information obtained by Parent and Merger Sub and their respective Representatives from QSG and each Shareholder that is not publicly available will be returned to QSG and each Shareholder, respectively, and will continue to be kept in confidence and not used by Parent and Merger Sub and their respective Representatives. (b) None of Parent, QSG or each Shareholder shall (and each of them shall not permit any of their respective Representatives to) issue any press release or make any public statement regarding this Agreement or the Merger, or regarding any of the other transactions contemplated by this Agreement, without the other parties' prior written consent. 6.4 STOCK OPTIONS. (a) At the Effective Time, all rights with respect to QSG Common Stock under each QSG Option then outstanding shall be converted into and become rights with respect to Parent Common Stock, and Parent shall assume each such QSG Option in accordance with the terms (as in effect as of the date of this Agreement) of the stock option plan under which it was issued and the stock option agreement by which it is evidenced. From and after the Effective Time, (i) each QSG Option assumed by Parent may be exercised solely for shares of Parent Common Stock, (ii) the number of shares of Parent Common Stock subject to each such QSG Option shall be equal to the number of shares of QSG Common Stock subject to such QSG Option immediately prior to the Effective Time multiplied by the 1.4849, rounding down to the nearest whole share (with cash, less the applicable exercise price, being payable for any fraction of a share), (iii) the per share exercise price under each such QSG Option shall be adjusted by dividing the per share exercise price under such QSG Option by the 1.4849 and rounding up to the nearest cent and (iv) any restriction on the exercise of any such QSG Option shall continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such QSG Option shall otherwise remain unchanged; PROVIDED, HOWEVER, that each QSG Option assumed by Parent in accordance with this Section 6.4 shall, in accordance with its terms, be subject to further adjustment as appropriate to reflect any stock split, stock dividend, reverse 29. stock split, reclassification, recapitalization or other similar transaction subsequent to the Effective Time. It is the intention of the parties that QSG Options assumed by Purchaser qualify following the Effective Time as incentive stock options as defined in Section 422 of the Code to the extent such QSG Options qualified as incentive stock options immediately prior to the Effective Date. (b) Promptly following the Effective Date, Parent will issue to each holder of an assumed or replaced QSG Option a document evidencing the foregoing assumption or replacement of such QSG Option by Parent. 6.5 FORM S-8. Parent agrees to file a registration statement on Form S-8 for the shares of Parent Common Stock issuable with respect to assumed QSG Options, as soon as reasonably practical after the Effective Time, and in no event less than thirty (30) days after the Effective Time. 6.6 RESERVATION OF SHARES. Parent agrees to reserve a sufficient number of shares of its Common Stock to consummate the transactions contemplated hereby. 6.7 LOCK-UP AGREEMENT. Each Shareholder shall execute and deliver to Parent, and QSG shall use all commercially reasonable efforts to cause such persons to execute and deliver to Parent, as promptly as practicable after the execution of this Agreement, the Lock-Up Agreement in the form of EXHIBIT G. 6.8 AFFILIATE AGREEMENTS. Each Person identified on EXHIBIT F-1 shall execute and deliver to Parent, and QSG shall use all commercially reasonable efforts to cause each Person identified on EXHIBIT F-1 (and any other Person that could reasonably be deemed to be an "affiliate" of QSG for purposes of the Securities Act), to execute and deliver to Parent, as promptly as practicable after the execution of this Agreement, an Affiliate Agreement in the form of EXHIBIT F-2. 6.9 EMPLOYMENT AND NONCOMPETITION AGREEMENTS. At or prior to the Closing, the persons identified on EXHIBIT H shall execute and deliver to Parent an Employment Agreement in the form of EXHIBIT I and a Noncompetition Agreement in the form of EXHIBIT J. QSG shall use its best efforts to cause each of the individuals identified on EXHIBIT H to execute and deliver to QSG and Parent, at the Closing, an Employment Agreement in the form of EXHIBIT I and a Noncompetition Agreement in the form of EXHIBIT J. 6.10 RELEASE. At the Closing, each shareholder of QSG and each holder of a QSG Option and QSG Warrant shall execute and deliver to Parent and QSG shall use all commercially reasonable efforts to cause such persons to execute and deliver to Parent, a Release in the form of EXHIBIT K. 6.11 BEST EFFORTS. During the Pre-Closing Period, (a) QSG and each Shareholder shall use their best efforts to cause the conditions set forth in Section 7 to be satisfied on a timely basis, and (b) Parent and Merger Sub shall use their best efforts to cause the conditions set forth in Section 8 to be satisfied on a timely basis. 30. 6.12 CONTINUITY OF ENTERPRISE. After the Closing Date, Parent agrees to conduct its business so as to satisfy the "continuity of enterprise" requirements described in Reg. Section 1.368-1(d)(1) and its successor regulations under the Code, to the extent required to satisfy the requirements for a reorganization under Section 368(a)(1)(A) of the Code. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent and Merger Sub to effect the Merger and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction, at or prior to the Closing, of each of the following conditions: 7.1 ACCURACY OF REPRESENTATIONS. Each of the representations and warranties made by QSG and the Shareholders in this Agreement and in each of the other agreements and instruments delivered to Parent in connection with the transactions contemplated by this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the Closing as if made at the Closing (without giving effect to any "Material Adverse Effect" or other materiality qualifications, or any similar qualifications, contained or incorporated directly or indirectly in such representations and warranties). 7.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that QSG and each Shareholder are required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all material respects. 7.3 APPROVAL BY THE SHAREHOLDERS. The terms of the Merger shall have been duly approved by the affirmative vote of 100% of the outstanding shares of capital stock of QSG entitled to vote with respect thereto. 7.4 CONSENTS. All Consents required to be obtained in connection with the Merger and the other transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect. 7.5 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the business, financial condition, operations, financial performance or prospects of QSG since the date of this Agreement. 7.6 CERTAIN CHANGES IN QSG'S WORKING CAPITAL AND NET WORTH. QSG's working capital shall not have decreased by more than One Hundred Thousand Dollars ($100,000) from the amount at the end of April 1998 stated in the financial statement dated May 12, 1998, and provided to Parent; QSG's net worth as of the end of the month preceding the Closing, as indicated on its unaudited financial statements for such month and the period then ended, shall not have decreased below zero. 7.7 AGREEMENTS AND DOCUMENTS. Parent and Merger Sub shall have received the following agreements and documents, each of which shall be in full force and effect: 31. (a) Escrow Agreement in the form of EXHIBIT E, executed by Parent, QSG and the Agent; (b) Affiliate Agreements in the form of EXHIBIT F-2, executed by the Persons identified on EXHIBIT F-1 and by any other Person who could reasonably be deemed to be an "affiliate" of QSG for purposes of the Securities Act; (c) Lock-Up Agreements in the form of EXHIBIT G, executed by each Shareholder; (d) Employment Agreements in the form of EXHIBIT I, executed by the individuals identified on EXHIBIT H; (e) Noncompetition Agreements, in the form of EXHIBIT J, executed by the individuals identified on EXHIBIT H; (f) Parent shall have received an Investment Representation and Appointment of Agent Letter in the form attached hereto as EXHIBIT L executed by each shareholder of QSG and each holder of a QSG Option and QSG Warrant (excluding Petra Capital, LLC); (g) a Release, in the form of EXHIBIT K, executed by each shareholder of QSG and each holder of a QSG Option and QSG Warrant (excluding Petra Capital, LLC); (h) confidential invention and assignment agreements, reasonably satisfactory in form and content to Parent, executed by all employees of QSG and by all consultants and independent contractors to QSG who have not already signed such agreements; (i) the statement referred to in Section 5.7, if applicable, executed by QSG; (j) a legal opinion of Thoits, Love, Hershberger & McLean, counsel to QSG dated as of the Closing Date, in the form of EXHIBIT M; (k) a certificate executed by the President and Chief Financial Officer of QSG to the effect that each of the representations and warranties set forth in Section 2 is accurate in all material respects Closing (without giving effect to any "Material Adverse Effect" or other materiality qualifications, or any similar qualifications, contained or incorporated directly or indirectly in such representations and warranties) as of the Closing Date as if made on the Closing Date and that the conditions set forth in Sections 7.1, 7.2, 7.3, 7.4, 7.5 and 7.6 have been duly satisfied; (l) a certificate executed by the Secretary of QSG dated as of the Closing Date, certifying as to the following matters: (i) the adoption of resolutions by QSG's board of directors and shareholders approving the transactions contemplated by this Agreement; (ii) the articles of incorporation of QSG; (iii) the bylaws of QSG; (iv) the incumbency of officers of QSG who are signatories to this Agreement or any of the exhibits to this agreement; and (v) such other matters as Parent may reasonably request; 32. (m) a certificate executed by each Shareholder to the effect that each of the representations and warranties set forth in Sections 2 and 3 is accurate as of the Closing Date as if made on the Closing Date (together with the certificates required by Sections 7.5(k) and 7.5(l) hereof, the "Closing Certificates"); (n) written resignations of all directors of QSG, effective as of the Effective Time; and (o) documentation satisfactory to Parent and its counsel demonstrating the cancellation and/or conversion of any warrants issuable to Silicon Valley Bank (including the terms thereof) as set forth in Section 1.7 hereof. 7.8 FIRPTA COMPLIANCE. QSG shall have filed with the Internal Revenue Service the notification referred to in Section 5.7, if applicable. 7.9 LEGAL INVESTMENT. On the Closing Date, the issuance of the shares of Parent Common Stock to the Shareholders shall be legally permitted by all laws and regulations to which the Shareholders, QSG and Parent are subject. 7.10 INFORMATION STATEMENT. Each shareholder of QSG and each holder of a QSG Option and QSG Warrant shall have received and read QSG's information statement setting forth certain information pursuant to Regulation D of the Securities Act. 7.11 NO RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the Merger that makes consummation of the Merger illegal. 7.12 NO LEGAL PROCEEDINGS. No Person shall have commenced or threatened to commence any Legal Proceeding challenging or seeking the recovery of a material amount of damages in connection with the Merger or seeking to prohibit or limit the exercise by Parent of any material right pertaining to its ownership of the Shares. 7.13 EMPLOYEES. All of the individuals identified on EXHIBIT N shall have agreed to become employees of Parent or shall not have ceased to be employed by, or expressed an intention to terminate their employment with, QSG. 7.14 ACTIONS SATISFACTORY. All actions and proceeding taken in connection with the transactions contemplated by this Agreement, and all documents relating to the transactions contemplated by this Agreement, shall be reasonably satisfactory in form and substance to Parent and its counsel. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF QSG AND THE SHAREHOLDERS. The obligations of QSG and each Shareholder to effect the Merger and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction, at or 33. prior to the Closing, of the following conditions: 8.1 ACCURACY OF REPRESENTATIONS. Each of the representations and warranties made by Parent and Merger Sub in this Agreement shall have been accurate in all material respects as of the date of this Agreement, and shall be accurate in all material respects as of the Closing as if made at the Closing. 8.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that Parent and Merger Sub are required to comply with or to perform at or prior to the Closing shall have been complied with and performed in all material respects. 8.3 DOCUMENTS. QSG shall have received the following documents: (a) a legal opinion of Cooley Godward LLP, dated as of the Closing Date, in the form of EXHIBIT O; (b) an Escrow Agreement in the form of EXHIBIT E, executed by Parent, QSG and the Agent (the "Escrow Agreement"); (c) copies of executed warrants to purchase Parent Common Stock issued to each holder of QSG Warrants pursuant to Section 1.8; (d) a certificate executed by the President and Chief Financial Officer of Parent to the effect that each of the representations and warranties set forth in Section 4 is accurate in all material respects as of the Closing Date as if made on the Closing Date; and (e) a certificate executed by the Secretary of Parent dated as of the Closing Date, certifying as to the following matters: (i) the adoption of resolutions by Parent's board of directors approving the transactions contemplated by this Agreement; (ii) the Certificate of Incorporation of Parent; (iii) the bylaws of Parent; (iv) the incumbency of officers of Parent who are signatories to this Agreement or any of the exhibits to this Agreement; and such other matters as QSG may reasonably request. 8.4 NO RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any court of competent jurisdiction and remain in effect, and there shall not be any Legal Requirement enacted or deemed applicable to the Merger that makes consummation of the Merger illegal. 8.5 NO LEGAL PROCEEDINGS. No Person shall have commenced or threatened to commence any Legal Proceeding challenging or seeking the recovery of a material amount of damages in connection with the Merger or seeking to prohibit or limit the exercise by Parent of any material right pertaining to its ownership of the Shares. 8.6 LEGAL INVESTMENT. On the Closing Date, the issuance of the shares of Parent Common Stock to the shareholders of QSG shall be legally permitted by all laws and regulations to which the shareholders of QSG, QSG and Parent are subject. 34. 8.7 BOARD OF DIRECTORS. Parent shall have caused the appointment of Thomas W. Minick to Parent's Board of Directors. 8.8 ACTIONS SATISFACTORY. All actions and proceeding taken in connection with the transactions contemplated by this Agreement, and all documents relating to the transactions contemplated by this Agreement, shall be reasonably satisfactory in form and substance to QSG and its counsel. 8.9 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the business, financial condition, operations, financial performance or prospects of Parent since the date of this Agreement. 9. INDEMNIFICATION, ETC. 9.1 SURVIVAL OF REPRESENTATIONS, ETC. (a) The representations and warranties made by QSG and each Shareholder (including the representations and warranties set forth in Section 2 and 3 and the representations and warranties set forth in the Closing Certificates) shall survive the Closing and shall survive and remain in full force and effect until the earlier of (i) March 31, 1999, and (ii) the date on which Parent files its 1998 annual report on Form 10-K with the SEC for the fiscal year ending December 31, 1998 (except for Sections 2.14 and 2.16, which each shall survive until the expiration of their respective statutes of limitations and except for Section 3.2, which shall survive for an unlimited period of time); PROVIDED, HOWEVER, that if, at any time prior to the expiration of the applicable survival period, any Indemnitee (acting in good faith) delivers to the QSG or such Shareholder a written notice alleging the existence of an inaccuracy in or a breach of any of the representations and warranties made by QSG or such Shareholder (and setting forth in reasonable detail the basis for such Indemnitee's belief that such an inaccuracy or breach may exist) and asserting a claim for recovery under Section 9.2 based on such alleged inaccuracy or breach, then the claim asserted in such notice shall survive the applicable survival period until such time as such claim is fully and finally resolved. The representations and warranties made by Parent and Merger Sub in Section 4 shall survive until the later of (i) 30 days after the date of filing of Parent's Form 10-K for the year ended December 31, 1998 and (ii) April 30, 1999; PROVIDED, HOWEVER, that if, at any time prior to the expiration of such survival period, the Shareholders (acting in good faith) deliver to the Parent a written notice alleging the existence of an inaccuracy in or a breach of any of the representations and warranties made by Parent (and setting forth in reasonable detail the basis for the Shareholders' belief that such an inaccuracy or breach may exist) and asserting a claim for recovery based on such alleged inaccuracy or breach, then the claim asserted in such notice shall survive the survival period until such time as such claim is fully and finally resolved. (b) The representations, warranties, covenants and obligations of QSG and each Shareholder, and the rights and remedies that may be exercised by the Indemnitees, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or Knowledge of, any of the Indemnitees or any of their Representatives. For purposes of this Agreement, each statement or other item of information set forth in the 35. Disclosure Schedule or in any update to the Disclosure Schedule shall be deemed to be a representation and warranty made by QSG and the Shareholders in this Agreement. 9.2 INDEMNIFICATION BY QSG AND EACH SHAREHOLDER. (a) Subject to the terms and conditions of the Escrow Agreement and this Section 9.2, from and after the Effective Time (but subject to Section 9.1(a)), QSG and each Shareholder, severally and jointly, shall hold harmless and indemnify each of the Indemnitees from and against, and shall compensate and reimburse each of the Indemnitees for, any Damages which are directly or indirectly suffered or incurred by any of the Indemnitees or to which any of the Indemnitees otherwise become subject (regardless of whether or not such Damages relate to any third-party claim) and which arise from, or as a result of, directly or indirectly: (i) any inaccuracy in or breach of any representation or warranty set forth in Section 2 and Section 3 or in the Closing Certificates; (ii) any breach of any covenant or obligation of QSG or the Shareholders (including the covenants set forth in Sections 5 and 6); (iii) any obligation to Silicon Valley Bank relating to its claim to entitlement to a warrant to purchase equity of QSG, or any payment made to Silicon Valley Bank in settlement of any such claim; or (iv) any Legal Proceeding relating to any inaccuracy or breach of the type referred to in clause "(i)" through "(iii)" above (including any Legal Proceeding commenced by any Indemnitee for the purpose of enforcing any of its rights under this Section 9). (b) Subject to Section 9.3 below, the amount of Damages that each Shareholder shall be obligated to compensate and reimburse the Indemnitees under this Section 9 shall not exceed the amounts held in the Escrow Fund with respect to such Shareholder. (c) QSG and each Shareholder acknowledge and agree that, if the Surviving Corporation suffers, incurs or otherwise becomes subject to any Damages as a result of or in connection with any inaccuracy in or breach of any representation, warranty, covenant or obligation by QSG or the Shareholders, then (without limiting any of the rights of the Surviving Corporation as an Indemnitee) Parent shall also be deemed, by virtue of its ownership of the stock of the Surviving Corporation, to have incurred Damages as a result of and in connection with such inaccuracy or breach. 9.3 SATISFACTION OF INDEMNIFICATION CLAIM. In the event any Shareholder shall have liability (for indemnification or otherwise) to any Indemnitee under this Section 9, such liability shall be satisfied from the Escrow Fund in accordance with the terms of the Escrow Agreement. Except with respect to liability of either Tom Minick or Todd Fitzwater for claims based on knowing or intentional misrepresentation of representations and warranties by such individual, if the Closing occurs, Parent and Merger Sub agree on behalf of themselves and all other Indemnitees that the Indemnitees sole and exclusive recourse against any Shareholder under this Section 9 shall be against the shares of Parent Common Stock held in escrow with respect to such Shareholder pursuant to the Escrow Agreement. For the purposes of satisfying any liability to the Indemnitee under this Section 9, the shares of Parent Common Stock held in escrow pursuant to the Escrow Agreement shall be valued at $2.8781 per share. Parent shall have the right to withhold and deduct any sum that may be owed to any Indemnitee under this Section 9 from any amount otherwise payable by any Indemnitee to any Shareholder, including any 36. amount due pursuant to Section 1.5; provided that the amount of any such withholding and deduction shall cause the release of an equivalent value of shares of Parent Common Stock (valued at $2.8781) from the Escrow Fund under the Escrow Agreement. The withholding and deduction of any such sum shall operate for all purposes as a complete discharge (to the extent of such sum) of the obligation to pay the amount from which such sum was withheld and deducted. 9.4 NO CONTRIBUTION. Each Shareholder waives, and acknowledges and agrees that he shall not have, exercise or assert (or attempt to exercise or assert), any right of contribution, right of indemnity or other right or remedy against the Surviving Corporation in connection with any indemnification obligation or any other liability for which it or he may become subject under or in connection with this Agreement or the Closing Certificates. 9.5 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or commencement by any Person of any claim or Legal Proceeding (whether against the Surviving Corporation, against Parent or against any other Person) with respect to which a Shareholder may become obligated to hold harmless, indemnify, compensate or reimburse any Indemnitee pursuant to this Section 9, Parent shall have the right, at its election, to proceed with the defense of such claim or Legal Proceeding on its own. If Parent so proceeds with the defense of any such claim or Legal Proceeding then: (a) Parent shall have control over the conduct of such defense, including the conduct of discovery and the nature and timing of any motions, including any dispositive motions; provided that the Shareholders shall be entitled to separate counsel at their expense if they reasonably conclude that a conflict of interest makes such separate representation necessary or appropriate; (b) all reasonable expenses relating to the defense of such claim or Legal Proceeding shall initially be borne and paid exclusively by such Shareholders out of the Escrow Fund; (c) each Shareholder shall make available to Parent any documents and materials in his possession or control that may be necessary to the defense of such claim or Legal Proceeding; and (d) Parent shall have the right to settle, adjust or compromise such claim or Legal Proceeding with the consent of Shareholders, which will not unreasonably be withheld. Parent shall give each Shareholder, as the case may be, prompt notice of the commencement of any such Legal Proceeding against Parent or the Surviving Corporation; PROVIDED, HOWEVER, that any failure on the part of Parent to so notify such Shareholder shall not limit any of the obligations of each Shareholder under this Section 9 (except to the extent such failure materially prejudices the defense of such Legal Proceeding). 9.6 EXERCISE OF REMEDIES BY INDEMNITEES OTHER THAN PARENT. No Indemnitee (other than Parent or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement unless Parent (or any 37. successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy. 10. TERMINATION AND ABANDONMENT. 10.1 TERMINATION. This Agreement may be terminated and the transactions herein contemplated may be abandoned at any time prior to the Effective Time notwithstanding approval thereof by the shareholders of QSG and Merger Sub, and, in the event that such termination occurs pursuant to Section 10.1(a), (b), (c) or (d) below, the date on which such termination occurs shall be referred to as the "Termination Date": (a) by mutual written consent of QSG, Merger Sub and Parent; (b) by Parent, if a Material Adverse Effect on QSG has occurred since the date of this Agreement; (c) by QSG, if a Material Adverse Effect on Parent has occurred since the date of this Agreement (provided that a decrease in the market price of Parent's stock shall not in and of itself be deemed to reflect a Material Adverse Effect on Parent); (d) by Parent if Parent reasonably determines that the timely satisfaction of any condition set forth in Section 7 has become impossible (other than as a result of any failure on the part of Parent or Merger Sub to comply with or perform any covenant or obligation of Parent or Merger Sub set forth in this Agreement); (e) by QSG if QSG reasonably determines that the timely satisfaction of any condition set forth in Section 8 has become impossible (other than as a result of any failure on the part of QSG to comply with or perform any covenant or obligation set forth in this Agreement or in any other agreement or instrument delivered to Parent); (f) by Parent, if there shall have been a violation or breach by any of QSG or the Shareholders of any material agreement, representation or warranty contained in this Agreement which has not been waived by Parent; or (g) by QSG, if there shall have been a violation or breach by Merger Sub or Parent of any material agreement, representation or warranty contained in this Agreement which has not been waived by QSG; or (h) by Parent, Merger Sub or QSG, if the Effective Time shall not have occurred on or before ninety (90) days after the date of this Agreement. 10.2 PROCEDURE UPON TERMINATION. In the event of termination and abandonment pursuant to this Section 10, written notice thereof shall forthwith be given to each party, and this Agreement shall terminate and be abandoned without further action by QSG, Parent or Merger Sub. If this Agreement is terminated as provided herein: 38. (a) each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same; (b) all information received by any party hereto with respect to the business of any other party or its subsidiaries (other than information which is a matter of public knowledge or which has heretofore been or is hereafter published in any publication for public distribution or filed as public information with any governmental authority) shall not at any time be used for the advantage of, or disclosed to third parties by, such party for any reason whatsoever; and (c) no party hereto shall have any liability or further obligation to any other party to this Agreement, except as stated in Section 6.3 above and this Section 10.2, and except for such legal and equitable rights and remedies which any party may have by reason of any breach or violation by any other party of any representation or warranty or any covenant or agreement made hereunder or pursuant hereto. 10.3 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to Section 10.1, all further obligations of the parties under this Agreement shall terminate; PROVIDED, HOWEVER, that: (a) neither QSG nor Parent shall be relieved of any obligation or liability arising from any prior breach by such party of any provision of this Agreement; and (b) QSG and Parent shall, in all events, remain bound by and continue to be subject to Section 6.3 and Section 12. 11. REGISTRATION RIGHTS. 11.1 REGISTRATION. (a) Parent shall use its best efforts to prepare and file with the SEC a registration statement on Form S-3 (or any successor form to Form S-3) for a public resale of the shares of Parent Common Stock issued at the Closing (excluding the shares issuable upon exercise of QSG Options and including shares issuable upon conversion of the Notes and Parent Warrant) within forty-five (45) days after the Closing Date. Parent shall use its best efforts to cause such registration statement to become effective within ninety (90) days of the filing date of such registration statement. Parent shall use its best efforts to cause such registration statement to remain effective for the period ending on the first to occur of (i) the date the distribution described in the registration statement is complete and (ii) the date twenty four (24) months after the date of effectiveness of such registration statement. Notwithstanding the foregoing, Thomas W. Minick, Todd Fitzwater and Petra Capital, LLC shall remain subject to the Lock-Up Agreement, the form of which is attached hereto as EXHIBIT G. No person shall have any rights to sell shares of stock under such registration statement after such time as such holder may take advantage of Rule 144(k) or may sell all of such person's shares of Parent Common Stock within a 90 day period under Rule 144. In the event that Parent shall become unable to use Form S-3, it will use Form S-1 in lieu thereof to satisfy its obligations under this Article 11. (b) In the case of any registration pursuant to this Section 11.1, Parent shall keep each person the resale of whose securities are to be registered thereunder (a "Selling 39. Stockholder") advised of the initiation and completion of such registration. At its expense, Parent will promptly: (i) Prepare and file with the SEC the registration statement described in Sections 11.1(a) above and thereafter use its best efforts to cause such registration statement to become effective; (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectuses used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (iii) Furnish to the Selling Stockholders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the securities covered by such registration statement; (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Selling Stockholders, PROVIDED that Parent shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (v) Notify each Selling Stockholder covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (vi) Cause all such shares of Parent Common Stock to be listed on each securities exchange or market system on which similar securities issued by the Parent are then listed; and (vii) Provide a transfer agent and registrar for all such shares of Parent Common Stock not later than the effective dates of such registration statements. (c) Each Selling Stockholder shall provide Parent with all necessary and reasonable assistance in the preparation and filing of the registration statement required to be prepared and filed by Parent and all other obligations of Parent under this Section 11.1. Parent's obligations under this Section 11.1 are conditioned in all respects on the provision of all necessary and reasonable assistance to Parent by each Selling Stockholder. 11.2 INDEMNIFICATION. (a) Parent agrees to indemnify, to the extent permitted by law, each Selling Stockholder, against all Damages caused by any untrue or alleged untrue statement of material 40. fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, EXCEPT insofar as the same are caused by or contained in any information furnished in writing to Parent by a Selling Stockholder or by a Selling Stockholder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after Parent has furnished such Selling Stockholder with a sufficient number of copies of the same. (b) In connection with any registration statement in which a Selling Stockholder is participating, each such Selling Stockholder will furnish to Parent in writing such information and affidavits as Parent reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify Parent, its directors and officers and each Person who controls Parent (within the meaning of the Securities Act) against all Damages resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such Selling Stockholder; PROVIDED that the obligation to indemnify will be several, not joint and several, among such Selling Stockholders and the liability of each such Selling Stockholder will be in proportion to and limited to the net amount received by such Selling Stockholder from the sale of Parent Common Stock with rights under this Section 11, pursuant to such registration statement. (c) Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any consent to the entry of any judgment or any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnification provided for under this Section 11 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and will survive the transfer of securities and the Merger. Parent also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event Parent's indemnification is unavailable for any reason. 41. 11.3 CURRENT PUBLIC INFORMATION. Until the rights specified in Sections 11.1(a) are fully exercised or expire, Parent will timely file all reports required to be filed by it under the Securities Act and the Securities Exchange Act of 1934, as amended, and the rules and regulations adopted by the SEC thereunder. Upon written request, Parent will deliver to the Selling Stockholders a written statement as to whether it has complied with such requirements. 11.4 TERMINATION OF REGISTRATION RIGHTS. Notwithstanding the foregoing provisions of this Section 11, Parent's obligations pursuant to this Section 11 shall terminate upon (a) the expiration of twenty-four months from the effectiveness of the registration statement described in Section 11.1(a) hereof, or (b) if earlier, with respect to a given Selling Stockholder, at the time such Selling Stockholder may sell all of his or her shares of Parent Common Stock within a 90 day period in compliance with Rule 144 under the Securities Act. 11.5 TRANSFERABILITY OF REGISTRATION RIGHTS. The rights under this Section 11 are not transferable by the holder thereof except in connection with (a) a transfer by will or intestacy and (b) estate planning transfers consisting of gifts to members of such holder's immediate family and transfers to trusts for the benefit of such shareholder or members of such holder's immediate family. 11.6 DELAY OF REGISTRATION. For one period not to exceed sixty (60) days, Parent may delay the filing or effectiveness of the registration statement, or suspend the use of the registration statement (and each Selling Shareholder hereby agrees not to offer or sell any shares of Parent Common Stock pursuant to the registration statement during such period), at any time when Parent, in its reasonable judgment, believes: (a) that the filing of a registration statement or the offering or sale of Parent Common Stock pursuant thereto, or the making of any required disclosure in connection therewith, could reasonably be expected to have an adverse effect upon (i) a pending or scheduled offering of Parent's securities, (ii) an acquisition, merger, consolidation, joint venture, equity investment or other potentially significant transaction or event, or (iii) any negotiations, discussions or proposal with respect to any of the foregoing; and (b) that the failure to disclose any material information with respect to any of the foregoing could result in a violation of the Securities Act, the Exchange Act or any provision of any state securities law. In the event Parent reasonably believes that any of the foregoing circumstances are continuing after such sixty (60) day period, it may extend such sixty (60) day period for one additional thirty (30) day period. 12. MISCELLANEOUS PROVISIONS. 12.1 FURTHER ASSURANCES. Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out or evidencing any of the transactions contemplated by this Agreement. 42. 12.2 FEES AND EXPENSES. Each party to this Agreement shall bear and pay all fees, costs and expenses (including legal fees and accounting fees) that have been incurred or that are incurred by such party in connection with the transactions contemplated by this Agreement, including all fees, costs and expenses incurred by such party in connection with or by virtue of (a) the investigation and review conducted by Parent and its Representatives with respect to QSG's business (and the furnishing of information to Parent and its Representatives in connection with such investigation and review), (b) the negotiation, preparation and review of this Agreement (including the Disclosure Schedule) and all agreements, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the transactions contemplated by this Agreement, (c) the preparation and submission of any filing or notice required to be made or given in connection with any of the transactions contemplated by this Agreement, and the obtaining of any Consent required to be obtained in connection with any of such transactions, and (d) the consummation of the Merger. 12.3 ATTORNEYS' FEES. If any action or proceeding relating to this Agreement or the enforcement of any provision of this Agreement is brought against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys' fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled). 12.4 NOTICES. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by facsimile) to the address or facsimile telephone number set forth beneath the name of such party below (or to such other address or facsimile telephone number as such party shall have specified in a written notice given to the other parties hereto): if to Parent: Racotek, Inc. 7301 Ohms Lane, Suite 200 Minneapolis, MN 55439 Attn: Ian Nemerov Facsimile: 612/832-9383 With a copy to: Cooley Godward LLP 5 Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306 Attn: Michael J. Sullivan, Esq. Facsimile: (650) 849-7400 if to QSG: Quicksilver Group, Inc. 10061 Bubb Road, Suite A Cupertino, CA 95014 Attn: Thomas W. Minick Facsimile: 650/347-5985 43. With a copy to: Thoits, Love, Hershberger & McLean 245 Lytton Avenue, Suite 300 Palo Alto, CA 94301 Attn: Terrence P. Conner Facsimile: (650) 325-5572 if to Shareholders: Tom Minick 605 West Poplar San Mateo, CA 94402 Facsimile: 650 347-5985 12.5 TIME OF THE ESSENCE. Time is of the essence of this Agreement. 12.6 HEADINGS. The underlined headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 12.7 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. 12.8 GOVERNING LAW. This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of California (without giving effect to principles of conflicts of laws). 12.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon: QSG and its successors and assigns (if any); the Shareholders and his respective personal representatives, executors, administrators, estates, heirs, successors and assigns (if any); Parent and its successors and assigns (if any); and Merger Sub and its successors and assigns (if any). This Agreement shall inure to the benefit of: QSG; the Shareholders and other shareholders of QSG (to the extent set forth in Sections 1.5, 1.6, 1.7, 1.9, 6.4, 6.7, 6.9 and 11); Parent; Merger Sub; the other Indemnitees (subject to Section 9.7); and the respective successors and assigns (if any) of the foregoing. Parent may freely assign any or all of its rights under this Agreement (including its indemnification rights under Section 9), in whole or in part, to any other Person without obtaining the consent or approval of any other party hereto or of any other Person. 12.10 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and remedies of the parties hereto shall be cumulative (and not alternative). The parties to this Agreement agree that, in the event of any breach or threatened breach by any party to this Agreement of any covenant, obligation or other provision set forth in this Agreement for the benefit of any other party to this Agreement, such other party shall be entitled (in addition to any other remedy that may be available to it) to (a) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (b) an injunction restraining such breach or threatened breach. 44. 12.11 WAIVER. (a) No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. (b) No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. 12.12 AMENDMENTS. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of all of the parties hereto. 12.13 SEVERABILITY. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law. 12.14 PARTIES IN INTEREST. Except for the provisions of Sections 1.4 and 9, none of the provisions of this Agreement is intended to provide any rights or remedies to any Person other than the parties hereto and their respective successors and assigns (if any). 12.15 ENTIRE AGREEMENT. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof. 12.16 CONSTRUCTION. (a) For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include the masculine and feminine genders. (b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. 45. (c) As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." (d) Except as otherwise indicated, all references in this Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement and Exhibits to this Agreement. 46. The parties hereto have caused this Agreement to be executed and delivered as of the date first written above. RACOTEK, INC., a Delaware corporation By: /s/ Michael A. Fabiaschi ------------------------------- Name: Michael A. Fabiaschi ---------------------------- Title: Chief Executive Officer ---------------------------- SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Agreement to be executed and delivered as of the date first written above. QUICKSILVER ACQUISITION CORP., a California corporation By: /s/ Michael A. Fabiaschi ------------------------------- Name: Michael A. Fabiaschi ---------------------------- Title: Chief Executive Officer ---------------------------- SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Agreement to be executed and delivered as of the date first written above. QUICKSILVER GROUP, INC., a California corporation By: /s/ Thomas W. Minick ----------------------------------- Name: Thomas W. Minick -------------------------------- Title: Chief Executive Officer -------------------------------- SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Agreement to be executed and delivered as of the date first written above. /s/ Thomas W. Minick ----------------------------------- Thomas W. Minick SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Agreement to be executed and delivered as of the date first written above. /s/ Todd Fitzwater ----------------------------------- Todd Fitzwater SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Agreement to be executed and delivered as of the date first written above. PETRA CAPITAL, LLC, a Georgia limited liability company By: /s/ Robert A. Smith ----------------------------------- Name: Robert A. Smith -------------------------------- Title: Vice President -------------------------------- SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION EXHIBIT A CERTAIN DEFINITIONS For purposes of the Agreement (including this EXHIBIT A): ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean any transaction involving: (a) the sale, license, disposition or acquisition of all or a material portion of QSG's business or assets; (b) the issuance, disposition or acquisition of (i) any capital stock or other equity security of QSG (other than common stock issued to employees of QSG, upon exercise of QSG Options or otherwise, in routine transactions in accordance with QSG's past practices), (ii) any option, call, warrant or right (whether or not immediately exercisable) to acquire any capital stock or other equity security of QSG (other than stock options granted to employees of QSG in routine transactions in accordance with QSG's past practices), or (iii) any security, instrument or obligation that is or may become convertible into or exchangeable for any capital stock or other equity security of QSG; or (c) any merger, consolidation, business combination, reorganization or similar transaction involving QSG. AGREEMENT. "Agreement" shall mean the Agreement and Plan of Merger and Reorganization to which this EXHIBIT A is attached (including the Disclosure Schedule), as it may be amended from time to time. CONSENT. "Consent" shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization) required by this Agreement, any Legal Requirement, any QSG Contract or otherwise to consummate the transactions contemplated hereby. CONTRACT. "Contract" shall mean any written, oral or other agreement, contract, subcontract, purchase order, letter of engagement, lease, instrument, note, warranty, insurance policy, benefit plan or legally binding commitment or undertaking of any nature. DAMAGES. "Damages" shall include any loss, damage, injury, decline in value, lost opportunity, liability, claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost (including costs of investigation) or expense of any nature. DISCLOSURE SCHEDULE. "Disclosure Schedule" shall mean the schedule (dated as of the date of the Agreement) delivered to Parent on behalf of QSG and the Shareholders. ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim, infringement, interference, option, right of first A-1 refusal, preemptive right, community property interest or restriction of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset). ENTITY. "Entity" shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, QSG (including any limited liability QSG or joint stock QSG), firm or other enterprise, association, organization or entity. EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. GOVERNMENT BID. "Government Bid" shall mean any quotation, bid or proposal submitted to any Governmental Body or any proposed prime contractor or higher-tier subcontractor of any Governmental Body. GAAP. "GAAP" shall mean generally accepted accounting principles. GOVERNMENT CONTRACT. "Government Contract" shall mean any prime contract, subcontract, letter contract, purchase order or delivery order executed or submitted to or on behalf of any Governmental Body or any prime contractor or higher-tier subcontractor, or under which any Governmental Body or any such prime contractor or subcontractor otherwise has or may acquire any right or interest. GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean any: (a) permit, license, certificate, franchise, permission, clearance, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body. GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or Entity and any court or other tribunal). INDEMNITEES. "Indemnitees" shall mean the following Persons: (a) Parent; (b) Parent's current and future affiliates (including the Surviving Corporation); (c) the respective Representatives of the Persons referred to in clauses "(a)" and "(b)" above; and (d) the respective successors and assigns of the Persons referred to in clauses "(a)", "(b)" and "(c)" above; PROVIDED, HOWEVER, that the Shareholders shall not be deemed to be an "Indemnitee." KNOWLEDGE. An individual shall be deemed to have "Knowledge" of a particular fact or other matter if: A-2 (d) such individual is actually aware of such fact or other matter; or (e) a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of such individual's reasonably diligent exercise of such individual's responsibilities related to such fact or other matter. QSG shall be deemed to have "Knowledge" of a particular fact or other matter if any director, officer, or executive staff member of QSG has Knowledge of such fact or other matter. LEGAL PROCEEDING. "Legal Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel. LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body. MATERIAL ADVERSE EFFECT. A violation or other matter will be deemed to have a "Material Adverse Effect" on a Person if such violation or other matter (considered together with all other matters that would constitute exceptions to the representations and warranties set forth in the Agreement or in the Closing Certificates but for the presence of "Material Adverse Effect" or other materiality qualifications, or any similar qualifications, in such representations and warranties) would have a material adverse effect on such Person's business, assets, liabilities, operations, financial condition or prospects. PERSON. "Person" shall mean any individual, Entity or Governmental Body. PROPRIETARY ASSET. "Proprietary Asset" shall mean any: (a) patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, fictitious business name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, maskwork, maskwork application, trade secret, know-how, customer list, franchise, system, computer software, computer program, invention, design, blueprint, engineering drawing, proprietary product, technology, proprietary right or other intellectual property right or intangible asset; or (b) right to use or exploit any of the foregoing. REPRESENTATIVES. "Representatives" shall mean officers, directors, employees, agents, attorneys, accountants, advisors and representatives. SEC. "SEC" shall mean the United States Securities and Exchange Commission. SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as amended. A-3 QSG CONTRACT. "QSG Contract" shall mean any Contract: (a) to which QSG is a party; (b) by which QSG or any of its assets or properties is or may become bound or under which QSG has, or may become subject to, any obligation; or (c) under which QSG has or may acquire any right or interest. QSG PROPRIETARY ASSET. "QSG Proprietary Asset" shall mean any Proprietary Asset owned by or licensed to QSG or otherwise used by QSG. TAX. "Tax" shall mean any tax (including any income tax, franchise tax, capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), imposed, assessed or collected by or under the authority of any Governmental Body. TAX RETURN. "Tax Return" shall mean any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax. A-4 EX-3 3 EX-3 Exhibit 3 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION among: RACOTEK, INC., a Delaware corporation; QUICKSILVER ACQUISITION CORP., a California corporation; QUICKSILVER GROUP, INC. a California corporation; and CERTAIN DESIGNATED SHAREHOLDERS Dated as of September 2, 1998 ___________________________ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION THIS ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") made and entered into as of July 6, 1998, by and among: Racotek, INC., a Delaware corporation ("Parent"); QUICKSILVER ACQUISITION CORP., a California corporation and a wholly-owned subsidiary of Parent ("Merger Sub"); QUICKSILVER GROUP, INC., a California corporation (the "QSG"); and CERTAIN SHAREHOLDERS OF QSG IDENTIFIED ON EXHIBIT B thereto (each a "Shareholder" and collectively, the "Shareholders") is made and entered into as of September 2, 1998 (the "Addendum"). RECITALS A. Parent, Merger Sub and QSG intend to effect a merger of QSG with and into Merger Sub in accordance with the Agreement, this Addendum and the California General Corporation Law (the "Merger"). Upon consummation of the Merger, QSG will cease to exist, and Merger Sub will be a wholly owned subsidiary of Parent. B. It is intended that the Merger qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). For accounting purposes, it is intended that the Merger be accounted for as a purchase. C. The Agreement has been approved by the respective boards of directors of Parent, Merger Sub and QSG. D. This Addendum has been authorized by the respective boards of directors of Parent, Merger Sub and QSG. ADDENDUM The parties to this Addendum, intending to be legally bound, agree as follows: 1. In addition to the shares to be issued pursuant to SECTION 1.5(a)(i) of the Agreement, a sum increment of 34,899 shares of Parent Common Stock will be issued by Parent to shareholders of QSG, such that each share of QSG Common Stock will receive an additional 0.0160 shares of Parent Common Stock, resulting in each share of QSG Common Stock receiving a total of 1.0754 shares in Parent Common Stock. 2. In addition to the rights with respect to Parent Common Stock granted to holders of rights to QSG Common Stock pursuant to QSG Options as set forth in SECTION (6.4) of the Agreement, a sum increment of 10,151 shares of Parent Common Stock will be granted by Parent to holders of QSG Options as of the date of the Agreement, such that each such WSG Option will be covered by an additional 0.0160 rights with respect to Parent Common Stock, or a total of 1.5009 rights with respect to Parent Common Stock. From and after the Effective Time, (i) each such QSG Option assumed by Parent may be exercised solely for shares of Parent Common Stock, (ii) the number of shares of Parent Common Stock subject to each such QSG Option shall be equal to the number of shares of QSG Common Stock subject to such QSG Option immediately prior to the Effective Time multiplied by 1.5009, rounding down to the nearest whole share (with cash, less the applicable exercise price, being payable for any fraction of a share), and (iii) the per share exercise price under each such QSG Option shall be adjusted by dividing the per share exercise price under such QSG Option by the 1.5009 and rounding up to the nearest cent. 3. The Parent Warrant to be issued pursuant to SECTION 1.7 of the Agreement shall provide rights with respect to an additional 4,950 shares in Parent Common Stock, such that each right under the Parent Warrant shall represent the right to receive an additional 0.0160 rights underlying Parent Common Stock for each share of QSG Common Stock subject to the QSG Warrant on the Closing Date, resulting in each right under the Parent Warrant representing the right to receive 1.5009 rights underlying Parent Common Stock for each share of QSG Common Stock subject to the QSG Warrant on the Closing Date (with cash, less the applicable exercise price, being payable for any fraction of a share). The per share exercise price under such Parent Warrant shall be the result of dividing the per share exercise price under such QSG Warrant by 1.5009 and rounding up to the nearest whole cent. 4. This Addendum replaces SECTION 12.15 of the Agreement in its entirety with the following: 12.15 ENTIRE AGREEMENT. The Agreement, the Addendum and the other agreements referred to herein set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof. 5. All other provisions of the Agreement shall remain in full force and effect as of July 6, 1998. The parties hereto have caused this Amendment to be executed and delivered as of the date first written above. RACOTEK, INC., a Delaware corporation By: /s/ Michael A. Fabiaschi ------------------------ Name: Michael A. Fabiaschi -------------------- Title: Chief Executive Officer ----------------------- SIGNATURE PAGE TO ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Amendment to be executed and delivered as of the date first written above. QUICKSILVER ACQUISITION CORP., a California corporation By: /s/ Michael A. Fabiaschi ------------------------ Name: Michael A. Fabiaschi -------------------- Title: Chief Executive Officer ----------------------- SIGNATURE PAGE TO ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Amendment to be executed and delivered as of the date first written above. QUICKSILVER GROUP, INC., a California corporation By: /s/ Thomas W. Minick -------------------- Name: Thomas W. Minick ---------------- Title: Chief Executive Officer ----------------------- SIGNATURE PAGE TO ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Amendment to be executed and delivered as of the date first written above. /s/ Thomas W. Minick -------------------- Thomas W. Minick SIGNATURE PAGE TO ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Amendment to be executed and delivered as of the date first written above. /s/ Todd Fitzwater ------------------ Todd Fitzwater SIGNATURE PAGE TO ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION The parties hereto have caused this Amendment to be executed and delivered as of the date first written above. PETRA CAPITAL, LLC, a Georgia limited liability company By: /s/ Robert A. Smith ------------------- Name: Robert A. Smith --------------- Title: Vice President -------------- SIGNATURE PAGE TO ADDENDUM TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION EX-4 4 EXHIBIT 4 Exhibit 4 CERTIFICATE OF OWNERSHIP AND MERGER MERGING ZAMBA CORPORATION, a Delaware Corporation INTO RACOTEK, INC. a Delaware Corporation - -------------------------------------------------------------------------------- Pursuant to Section 253 of the General Corporation Law of the State of Delaware - -------------------------------------------------------------------------------- Racotek, Inc. a corporation organized and existing under the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That this corporation owns all of the outstanding shares of Zamba Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware. SECOND: That this corporation, by the following resolutions of its Board of Directors, duly adopted by Unanimous Written Consent pursuant to Section 141(f) of the General Corporation Law of the State of Delaware on the 5th day of October, 1998, determined to merge Zamba Corporation into itself on the terms and conditions set forth in such resolutions: RESOLVED, that Zamba Corporation be merged with and into the Corporation and that the Corporation be the surviving corporation in such merger; FURTHER RESOLVED, that the merger shall become effective upon the date and time of the filing of a Certificate of Ownership and Merger with the Secretary of State of the State of Delaware; FURTHER RESOLVED, that upon the effectiveness of the merger, the Corporation shall assume all of the liabilities and obligations of Zamba Corporation; and 1. FURTHER RESOLVED, that upon the effectiveness of the merger, the name of the Corporation shall be changed to "Zamba Corporation" and Article I of the Third Amended and Restated Certificate of Incorporation of the Corporation shall be amended to read as follows: "ARTICLE I. The name of this corporation is Zamba Corporation." IN WITNESS WHEREOF, this Certificate of Ownership and Merger is hereby executed on behalf of the surviving corporation, Racotek, Inc., and attested to by its officers thereunto duly authorized. Dated as of October 5, 1998 RACOTEK, INC. By: /s/ Michael A. Fabiaschi ------------------------ Michael A. Fabiaschi ------------------------ President and Chief Executive Officer 2. EX-5 5 EXHIBIT 5 EXHIBIT 5 NEXTNET, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT September 21, 1998 TABLE OF CONTENTS
PAGE ---- 1. Purchase and Sale of Preferred Stock.................................. 1 1.1 Sale and Issuance of Series A Preferred Stock................... 1 1.2 Closing; Delivery............................................... 1 2. Representations and Warranties of the Company......................... 1 2.1 Organization, Good Standing and Qualification................... 2 2.2 Capitalization.................................................. 2 2.3 Subsidiaries.................................................... 3 2.4 Authorization................................................... 3 2.5 Valid Issuance of Securities.................................... 3 2.6 Governmental Consents........................................... 4 2.7 Litigation...................................................... 4 2.8 Intellectual Property........................................... 4 2.9 Compliance with Laws; Permits................................... 5 2.10 Compliance with Other Instruments.............................. 5 2.11 Agreements; Action............................................. 5 2.12 Disclosure..................................................... 6 2.13 No Conflict of Interest........................................ 6 2.14 Rights of Registration and Voting Rights....................... 6 2.15 Title to Property and Assets................................... 7 2.16 Financial Statements........................................... 7 2.17 Changes........................................................ 7 2.18 Employee Benefit Plans......................................... 8 2.19 Tax Returns and Payments....................................... 8 2.20 Insurance...................................................... 8 2.21 Labor Agreements and Actions; Employees........................ 8 2.22 Confidential Information and Invention Assignment Agreements... 9 2.23 Permits........................................................ 9 2.24 Corporate Documents............................................ 9 2.25 Obligations of Management...................................... 9 2.26 Section 83(b) Elections........................................ 10 3. Representations and Warranties of the Purchaser....................... 10 3.1 Authorization................................................... 10 3.2 Purchase Entirely for Own Account............................... 10 3.3 Disclosure of Information....................................... 10 3.4 Restricted Securities........................................... 10 3.5 No Public Market................................................ 11 3.6 Restrictions on Transfer........................................ 11 3.7 Legends......................................................... 11 3.8 Accredited Investor............................................. 12 3.9 Foreign Investors............................................... 12 4. Conditions of the Purchasers' Obligations at Closing.................. 12 4.1 Representations and Warranties.................................. 12 4.2 Performance..................................................... 12 4.3 Compliance Certificate.......................................... 12 4.4 Qualifications.................................................. 12 4.5 Opinion of Company Counsel...................................... 13 4.6 Board of Directors.............................................. 13 4.7 Investors' Rights Agreement..................................... 13 4.8 Voting Agreement................................................ 13 4.9 Right of First Refusal Agreement................................ 13 4.10 Restated Certificate........................................... 13 4.11 Confidential Information and Invention Assignment Agreement.... 13 5. Conditions of the Company's Obligations at Closing.................... 13 5.1 Representations and Warranties.................................. 14 5.2 Performance..................................................... 14 5.3 Qualifications.................................................. 14 5.4 Approval of Racotek's Board of Directors........................ 14 6. Miscellaneous......................................................... 14 6.1 Survival of Warranties.......................................... 14 6.2 Transfer; Successors and Assigns................................ 14 6.3 Governing Law................................................... 14 6.4 Counterparts.................................................... 14 6.5 Titles and Subtitles............................................ 14 6.6 Notices......................................................... 14 6.7 Finder's Fee.................................................... 15 6.8 Attorney's Fees................................................. 15 6.9 Amendments and Waivers.......................................... 15 6.10 Severability................................................... 15 6.11 Delays or Omissions............................................ 15 6.12 Entire Agreement............................................... 16 6.13 Corporate Securities Law....................................... 16 6.14 Confidentiality................................................ 16 6.15 Exculpation Among Purchasers................................... 16
-2- NEXTNET, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT This Series A Preferred Stock Purchase Agreement (the "AGREEMENT") is made as of the 21st day of September, 1998 by and between NextNet, Inc., a Delaware corporation (the "COMPANY") and Racotek, Inc., a Delaware corporation (the "PURCHASER"). The parties hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK. 1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of the State of Delaware on or before the Closing (as defined below) the Amended and Restated Certificate of Incorporation in the form attached hereto as EXHIBIT B (the "RESTATED CERTIFICATE"). (b) Subject to the terms and conditions of this Agreement, the Purchaser agrees to purchase at the Closing and the Company agrees to sell and issue to the Purchaser at the Closing that number of shares of Series A Preferred Stock set forth opposite such Purchaser's name on EXHIBIT A attached hereto in exchange for the assignment of certain technology from the Purchaser to the Company as set forth in the Intellectual Property and Assets Transfer Agreement between the Purchaser and the Company of even date herewith (the "TRANSFER AGREEMENT"). The shares of Series A Preferred Stock issued to the Purchaser pursuant to this Agreement shall be hereinafter referred to as the "STOCK." 1.2 CLOSING; DELIVERY. (a) The purchase and sale of the Stock shall take place at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California, at 9:00 a.m., on the closing date of the sale by the Company to certain investors of Series B Preferred Stock pursuant to that certain Series B Preferred Stock Purchase Agreement of even date herewith, or on such other date as the Company and the Purchaser mutually agree (which time and place are designated as the "CLOSING"). (b) At the Closing, the Company shall deliver to the Purchaser a certificate representing the Stock being purchased thereby against delivery to the Company by the Purchaser at the closing of (a) an executed counter part of this Agreement, (b) an executed counter part of the Transfer Agreement and (c) payment of the purchase price therefor by check payable to the Company or by wire transfer to the Company's bank account. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser that, except as set forth on a Schedule of Exceptions attached hereto as EXHIBIT C, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted and as presently proposed to be conducted in the Business Plan, as defined below. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION. The authorized capital of the Company consists, or will consist, immediately prior to the Closing, of: (a) 4,900,000 shares of Preferred Stock, each with a par value of $0.0001 per share, 2,400,000 shares of which have been designated Series A Preferred Stock, none of which are issued and outstanding immediately prior to the Closing and 2,500,000 shares of which have been designated Series B Preferred Stock, none of which are issued and outstanding immediately prior to the Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Certificate. (b) 25,100,000 shares of Common Stock, each with a par value of $0.0001 per share, 1,100,000 shares of which are issued and outstanding immediately prior to the Closing. All of the outstanding shares of Common Stock have been duly authorized, validly issued, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. The Company has reserved 4,900,000 shares of Common Stock for issuance upon conversion of the Preferred Stock. (c) The Company has reserved 2,017,544 shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 1998 Stock Plan duly adopted by the Board of Directors and approved by the Company stockholders (the "STOCK PLAN"). Of such reserved shares of Common Stock, 1,000,000 shares have been issued pursuant to restricted stock purchase agreements, and 1,017,544 shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. (d) There are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights), proxy or shareholder agreements, or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. (e) Except as set forth on the Schedule of Exceptions, no stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any equity securities or rights to purchase equity securities provides for acceleration or other changes in the vesting provisions or other terms of such agreement or understanding as the result of any merger, consolidated sale of stock or assets, change in control or other similar transaction by the Company. -2- 2.3 SUBSIDIARIES. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement, in the form attached hereto as EXHIBIT D (the "INVESTORS' RIGHTS AGREEMENT") and the Voting Agreement in the form attached hereto as EXHIBIT E (the "VOTING AGREEMENT" and collectively with this Agreement and the Investors' Rights Agreement, the "AGREEMENTS"), the performance of all obligations of the Company hereunder and thereunder and the authorization, sale, issuance and delivery of the Stock and the Common Stock issuable upon conversion of the Stock (together, the "SECURITIES") has been taken or will be taken prior to the Closing, and the Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. The sale of the Stock and the subsequent conversion of the Stock into shares of common stock (the "CONVERSION SHARES") are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The Company has all requisite corporate power and authority to execute and deliver the Agreements, to issue and sell the Stock and the Conversion Shares and to carry out the provisions of the Agreements and the Restated Certificate. 2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to the Purchaser hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable state and federal securities laws and will have the rights preferences and privileges as set forth in the Restated Certificate. Based in part upon the representations of the Purchaser in this Agreement and subject to the provisions of Section 2.6 below, the Stock will be offered, sold and issued, as contemplated by this Agreement, in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Stock has been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Certificate, shall be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable federal and state securities laws and will be issued in compliance with all applicable federal and state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares to any person or persons so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act or any state securities laws. -3- 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for filings pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, other applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "SECURITIES ACT"). 2.7 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company, nor, to the Company's knowledge, is there any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened (or any basis therefor known to the Company) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 2.8 INTELLECTUAL PROPERTY. To its knowledge, the Company owns or possesses sufficient legal rights to use without material cost, free and clear of all liens, charges, claims and restrictions, all patents, trademarks, service marks, tradenames, copyrights, trade secrets, licenses, information and proprietary rights and processes necessary for its business as now conducted and as presently proposed to be conducted in the Business Plan without any conflict with, or infringement of, the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as presently proposed in the Business Plan, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interest of the Company or that would conflict with the Company's business as presently proposed in the Business Plan. Neither the execution or delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as presently proposed in the Business Plan, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to use any inventions, trade secrets or proprietary information of any of its employees (or persons it currently intends to hire) made prior to their employment by the Company. -4- 2.9 COMPLIANCE WITH LAWS; PERMITS. To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition or operations of the Company. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. (a) The Company is not in violation or default of any provisions of its Restated Certificate or Bylaws or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of the Agreements and the consummation of the transactions contemplated hereby or thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company. (b) To its knowledge, the Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any right granted under any license, distribution agreement or other agreement. 2.11 AGREEMENTS; ACTION. (a) There are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of, $25,000, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company or (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $25,000 or in excess of $100,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Certificate or Bylaws, -5- that adversely affects its business as now conducted or as presently proposed to be conducted in the Business Plan, its assets or properties or its financial condition. (e) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 2.12 DISCLOSURE. The Company has fully provided the Purchaser with all the information that the Purchaser have requested for deciding whether to acquire the Stock including certain of the Company's projections describing its proposed business (collectively, the "BUSINESS PLAN"). The Agreements, the exhibits attached hereto or thereto, any certificate furnished or to be furnished to Purchaser at the Closing, the Business Plan or any other documents which have been prepared by the Company for the Purchasers or their attorneys or agents in connection with the transaction as contemplated by the Agreement (when read together) do not contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. To the extent the Business Plan was prepared by management of the Company, the Business Plan and the financial and other projections contained in the Business Plan were prepared in good faith; however, the Company does not warrant that it will achieve such projections. 2.13 NO CONFLICT OF INTEREST. The Company is not indebted, directly or indirectly, to any of its officers or directors, shareholders or employees or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees. None of the Company's officers, directors, or shareholders or any members of their immediate families, are, directly or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock) or, to the Company's knowledge, have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company except that officers, directors and/or stockholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded companies that may compete with the Company. To the Company's knowledge, none of the Company's officers, directors or shareholders or any members of their immediate families are, directly or indirectly, interested in any material contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.14 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. Except as contemplated -6- in the Voting Agreement, neither the Company nor any stockholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company. 2.15 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.16 FINANCIAL STATEMENTS. Except as set forth in the Business Plan, the Company has not prepared any balance sheet, income statement, statement of operations, statement of changes in financial position and stockholders' equity or other financial statement. 2.17 CHANGES. Since the date of the Business Plan, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Business Plan, except changes in the ordinary course of business that have not been, either individually or in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the business, properties, prospects, or financial condition of the Company; (c) any waiver or compromise by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the business, properties, prospects or financial condition of the Company; (e) any material change to a material contract or agreement by which the Company or any of its assets is bound or subject; (f) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder; (g) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (h) any resignation or termination of employment of any officer or key employee of the Company; and the Company, is not aware of any impending resignation or termination of employment of any such officer or key employee; (i) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; -7- (j) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; (k) any declaration, setting aside or payment or other distribution in respect to any of the Company's capital stock, or any direct or indirect redemption, purchase, or other acquisition of any of such stock by the Company; (l) to the Company's knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Company; (m) any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (n) any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary; or (o) any arrangement or commitment by the Company to do any of the things described in this Section 2.16. 2.18 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.19 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. The Company has not been audited (and is not presently under audit) in respect of any such tax return or report. 2.20 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. 2.21 LABOR AGREEMENTS AND ACTIONS; EMPLOYEES. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company, nor is the Company aware of any labor organization activity involving its employees. The employment of each officer and employee of the Company is terminable at the will of the Company. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and -8- with other laws related to employment. To the Company's knowledge, no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company because of the nature of the business to be conducted by the Company; and to the Company's knowledge the continued employment by the Company of its present employees, and the performance of the Company's contracts with its independent contractors, will not result in any such violation. The Company has not received any notice alleging that any such violation has occurred. No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. To the Company's knowledge, no officer or key employee intends to terminate his or her employment with the Company, nor does the Company have a present intention to terminate the employment of any officer or key employee. 2.22 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS. Each former and current employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms delivered to the counsel for the Purchasers. No current employee, officer or consultant of the Company has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee, officer or consultant's Proprietary Information and Inventions Agreement. The Company is not aware, after reasonable inquiry, that any of its employees or consultants is in violation thereof, and the Company will use its best efforts to prevent any such violation. 2.23 PERMITS. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company and believes it can obtain, without undue burden or expenses, any similar authority for the conduct of its business as planned to be conducted in the Business Plan. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.24 CORPORATE DOCUMENTS. The Restated Certificate and Bylaws of the Company are in the form provided to counsel for the Purchaser. The copy of the minute books of the Company provided to the Purchaser's counsel contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.25 OBLIGATIONS OF MANAGEMENT. Each officer of the Company is currently devoting one hundred percent (100%) of his or her business time to the conduct of the business of the Company. The Company is not aware of any officer or key employee of the Company planning to work less than full-time at the Company in the future. -9- 2.26 SECTION 83(b) ELECTIONS. To the Company's knowledge, all elections and notices permitted by Section 83(b) of the Internal Revenue Code and any analogous provisions of applicable state tax laws have been timely filed by all employees who have purchased shares of the Company's common stock under agreements that provide for the vesting of such shares. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company that: 3.1 AUTHORIZATION. Such Purchaser has full power and authority to enter into this Agreement. The Agreements, when executed and delivered by the Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, or (b) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Purchaser in reliance upon the Purchaser's representation to the Company, which by the Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the Securities to be acquired by the Purchaser will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Purchaser has not been formed for the specific purpose of acquiring the Securities. 3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity to discuss the Company's business, management, financial affairs and the terms and conditions of the offering of the Stock with the Company's management and has had an opportunity to review the Company's facilities. The Purchaser understands that such discussions, as well as the Business Plan and any other written information delivered by the Company to the Purchaser, were intended to describe the aspects of the Company's business which it believes to be material. 3.4 RESTRICTED SECURITIES. The Purchaser understands that the Securities have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser's representations as expressed herein. The Purchaser understands that the Securities are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration -10- and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale except as set forth in the Investors' Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. 3.5 NO PUBLIC MARKET. The Purchaser understands that no public market now exists for any of the securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Securities. 3.6 RESTRICTIONS ON TRANSFER (a) Each Purchaser agrees not to make any disposition of all or any portion of the Stock or Conversion Shares unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) The transferee has agreed in writing to be bound by the terms of these restrictions, (B) such Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Purchaser shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Purchaser which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (D) to the Purchaser's family member or trust for the benefit of an individual Purchaser ; PROVIDED that in each case the transferee will be subject to the terms of these restrictions to the same extent as if he were an original Purchaser hereunder. 3.7 LEGENDS. The Purchaser understands that the Securities and any securities issued in respect of or exchange for the Securities, may bear one or all of the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN -11- CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (b) Any legend set forth in the other Agreements. (c) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. 3.8 ACCREDITED INVESTOR. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. 3.9 FOREIGN INVESTORS. If the Purchaser is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended), such Purchaser hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Stock or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Stock, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Stock. Such Purchaser's subscription and payment for and continued beneficial ownership of the Stock, will not violate any applicable securities or other laws of the Purchaser's jurisdiction. 4. CONDITIONS OF THE PURCHASER'S OBLIGATIONS AT CLOSING. The obligations of the Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to the Purchaser at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in -12- connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 4.5 OPINION OF COMPANY COUNSEL. The Purchaser shall have received from Venture Law Group, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of EXHIBIT G. 4.6 BOARD OF DIRECTORS. As of the Closing, the Board shall be comprised of Isaac Shpantzer, Joseph Costello, Dixon Doll, Barry Schiffman, Don Green, Vladimir Kelman with one seat remaining vacant. 4.7 INVESTORS' RIGHTS AGREEMENT. The Company, the Purchaser, the purchasers of the Company's Series B Preferred Stock pursuant to that certain Series B Preferred Stock Purchase Agreement dated of even date herewith (the "SERIES B PURCHASERS"), Isaac Shpantzer, Vladimir Kelman and Beverly Waldorf shall have executed and delivered the Investors' Rights Agreement in substantially the form attached as EXHIBIT D. 4.8 VOTING AGREEMENT. The Company, the Purchaser, the Series B Purchasers, Isaac Shpantzer, Vladimir Kelman, Beverly Waldorf, Eric Dunn, Stuart Froelich, Kerry Shore and Tony Klein shall have executed and delivered the Voting Agreement in substantially the form attached as EXHIBIT E. 4.9 RIGHT OF FIRST REFUSAL AGREEMENT. The Company, the Purchaser and the Series B Purchasers shall have executed and delivered the Right of First Refusal Agreement in substantially the form attached as EXHIBIT F. 4.10 RESTATED CERTIFICATE. The Company shall have filed the Restated Certificate with the Secretary of State of Delaware on or prior to the Closing Date, which shall continue to be in full force and effect as of the Closing Date. 4.11 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. The Company and each of its employees shall have entered into the Company's standard form Confidential Information and Invention Assignment Agreement, in substantially the form provided to the Purchaser. 4.12 MINIMUM INVESTMENT. In the Initial Closing, the Company shall have received an aggregate investment of not less than $8,000,000. 4.13 APPROVAL OF RACOTEK'S BOARD OF DIRECTORS. The assignment of certain technology pursuant to the Intellectual Property and Assets Transfer Agreement between Racotek and the Company of even date herewith shall have been approved by the disinterested members of the Board of Directors of Racotek. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to the Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: -13- 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser contained in Section 3 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed by the Purchaser on or prior to the Closing shall have been performed or complied with in all material respects. 5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 5.4 APPROVAL OF RACOTEK'S BOARD OF DIRECTORS. The assignment of certain technology pursuant to the Transfer Agreement shall have been approved by the disinterested members of the Board of Directors of Racotek. 6. MISCELLANEOUS. 6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and the Purchaser contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement. 6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 6.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 6.6 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight -14- courier or sent by telegram or fax, or 10 days after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth on the signature page or EXHIBIT A hereto, or as subsequently modified by written notice, and (a) if to the Company, with a copy to Glen R. Van Ligten, Venture Law Group, 2800 Sand Hill Road, Menlo Park, California 94025 or (b) if to the Purchaser, with a copy to Mike Sullivan, Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, California 94306. 6.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. The Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless the Purchaser from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or waived only with the written consent of the Company and Racotek. Any amendment or waiver effected in accordance with this Section 6.10 shall be binding upon the Purchaser and each transferee of the Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. 6.10 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 6.11 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and -15- shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.12 ENTIRE AGREEMENT. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements relating to the subject matter hereof existing between the parties hereto are expressly canceled. 6.13 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. 6.14 CONFIDENTIALITY. Each party hereto agrees that, except with the prior written permission of the other party, it shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of Stock purchased hereunder. The provisions of this Section 6.15 shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby. 6.15 EXCULPATION AMONG PURCHASERS. The Purchaser acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. The Purchaser agrees that no Series B Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Series B Purchaser shall be liable to the Purchaser or to any other Series B Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Securities. [Signature Pages Follow] -16- The parties have executed this Series A Preferred Stock Purchase Agreement as of the date first written above. COMPANY: NEXTNET, INC. By: /s/ Isaac Shpantzer Name: Isaac Shpantzer Title: President Address: 11173 Meg Grace Lane Eden Prairie, MN 55344 PURCHASER: RACOTEK, INC. By: /s/ Mike Fabiashi Name: Mike Fabiashi Title: President and CEO Address: 7301 Ohms Lane, Suite 200 Minneapolis, MN 55439 EX-6 6 EXHIBIT 6 EXHIBIT 6 NEXTNET, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT September 21, 1998 TABLE OF CONTENTS
PAGE ---- 1. Purchase and Sale of Preferred Stock. . . . . . . . . . . . . . . . . .1 1.1 Sale and Issuance of Series B Preferred Stock . . . . . . . . . .1 1.2 Closing; Delivery . . . . . . . . . . . . . . . . . . . . . . . .1 2. Representations and Warranties of the Company . . . . . . . . . . . . .2 2.1 Organization, Good Standing and Qualification . . . . . . . . . .2 2.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . .2 2.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.5 Valid Issuance of Securities. . . . . . . . . . . . . . . . . . .3 2.6 Governmental Consents . . . . . . . . . . . . . . . . . . . . . .4 2.7 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.8 Intellectual Property . . . . . . . . . . . . . . . . . . . . . .4 2.9 Compliance with Laws; Permits . . . . . . . . . . . . . . . . . .5 2.10 Compliance with Other Instruments. . . . . . . . . . . . . . . .5 2.11 Agreements; Action . . . . . . . . . . . . . . . . . . . . . . .5 2.12 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . .6 2.13 No Conflict of Interest. . . . . . . . . . . . . . . . . . . . .6 2.14 Rights of Registration and Voting Rights . . . . . . . . . . . .7 2.15 Title to Property and Assets . . . . . . . . . . . . . . . . . .7 2.16 Financial Statements . . . . . . . . . . . . . . . . . . . . . .7 2.17 Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2.18 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . .8 2.19 Tax Returns and Payments . . . . . . . . . . . . . . . . . . . .8 2.20 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.21 Labor Agreements and Actions; Employees. . . . . . . . . . . . .9 2.22 Confidential Information and Invention Assignment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.23 Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2.24 Corporate Documents. . . . . . . . . . . . . . . . . . . . . . 10 2.25 Qualified Small Business Stock . . . . . . . . . . . . . . . . 10 2.26 Obligations of Management. . . . . . . . . . . . . . . . . . . 10 2.27 Section 83(b) Elections. . . . . . . . . . . . . . . . . . . . 10 2.28 Real Property Holding Corporation. . . . . . . . . . . . . . . 11 2.29 Small Business Concern . . . . . . . . . . . . . . . . . . . . 11 3. Representations and Warranties of the Purchasers. . . . . . . . . . . 11 3.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.2 Purchase Entirely for Own Account . . . . . . . . . . . . . . . 11 3.3 Disclosure of Information . . . . . . . . . . . . . . . . . . . 11 3.4 Restricted Securities . . . . . . . . . . . . . . . . . . . . . 12 3.5 No Public Market. . . . . . . . . . . . . . . . . . . . . . . . 12 3.6 Restrictions on Transfer. . . . . . . . . . . . . . . . . . . . 12 3.7 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.8 Accredited Investor . . . . . . . . . . . . . . . . . . . . . . 13 -1- 3.9 Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . 13 4. Conditions of the Purchasers' Obligations at Closing. . . . . . . . . 13 4.1 Representations and Warranties. . . . . . . . . . . . . . . . . 13 4.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.3 Compliance Certificate. . . . . . . . . . . . . . . . . . . . . 14 4.4 Qualifications. . . . . . . . . . . . . . . . . . . . . . . . . 14 4.5 Opinion of Company Counsel. . . . . . . . . . . . . . . . . . . 14 4.6 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . 14 4.7 Investors' Rights Agreement . . . . . . . . . . . . . . . . . . 14 4.8 Voting Agreement. . . . . . . . . . . . . . . . . . . . . . . . 14 4.9 Right of First Refusal Agreement. . . . . . . . . . . . . . . . 14 4.10 Restated Certificate . . . . . . . . . . . . . . . . . . . . . 14 4.11 Confidential Information and Invention Assignment Agreement. . 14 4.12 SBA Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.13 Minimum Investment . . . . . . . . . . . . . . . . . . . . . . 15 4.14 Approval of Racotek's Board of Directors . . . . . . . . . . . 15 5. Conditions of the Company's Obligations at Closing. . . . . . . . . . 15 5.1 Representations and Warranties. . . . . . . . . . . . . . . . . 15 5.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.3 Qualifications. . . . . . . . . . . . . . . . . . . . . . . . . 15 6. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.1 Survival of Warranties. . . . . . . . . . . . . . . . . . . . . 15 6.2 Transfer; Successors and Assigns. . . . . . . . . . . . . . . . 15 6.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.4 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.5 Titles and Subtitles. . . . . . . . . . . . . . . . . . . . . . 16 6.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.7 Finder's Fee. . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.8 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 16 6.9 Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . 17 6.10 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . 17 6.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.12 Delays or Omissions. . . . . . . . . . . . . . . . . . . . . . 17 6.13 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 17 6.14 Corporate Securities Law . . . . . . . . . . . . . . . . . . . 17 6.15 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . 18 6.16 Exculpation Among Purchasers . . . . . . . . . . . . . . . . . 18 6.17 Waiver of Conflicts. . . . . . . . . . . . . . . . . . . . . . 18
-2- NEXTNET, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT This Series B Preferred Stock Purchase Agreement (the "AGREEMENT") is made as of the 21st day of September, 1998 by and between NextNet, Inc., a Delaware corporation (the "COMPANY") and the investors listed on EXHIBIT A attached hereto (each a "PURCHASER" and together the "PURCHASERS"). The parties hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK. 1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of the State of Delaware on or before the Closing (as defined below) the Amended and Restated Certificate of Incorporation in the form attached hereto as EXHIBIT B (the "RESTATED CERTIFICATE"). (b) Subject to the terms and conditions of this Agreement, each Purchaser agrees to purchase at the Closing and the Company agrees to sell and issue to each Purchaser at the Closing that number of shares of Series B Preferred Stock set forth opposite each such Purchaser's name on EXHIBIT A attached hereto at a purchase price of $4.00 per share. The shares of Series B Preferred Stock issued to the Purchaser pursuant to this Agreement shall be hereinafter referred to as the "STOCK." 1.2 CLOSING; DELIVERY. (a) The purchase and sale of the Stock shall take place at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California, at 5:00 p.m., on September 21, 1998, or at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (which time and place are designated as the "CLOSING"). (b) At the Closing, the Company shall deliver to each Purchaser a certificate representing the Stock being purchased thereby against payment of the purchase price therefor by check payable to the Company or by wire transfer to the Company's bank account. (c) If the full number of the authorized shares of Series B Preferred Stock of the Company is not sold at the Closing, the Company shall have the right, at any time within ninety (90) days of the Closing, to sell the remaining authorized but unissued shares of Series B Preferred Stock to one or more additional purchasers or to any Purchaser hereunder who wishes to acquire additional shares of Series B Preferred Stock as determined by the Board of Directors of the Company at the price and on the terms set forth herein. Any additional purchaser so acquiring shares of Series B Preferred Stock ("Additional Purchasers"), by executing and delivering to the Company an additional counterpart signature page to this Agreement, shall become a party to this Agreement, have the rights and obligations hereunder -1- and, be considered a "Purchaser" for purposes of this Agreement. Any Series B Preferred Stock so acquired by such Additional Purchasers shall be considered "Stock" for purposes of this Agreement and all other agreements contemplated hereby. In addition, by executing and delivering to the Company additional counterpart signature pages to the Investor's Rights Agreement and the Voting Agreement (as such agreements are defined below) the Additional Purchasers shall become parties to such agreements and have the rights and obligations thereunder. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, except as set forth on a Schedule of Exceptions attached hereto as EXHIBIT C, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted and as presently proposed to be conducted in the Business Plan, as defined below. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION. The authorized capital of the Company consists, or will consist, immediately prior to the Closing, of: (a) 4,900,000 shares of Preferred Stock, each with a par value of $0.0001 per share, of which 2,400,000 shares have been designated Series A Preferred Stock, none of which are issued and outstanding immediately prior to the Closing, of which 2,500,000 shares have been designated Series B Preferred Stock, none of which are issued and outstanding immediately prior to the Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Certificate. (b) 25,100,000 shares of Common Stock, each with a par value of $0.0001 per share, 1,100,000 shares of which are issued and outstanding immediately prior to the Closing. All of the outstanding shares of Common Stock have been duly authorized, validly issued, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. The Company has reserved 4,900,000 shares of Common Stock for issuance upon conversion of the Preferred Stock. (c) The Company has reserved 2,017,544 shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 1998 Stock Plan duly adopted by the Board of Directors and approved by the Company stockholders (the "STOCK PLAN"). Of such reserved shares of Common Stock, 1,000,000 shares have been issued pursuant to restricted stock purchase agreements, and 1,017,544 shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. -2- (d) There are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights), proxy or shareholder agreements, or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. (e) Except as set forth on the Schedule of Exceptions, no stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any equity securities or rights to purchase equity securities provides for acceleration or other changes in the vesting provisions or other terms of such agreement or understanding as the result of any merger, consolidated sale of stock or assets, change in control or other similar transaction by the Company. 2.3 SUBSIDIARIES. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement, in the form attached hereto as EXHIBIT D (the "INVESTORS' RIGHTS AGREEMENT"), and the Voting Agreement in the form attached hereto as EXHIBIT E (the "VOTING AGREEMENT" and collectively with this Agreement and the Investors' Rights Agreement, the "AGREEMENTS"), the performance of all obligations of the Company hereunder and thereunder and the authorization, sale, issuance and delivery of the Stock and the Common Stock issuable upon conversion of the Stock (together, the "SECURITIES") has been taken or will be taken prior to the Closing, and the Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. The sale of the Stock and the subsequent conversion of the Stock into shares of common stock (the "Conversion Shares") are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The Company has all requisite corporate power and authority to execute and deliver the Agreements, to issue and sell the Stock and the Conversion Shares and to carry out the provisions of the Agreements and the Restated Certificate. 2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to the Purchasers hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable state and federal securities laws and will have the rights, preferences and privileges as set forth in the Restated Certificate. Based in part upon the -3- representations of the Purchasers in this Agreement and subject to the provisions of Section 2.6 below, the Stock will be offered, sold and issued, as contemplated by this Agreement, in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Stock has been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Certificate, shall be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable federal and state securities laws and will be issued in compliance with all applicable federal and state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares to any person or persons so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act or any state securities laws. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for filings pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, other applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "SECURITIES ACT"). 2.7 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company, nor, to the Company's knowledge, is there any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened (or any basis therefor known to the Company) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 2.8 INTELLECTUAL PROPERTY. To its knowledge, the Company owns or possesses sufficient legal rights to use without material cost, free and clear of all liens, charges, claims and restrictions, all patents, trademarks, service marks, tradenames, copyrights, trade secrets, licenses, information and proprietary rights and processes necessary for its business as now conducted and as presently proposed to be conducted in the Business Plan without any conflict with, or infringement of, the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as presently proposed in the Business Plan, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. -4- The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interest of the Company or that would conflict with the Company's business as presently proposed in the Business Plan. Neither the execution or delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as presently proposed in the Business Plan, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to use any inventions, trade secrets or proprietary information of any of its employees (or persons it currently intends to hire) made prior to their employment by the Company. 2.9 COMPLIANCE WITH LAWS; PERMITS. To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition or operations of the Company. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. (a) The Company is not in violation or default of any provisions of its Restated Certificate or Bylaws or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of the Agreements and the consummation of the transactions contemplated hereby or thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company. (b) To its knowledge, the Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any right granted under any license, distribution agreement or other agreement. 2.11 AGREEMENTS; ACTION. (a) There are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of, $25,000, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company or (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person -5- or affect the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $25,000 or in excess of $100,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Certificate or Bylaws, that adversely affects its business as now conducted or as presently proposed to be conducted in the Business Plan, its assets or properties or its financial condition. (e) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 2.12 DISCLOSURE. The Company has fully provided the Purchasers with all the information that the Purchasers have requested for deciding whether to acquire the Stock including certain of the Company's projections describing its proposed business (collectively, the "BUSINESS PLAN"). The Agreements, the exhibits attached hereto or thereto, any certificate furnished or to be furnished to Purchasers at the Closing, the Business Plan or any other documents which have been prepared by the Company for the Purchasers or their attorneys or agents in connection with the transaction as contemplated by the Agreement (when read together) do not contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. To the extent the Business Plan was prepared by management of the Company, the Business Plan and the financial and other projections contained in the Business Plan were prepared in good faith; however, the Company does not warrant that it will achieve such projections. 2.13 NO CONFLICT OF INTEREST. The Company is not indebted, directly or indirectly, to any of its officers or directors, shareholders or employees or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees. None of the Company's officers, directors, or shareholders or any members of their immediate families, are, directly or indirectly, indebted to the Company (other than in connection -6- with purchases of the Company's stock) or, to the Company's knowledge, have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company except that officers, directors and/or stockholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded companies that may compete with the Company. To the Company's knowledge, none of the Company's officers, directors or shareholders or any members of their immediate families are, directly or indirectly, interested in any material contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.14 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. Except as contemplated in the Voting Agreement, neither the Company nor any stockholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company. 2.15 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.16 FINANCIAL STATEMENTS. Except as set forth in the Business Plan, the Company has not prepared any balance sheet, income statement, statement of operations, statement of changes in financial position and stockholders' equity or other financial statement. 2.17 CHANGES. Since the date of the Business Plan, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Business Plan, except changes in the ordinary course of business that have not been, either individually or in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the business, properties, prospects, or financial condition of the Company; (c) any waiver or compromise by the Company of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the business, properties, prospects or financial condition of the Company; (e) any material change to a material contract or agreement by which the Company or any of its assets is bound or subject; -7- (f) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder; (g) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (h) any resignation or termination of employment of any officer or key employee of the Company; and the Company, is not aware of any impending resignation or termination of employment of any such officer or key employee; (i) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (j) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; (k) any declaration, setting aside or payment or other distribution in respect to any of the Company's capital stock, or any direct or indirect redemption, purchase, or other acquisition of any of such stock by the Company; (l) to the Company's knowledge, any other event or condition of any character that might materially and adversely affect the business, properties, prospects or financial condition of the Company; (m) any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (n) any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary; or (o) any arrangement or commitment by the Company to do any of the things described in this Section 2.16. 2.18 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.19 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. The Company has not been audited (and is not presently under audit) in respect of any such tax return or report. -8- 2.20 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. 2.21 LABOR AGREEMENTS AND ACTIONS; EMPLOYEES. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company, nor is the Company aware of any labor organization activity involving its employees. The employment of each officer and employee of the Company is terminable at the will of the Company. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and with other laws related to employment. To the Company's knowledge, no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company because of the nature of the business to be conducted by the Company; and to the Company's knowledge the continued employment by the Company of its present employees, and the performance of the Company's contracts with its independent contractors, will not result in any such violation. The Company has not received any notice alleging that any such violation has occurred. No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. To the Company's knowledge, no officer or key employee intends to terminate his or her employment with the Company, nor does the Company have a present intention to terminate the employment of any officer or key employee. 2.22 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS. Each former and current employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms delivered to the counsel for the Purchasers. No current employee, officer or consultant of the Company has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee, officer or consultant's Proprietary Information and Inventions Agreement. The Company is not aware, after reasonable inquiry, that any of its employees or consultants is in violation thereof, and the Company will use its best efforts to prevent any such violation. 2.23 PERMITS. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company and believes it can obtain, without undue burden or expenses, any similar authority for the conduct of its business as planned to be conducted in the Business Plan. -9- The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.24 CORPORATE DOCUMENTS. The Restated Certificate and Bylaws of the Company are in the form provided to counsel for the Purchasers. The copy of the minute books of the Company provided to the Purchasers' counsel contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.25 QUALIFIED SMALL BUSINESS STOCK. (a) Immediately prior to the Closing, (i) the Company will be a domestic C corporation, (ii) the Company will not have made any purchases of its own stock described in Section 1202(c)(3)(B) of the Internal Revenue Code of 1986 (the "CODE") during the one-year period preceding the Closing, and (iii) the Company's (and any predecessor's) aggregate gross assets, as defined by Code Section 1202(d)(2), at no time from the date of incorporation of the Company and through the Closing have exceeded or will exceed $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with Code Section 1202(d)(3). (b) The Company will take no tax reporting position inconsistent with the Stock qualifying as "qualified small business stock" under Section 1202 of the Code. (c) The Company shall (i) comply with applicable federal and California reporting obligations necessary to avoid disqualification of the Stock as "qualifying small business stock" under Section 1202 of the Code for so long as the Purchasers are owners of the Stock; and (ii) agree not to repurchase any stock of the Company if such repurchase would constitute a significant redemption under Section 1202(c)(3)(b) of the Code and the Regulations thereunder with respect to such Stock. 2.26 OBLIGATIONS OF MANAGEMENT. Each officer of the Company is currently devoting one hundred percent (100%) of his or her business time to the conduct of the business of the Company. The Company is not aware of any officer or key employee of the Company planning to work less than full-time at the Company in the future. 2.27 SECTION 83(b) ELECTIONS. To the Company's knowledge, all elections and notices permitted by Section 83(b) of the Internal Revenue Code and any analogous provisions of applicable state tax laws have been timely filed by all employees who have purchased shares of the Company's common stock under agreements that provide for the vesting of such shares. -10- 2.28 REAL PROPERTY HOLDING CORPORATION. The Company is not a real property holding corporation within the meaning of Internal Revenue Code Section 897(c)(2) and any regulations promulgated thereunder. 2.29 SMALL BUSINESS CONCERN. The Company together with its "affiliates" (as that term is defined in Section 121.103 of Title 13 of the Code of Federal Regulations (the "Federal Regulations")), is a "small business concern" within the meaning of the Small Business Investment Act of 1958, as amended (the "Small Business Act"), and the regulations thereunder, including Section 121.301 of Title 13 of the Federal Regulations (a "Small Business Concern"). The information delivered to each Purchaser that is a licensed Small Business Investment Company (an "SBIC Purchaser") on SBA Forms 480, 652 and 1031 delivered in connection herewith is true and correct. The Company is not ineligible for financing by any SBIC Purchaser pursuant to Section 107.720 of Title 13 of the Federal Regulations. Based solely upon information provided to each SBIC Purchaser, the Company acknowledges that each SBIC Purchaser is a Federal licensee under the Small Business Investment Act of 1958, as amended. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants to the Company that: 3.1 AUTHORIZATION. Such Purchaser has full power and authority to enter into this Agreement. The Agreements, when executed and delivered by the Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, or (b) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Purchaser in reliance upon the Purchaser's representation to the Company, which by the Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the Securities to be acquired by the Purchaser will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Purchaser has not been formed for the specific purpose of acquiring the Securities. 3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity to discuss the Company's business, management, financial affairs and the terms and conditions of the offering of the Stock with the Company's management and has had an opportunity to review the Company's facilities. The Purchaser understands that such discussions, as well as the -11- Business Plan and any other written information delivered by the Company to the Purchaser, were intended to describe the aspects of the Company's business which it believes to be material. 3.4 RESTRICTED SECURITIES. The Purchaser understands that the Securities have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser's representations as expressed herein. The Purchaser understands that the Securities are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale except as set forth in the Investors' Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. 3.5 NO PUBLIC MARKET. The Purchaser understands that no public market now exists for any of the securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Securities. 3.6 RESTRICTIONS ON TRANSFER (a) Each Purchaser agrees not to make any disposition of all or any portion of the Stock or Conversion Shares unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) The transferee has agreed in writing to be bound by the terms of these restrictions, (B) such Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Purchaser shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Purchaser which is (A) a partnership to its partners, former partners or an affiliated partnership managed by the same manager or managing partner or management company, or managed by an entity controlling, controlled by, or under common control with, such manager or managing -12- partner or management company in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (D) to the Purchaser's family member or trust for the benefit of an individual Purchaser ; PROVIDED that in each case the transferee will be subject to the terms of these restrictions to the same extent as if he were an original Purchaser hereunder. 3.7 LEGENDS. The Purchaser understands that the Securities and any securities issued in respect of or exchange for the Securities, may bear one or all of the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (b) Any legend set forth in the other Agreements. (c) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. 3.8 ACCREDITED INVESTOR. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. 3.9 FOREIGN INVESTORS. If the Purchaser is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended), such Purchaser hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Stock or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Stock, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Stock. Such Purchaser's subscription and payment for and continued beneficial ownership of the Stock, will not violate any applicable securities or other laws of the Purchaser's jurisdiction. 4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true and correct in all material respects on and as of -13- the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to the Purchasers at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 4.5 OPINION OF COMPANY COUNSEL. The Purchasers shall have received from Venture Law Group, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of EXHIBIT F. 4.6 BOARD OF DIRECTORS. As of the Closing, the Board shall be comprised of Isaac Shpantzer, Joseph Costello, Dixon Doll, Barry Schiffman, Don Green, Vladimir Kelman with one seat remaining vacant. 4.7 INVESTORS' RIGHTS AGREEMENT. The Company, each Purchaser, Racotek, Inc. ("RACOTEK"), Isaac Shpantzer, Vladimir Kelman and Beverly Waldorf shall have executed and delivered the Investors' Rights Agreement in substantially the form attached as EXHIBIT D. 4.8 VOTING AGREEMENT. The Company, each Purchaser, Racotek, Isaac Shpantzer, Vladimir Kelman, Beverly Waldorf, Eric Dunn, Stuart Froelich, Kerry Shore and Tony Klein shall have executed and delivered the Voting Agreement in substantially the form attached as EXHIBIT E. 4.9 RIGHT OF FIRST REFUSAL AGREEMENT. The Company, each Purchaser and Racotek shall have executed and delivered the Right of First Refusal Agreement in substantially the form attached as EXHIBIT F. 4.10 RESTATED CERTIFICATE. The Company shall have filed the Restated Certificate with the Secretary of State of Delaware on or prior to the Closing Date, which shall continue to be in full force and effect as of the Closing Date. 4.11 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. The Company and each of its employees shall have entered into the Company's standard form Confidential Information and Invention Assignment Agreement, in substantially the form provided to the Purchasers. -14- 4. 12 SBA MATTERS. The Company shall have executed and delivered to each SBIC Purchaser a Size Status Declaration on SBA Form 480 and an Assurance of Compliance on SBA Form 652, and shall have provided to each such Purchaser information necessary for the preparation of a Portfolio Financing Report on SBA Form 1031. 4.13 MINIMUM INVESTMENT. In the Initial Closing, the Company shall have received an aggregate investment of not less than $8,000,000. 4.14 APPROVAL OF RACOTEK'S BOARD OF DIRECTORS. The assignment of certain technology pursuant to the Intellectual Property and Assets Transfer Agreement between Racotek and the Company of even date herewith shall have been approved by the disinterested members of the Board of Directors of Racotek. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Purchaser contained in Section 3 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed by the Purchasers on or prior to the Closing shall have been performed or complied with in all material respects. 5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 6. MISCELLANEOUS. 6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement. 6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and -15- interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 6.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 6.6 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or ten (10) days after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth on the signature page or EXHIBIT A hereto, or as subsequently modified by written notice, and (a) if to the Company, with a copy to: Glen R. Van Ligten Venture Law Group, A Professional Corporation, 2800 Sand Hill Road Menlo Park, CA 94025 or (b) if to the Purchasers, with a copy to: Stephanie Anagnostou Cooley Godward LLP 3000 Sand Hill Road Building 3, Suite 230 Menlo Park, CA 94025 6.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which each Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 FEES AND EXPENSES. The Company shall pay the reasonable fees and expenses of Cooley Godward LLP, the counsel for JAFCO America Ventures, Inc. (and its affiliates), incurred with respect to this Agreement, the documents referred to herein and the -16- transactions contemplated hereby and thereby, provided such fees and expenses do not exceed $15,000. 6.9 ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or waived only with the written consent of the Company and the holders of at least 66 2/3% of the Common Stock issued or issuable upon conversion of the Stock. Any amendment or waiver effected in accordance with this Section 6.10 shall be binding upon the Purchasers and each transferee of the Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. 6.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.13 ENTIRE AGREEMENT. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements relating to the subject matter hereof existing between the parties hereto are expressly canceled. 6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY -17- SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. 6.15 CONFIDENTIALITY. Each party hereto agrees that, except with the prior written permission of the other party, it shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of Stock purchased hereunder, provided that, in connection with its periodic reports to its partners or shareholders, each Purchaser may, without first obtaining such written consent, make general statements, not containing technical information, regarding the nature and progress of the Company's business. The provisions of this Section 6.15 shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby. 6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that neither Racotek nor any Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of Racotek or any Purchaser shall be liable to any Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Securities. 6.17 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges that Venture Law Group, counsel for the Company, has in the past performed and may continue to perform legal services for certain of the Purchasers in matters unrelated to the transactions described in this Agreement, including the representation of such Purchasers in venture capital financings and other matters. Accordingly, each party to this Agreement hereby (a) acknowledges that they have had an opportunity to ask for information relevant to this disclosure; and (b) gives its informed consent to Venture Law Group's representation of certain of the Purchasers in such unrelated matters and to Venture Law Group's representation of the Company in connection with this Agreement and the transactions contemplated hereby. [Signature Pages Follow] -18- The parties have executed this Series B Preferred Stock Purchase Agreement as of the date first written above. COMPANY: NEXTNET, INC. By: \s\ Issac Shpantzer Isaac Shpantzer, President Address: 11173 Meg Grace Lane Eden Prairie, MN 55344 SIGNATURE PAGE TO SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: SVM STAR VENTURES MANAGEMENTGESELLSCHAFT mbH Nr. 3 & CO. BETEILIGUNGS KG Nr. 2 By: SVM Star Ventures Management- gesellschaft mbH No. 3 By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 SIGNATURE PAGE TO SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: SVE STAR VENTURES ENTERPRISES NO. VII, A GERMAN CIVIL LAW PARTNERSHIP (with limitation of liability) By: SVM Star Ventures Management- gesellschaft mbH No. 3 By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 SIGNATURE PAGE TO SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: STAR SEED ENTERPRISES, A GERMAN CIVIL LAW PARTNERSHIP (with limitation of liability) By: Star-Seed Managementgesellschaft mbH By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 SIGNATURE PAGE TO SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: DOLL TECHNOLOGY INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP By: Doll Technology Investment Management, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 SIGNATURE PAGE TO SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: DOLL TECHNOLOGY AFFILIATES FUND, L.P. By: Doll Technology Investment Management, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 SIGNATURE PAGE TO SERIES B PREFERRED STOCK PURCHASE AGREEMENT PURCHASERS: DOLL TECHNOLOGY SIDE FUND, L.P. By: Doll Technology Investment Management, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 PURCHASERS: DON GREEN By: \s\ Don Green Don Green Address: I Willowbrook Court Petaluma, CA 94954 PURCHASERS: JAFCO Co., Ltd. (Investing Entity) By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures 505 Hamilton Street Suite 310 Palo Alto, CA 94301 PURCHASERS: JAFCO G-6 (A) Investment Enterprise Partnership (Investing Entity) By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures 505 Hamilton Street Suite 310 Palo Alto, CA 94301 PURCHASERS: JAFCO G-6 (B) Investment Enterprise Partnership (Investing Entity) By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures 505 Hamilton Street Suite 310 Palo Alto, CA 94301 PURCHASERS: JAFCO G-7 (A) Investment Enterprise Partnership (Investing Entity) By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures 505 Hamilton Street Suite 310 Palo Alto, CA 94301 PURCHASERS: JAFCO G-7 (B) Investment Enterprise Partnership (Investing Entity) By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures 505 Hamilton Street Suite 310 Palo Alto, CA 94301 PURCHASERS: JAFCO USIT Fund III, L.P. (Investing Entity) By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Its Executive Partner Address: JAFCO America Ventures 505 Hamilton Street Suite 310 Palo Alto, CA 94301 PURCHASERS ____________________________________ Dovrat, Shrem & Co., Ltd. ____________________________________ Horizon Fund Ltd. ____________________________________ Dovrat, Shrem-Skies Fund 92' Ltd. ____________________________________ Dovrat, Shrem-Rainbow Fund, Ltd. ____________________________________ Canada Israel Opportunity Fund L.P. _____________________________________ The Canada-Israel Opportunity Fund II ____________________________________ Dovrat, Shrem Founders Group, Limited Partnership Address: Dovrat, Shrem & Co. Shaul Hamelech Avenue #37 Tel Aviv 64928 ISRAEL EX-7 7 EXHIBIT 7 EXHIBIT 7 NEXTNET, INC. INVESTORS' RIGHTS AGREEMENT September 21, 1998 TABLE OF CONTENTS
Page ---- 1. Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Request for Registration. . . . . . . . . . . . . . . . . . 2 1.3 Company Registration. . . . . . . . . . . . . . . . . . . . 4 1.4 Form S-3 Registration . . . . . . . . . . . . . . . . . . . 4 1.5 Obligations of the Company. . . . . . . . . . . . . . . . . 5 1.6 Furnish Information . . . . . . . . . . . . . . . . . . . . 6 1.7 Expenses of Registration. . . . . . . . . . . . . . . . . . 7 1.8 Underwriting Requirements . . . . . . . . . . . . . . . . . 7 1.9 Delay of Registration . . . . . . . . . . . . . . . . . . . 8 1.10 Indemnification. . . . . . . . . . . . . . . . . . . . . . 8 1.11 Reports Under Securities Exchange Act of 1934. . . . . . .10 1.12 Assignment of Registration Rights. . . . . . . . . . . . .11 1.13 Limitations on Subsequent Registration Rights. . . . . . .11 1.14 "Market Stand-Off" Agreement . . . . . . . . . . . . . . .12 1.15 Termination of Registration Rights . . . . . . . . . . . .12 2. Covenants of the Company. . . . . . . . . . . . . . . . . . . . . .13 2.1 Delivery of Financial Statements. . . . . . . . . . . . . .13 2.2 Inspection. . . . . . . . . . . . . . . . . . . . . . . . .13 2.3 Stock Vesting . . . . . . . . . . . . . . . . . . . . . . .14 2.4 Founder Stock Vesting . . . . . . . . . . . . . . . . . . .14 2.5 Visitation Rights . . . . . . . . . . . . . . . . . . . . .14 2.6 Right of First Offer. . . . . . . . . . . . . . . . . . . .14 2.7 Certain Covenants Relating to SBA Matters . . . . . . . . .16 2.8 Termination of Covenants. . . . . . . . . . . . . . . . . .17 3. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . .17 3.1 Successors and Assigns. . . . . . . . . . . . . . . . . . .17 3.2 Amendments and Waivers. . . . . . . . . . . . . . . . . . .17 3.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . .18 3.4 Severability. . . . . . . . . . . . . . . . . . . . . . . .18 3.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . .18 3.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . .18 3.7 Titles and Subtitles. . . . . . . . . . . . . . . . . . . .18 3.8 Aggregation of Stock. . . . . . . . . . . . . . . . . . . .18 3.9 Addition of Investors . . . . . . . . . . . . . . . . . . .18
-i- NEXTNET, INC. INVESTORS' RIGHTS AGREEMENT This Investors' Rights Agreement (the "AGREEMENT") is made as of the 21st day of September, 1998, by and among NextNet, Inc., a Delaware corporation (the "COMPANY"), Racotek, Inc. ("Racotek"), the investors listed on EXHIBIT A hereto, each of which is herein referred to as an "INVESTOR," and Isaac Shpantzer, Vladi Kelman, and Beverly Waldorf, each of whom is herein referred to as a "FOUNDER". RECITALS The Company and Racotek have entered into a Series A Preferred Stock Purchase Agreement (the "SERIES A PURCHASE AGREEMENT") and the Company and the Investors have entered into a Series B Preferred Stock Purchase Agreement (the "SERIES B PURCHASE AGREEMENT") each of even date herewith, pursuant to which the Company desires to sell to Racotek and the Investors, respectively, and Racotek and the Investors, respectively, desire to purchase from the Company shares of the Company's Series A and Series B Preferred Stock, respectively. A condition to Racotek's and the Investors' obligations under the Purchase Agreements, respectively, is that the Company, Racotek, the Founders and the Investors enter into this Agreement in order to provide Racotek and the Investors with (i) certain rights to register shares of the Company's Common Stock issuable upon conversion of the Series A and Series B Preferred Stock held by them, (ii) certain rights to receive or inspect information pertaining to the Company, and (iii) a right of first offer with respect to certain issuances by the Company of its securities. The Company and the Founders each desire to induce Racotek and the Investors to purchase shares of Series A and Series B Preferred Stock, respectively, pursuant to the Series A and Series B Purchase Agreements by agreeing to the terms and conditions set forth herein. AGREEMENT The parties hereby agree as follows: 1. REGISTRATION RIGHTS. The Company, Racotek and the Investors covenant and agree as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The terms "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "REGISTRABLE SECURITIES" means (i) the shares of Common Stock issuable or issued upon conversion of the Series A Preferred Stock issued pursuant to the Series A Purchase Agreement, (ii) the shares of Common Stock issuable or issued upon conversion of the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement, (iii) the shares of Common Stock issued to the Founders (the "FOUNDERS' STOCK"), PROVIDED, HOWEVER, that for the purposes of Section 1.2, 1.4 or 1.13 the Founders' Stock shall not be deemed Registrable Securities and the Founders shall not be deemed Holders, and (iv) any other shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares listed in (i) and (ii); PROVIDED, HOWEVER, that the foregoing definition shall exclude in all cases any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned. Notwithstanding the foregoing, Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale; (c) The number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities; (d) The term "HOLDER" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.12 of this Agreement; (e) The term "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any successor form under the Securities Act; (f) The term "SEC" means the Securities and Exchange Commission; and (g) The term "QUALIFIED IPO" means the initial public offering by the Company of shares of its Common Stock; provided that all shares of the Company's Preferred Stock are converted into Common Stock prior to or in connection with such offering. 1.2 REQUEST FOR REGISTRATION. (a) If the Company shall receive at any time after six (6) months after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145 transaction), a written request from the Holders of at least 66 2/3% of the Registrable Securities then outstanding that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities with an anticipated aggregate offering price, net of underwriting discounts and commissions, exceeding $15,000,000, then the Company shall, -2- within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b), use its best efforts to effect as soon as practicable, and in any event within 60 days of the receipt of such request, the registration under the Securities Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.3. (b) If the Holders initiating the registration request hereunder ("INITIATING HOLDERS") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter will be selected by a majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.5(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; PROVIDED, HOWEVER, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. (c) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; PROVIDED, HOWEVER, that the Company may not utilize this right more than twice in any twelve-month period. (d) In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.2: (i) After the Company has effected two (2) registrations pursuant to this Section 1.2 and such registrations have been declared or ordered effective; (ii) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one -3- hundred eighty (180) days after the effective date of, a registration subject to Section 1.3 hereof; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iii) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 1.4 below. 1.3 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan or a transaction covered by Rule 145 under the Securities Act, a registration in which the only stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered, or any registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.3, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders of not less than fifty percent (50%) of the Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 90 days after receipt of such written notice from the Company; PROVIDED, HOWEVER, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.4: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $500,000; (iii) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the -4- Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 90 days after receipt of the request of the Holder or Holders under this Section 1.4; PROVIDED, HOWEVER, that the Company shall not utilize this right more than once in any twelve month period; (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one registration on Form S-3 for the Holders pursuant to this Section 1.4; (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; or (vi) during the period ending one hundred eighty (180) days after the effective date of a registration statement subject to Section 1.3. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 1.2 or 1.3, respectively. 1.5 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days. The Company shall not be required to file, cause to become effective or maintain the effectiveness of any registration statement that contemplates a distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for up to one hundred twenty (120) days. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, PROVIDED that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. -5- (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, such obligation to continue for one hundred twenty (120) days. (g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. (i) Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.6 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. The Company shall have no obligation with respect to any registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement if, as a result of the application of the preceding sentence, the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's -6- obligation to initiate such registration as specified in subsection 1.2(a) or subsection 1.4(b)(2), whichever is applicable. 1.7 EXPENSES OF REGISTRATION. (a) DEMAND REGISTRATION. All expenses other than stock transfer taxes and underwriting discounts and commissions incurred in connection with registrations, filings or qualifications of Registrable Securities pursuant to Section 1.2 (which right may be assigned pursuant to Section 1.12), including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and reasonable fees and disbursements of a single counsel for the Holders not to exceed $15,000 shall be borne by the Company; PROVIDED, HOWEVER, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2; provided further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2. (b) COMPANY REGISTRATION. All expenses other than stock transfer taxes and underwriting discounts and commissions incurred in connection with registrations, filings or qualifications of Registrable Securities pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.12), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and reasonable fees and disbursements of a single counsel for the Holders not to exceed $15,000 shall be borne by the Company. (c) REGISTRATION ON FORM S-3. All expenses incurred in connection with a registration requested pursuant to Section 1.4, including (without limitation) all registration, filing, qualification, printers' and accounting fees and any underwriters' discounts or commissions associated with Registrable Securities and reasonable fees and disbursements of a single counsel for the Holders not to exceed $15,000 shall be borne by the Company. 1.8 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities sold -7- other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders) but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below twenty percent (20%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities, in which case, the selling stockholders may be excluded if the underwriters make the determination described above and no other stockholder's securities are included or (ii) any securities held by a Founder be included if any securities held by any other selling Holder are excluded. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "SELLING STOCKHOLDER," and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder," as defined in this sentence. 1.9 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, each of its directors or general partners, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; -8- and the Company will pay to each such Holder, each of its directors or general partners, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection 1.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to any Holder, underwriter or controlling person for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action, PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; PROVIDED, that in no event shall any indemnity under this subsection 1.10(b) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the -9- indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10. (d) If the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations; PROVIDED, that in no event shall any contribution by a Holder under this Subsection 1.10(d) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by the Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by claimant or plaintiff to such Indemnified party of a release from all liability in respect to such claim or litigation. 1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to use its best efforts to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to -10- the general public so long as the Company remains subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee who acquires at least 125,000 shares of such securities or to partners; which is an affiliated partnership managed by the same manager or managing partner or management company, or managed by an entity controlling, controlled by, or under common control with, such manager or managing partner or management company; who is a parent, child or spouse of the Holder; or which is the Holder's estate, PROVIDED the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and PROVIDED, FURTHER, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under Section 1. 1.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders -11- of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a) or within one hundred twenty (120) days of the effective date of any registration effected pursuant to Section 1.2. 1.14 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that, during the period of duration (up to, but not exceeding, 180 days) specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Securities Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration; PROVIDED, HOWEVER, that: (a) such agreement shall be applicable only with respect to the first such registration statement of the Company which covers Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (b) all officers and directors of the Company, all one-percent securityholders, and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period, and each Holder agrees that, if so requested, such Holder will execute an agreement in the form provided by the underwriter containing terms which are essentially consistent with the provisions of this Section 1.14. Notwithstanding the foregoing, the obligations described in this Section 1.14 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or a registration relating solely to an SEC Rule 145 transaction on Form S-4 or similar forms which may be promulgated in the future. 1.15 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to exercise any right provided for in this Section 1 after the earlier of (i) four (4) years following the consummation of a Qualified IPO, or (ii) such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder's shares during a three (3)-month period without registration; provided that (i) the Company has completed its IPO and is subject to the Exchange Act provisions and (ii) such Holder (together with its affiliates) holds -12- less than one percent (1%) of the Company's outstanding Common Stock (on an as converted basis). 2. COVENANTS OF THE COMPANY. 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each Holder of at least 125,000 shares of Registrable Securities (other than a Holder reasonably deemed by the Company to be a competitor of the Company): (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder's equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("GAAP"), and audited and certified by an independent public accounting firm of nationally recognized standing selected by the Company; (b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the three (3) quarters of each fiscal year of the Company, an unaudited profit or loss statement, a statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter; (c) within thirty (30) days of the end of each month, a monthly report in a form agreed to by the Board of Directors; (d) as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, an updated list of all stockholders of the Company that includes the name of each stockholder and the number and class of shares held by each stockholder, and, as soon as prepared, any other budgets or revised budgets prepared by the Company; and (e) with respect to the financial statements called for in subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company and certifying that such financials were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment, provided that the foregoing shall not restrict the right of the Company to change its accounting principles consistent with GAAP, if the Board of Directors determines that it is in the best interest of the Company to do so. 2.2 INSPECTION. The Company shall permit each Holder of at least 125,000 shares of Registrable Securities (except for a Holder reasonably deemed by the Company to be a competitor of the Company), at such Holder's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the -13- Investor; PROVIDED, HOWEVER, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. 2.3 STOCK VESTING. Unless approved by the Board of Directors, all stock options and other stock equivalents issued after the date of this Agreement to employees, directors, consultants and other service providers shall be subject to vesting as follows: (a) twenty-five percent (25%) of such stock shall vest at the end of the first year following the earlier of the date of issuance or such person's services commencement date with the company, and (b) seventy-five percent (75%) of such stock shall vest monthly over the remaining three (3) years. With respect to any shares of stock purchased by any such person, the Company's repurchase option shall provide that upon such person's termination of employment or service with the Company, with or without cause, the Company or its assignee (to the extent permissible under applicable securities laws and other laws) shall have the option to purchase at cost any unvested shares of stock held by such person. 2.4 FOUNDER STOCK VESTING. All stock options and other stock equivalents issued to Beverly Waldorf and Isaac Shpantzer as of the date of this Agreement shall be subject to vesting as follows: (a) 70.83% shall initially be subject to a repurchase option by the Company and (b) 1/34th of such stock shall vest monthly thereafter. All stock options and other stock equivalents issued to Vladi Kelman, Eric Dunn, Stuart Froelich, Kerry Shore and Tony Klein as of the date of this Agreement shall be subject to vesting as follows: (a) 83.33% shall initially be subject to a repurchase option by the Company and (b) 1/40th of such stock shall vest monthly thereafter. With respect to any shares of stock purchased by any such person, the Company's repurchase option shall provide that upon such person's termination of employment or service with the Company, with or without cause, the Company or its assignee (to the extent permissible under applicable securities laws and other laws) shall have the option to purchase at cost any unvested shares of stock held by such person. 2.5 VISITATION RIGHTS. The Company shall allow one representative designated by the Star Ventures (or its affiliates) to attend all meetings of the Company's Board of Directors in a nonvoting capacity, and in connection therewith, the Company shall give such representative copies of all notices, minutes, consents and other materials, financial or otherwise, which the Company provides to its Board of Directors; provided, however, that the Company reserves the right to exclude such representative from access to any material or meeting or portion thereof if the Company believes upon advice of counsel that such exclusion is reasonably necessary to preserve the attorney-client privilege, to protect highly confidential proprietary information or for other similar reasons. 2.6 RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in this Section 2.3, the Company hereby grants to each Major Investor (as hereinafter defined) a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.3, a "MAJOR INVESTOR" shall mean any person who holds at least 125,000 shares of the Series A and/or Series B Preferred Stock (or the Common Stock issued upon conversion thereof) issued pursuant to the Purchase Agreement. For purposes of this -14- Section 2.3, Major Investor includes any general partners and affiliates of a Major Investor. A Major Investor who chooses to exercise the right of first offer may designate as purchasers under such right itself or its partners or affiliates in such proportions as it deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, Preferred Stock, Common Stock or other security of the Company ("SHARES"), the Company shall first make an offering of such Shares to each Major Investor in accordance with the following provisions: (a) The Company shall deliver a notice by certified mail ("NOTICE") to the Major Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) Within 15 calendar days after delivery of the Notice, the Major Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion and exercise of all convertible or exercisable securities then held, by such Major Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities). The Company shall promptly, in writing, inform each Major Investor that purchases all the shares available to it (each, a "FULLY-EXERCISING INVESTOR") of any other Major Investor's failure to do likewise. During the ten (10)-day period commencing after receipt of such information, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares for which Major Investors were entitled to subscribe but which were not subscribed for by the Major Investors that is equal to the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion and exercise of all convertible or exercisable securities then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities). (c) The Company may, during the 45-day period following the expiration of the period provided in subsection 2.3(b) hereof, offer the remaining unsubscribed portion of the Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 60 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Major Investors in accordance herewith. (d) The right of first offer in this paragraph 2.3 shall not be applicable (i) to the issuance or sale of Common Stock (or options therefor) to employees, consultants and directors, pursuant to plans or agreements approved by the Board of Directors for the primary purpose of soliciting or retaining their services, (ii) to or after consummation of a Qualified IPO, (iii) to the issuance of securities pursuant to the conversion or exercise of convertible or -15- exercisable securities so long as this right of first offers in this Section 2 applied with respect to the initial sale or grant by the Company of such security, (iv) to the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (v) to the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, or similar transactions approved by the Board, (vi) to the issuance pursuant to currently outstanding options, warrants, notes or other rights to acquire securities of the Company or (vii) to issuances of securities in connection with stock splits, stock dividends or like transactions; (viii) to the issuance or sale of the Series B Preferred Stock pursuant to the Purchase Agreement. (e) ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Right of First Refusal pursuant to this Section 2.6 may be assigned (but only with all related obligations) by a holder to a transferee or assignee who acquires at least 125,000 shares of such securities or to partners; which is an affiliated partnership managed by the same manager or managing partner or management company, or managed by an entity controlling, controlled by, or under common control with, such manager or managing partner or management company; who is a parent, child or spouse of the holder; or which is the Holder's estate, PROVIDED the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and PROVIDED, FURTHER, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. For the purposes of determining the number of shares held by a transferee or assignee, the holders of transferees and assignees of a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquired Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under Section 2.6. 2.7 CERTAIN COVENANTS RELATING TO SBA MATTERS. (a) USE OF PROCEEDS. The Company intends to use the proceeds from the sale of the shares of Series B Preferred Stock of the Company to the Investors for general purposes including working capital, product development, capital investments and expansion of distribution and marketing capabilities. (b) COMPLIANCE WITH REGULATIONS. The Company agrees to use reasonable efforts to complete any forms and provide any information required by Investor in connection with its status as a small business investment company, PROVIDED, HOWEVER, that any material expenses incurred by the Company in completing such forms or providing such information shall be promptly reimbursed by Investor. -16- (c) POTENTIAL NON-COMPLIANCE WITH REGULATIONS. To the extent that Investor discovers that it does not, or will not in the near future, comply with the regulations of the SBIA because of its holdings in the Company, the Company agrees to cooperate with Investor and use reasonable efforts to enter into transactions such that after such transactions, Investor is in compliance with the SBIA and the regulations thereunder and the Company, Investor and the other purchasers of Series B Preferred Stock are in as similar an economic position relative to one another as is reasonably practicable with respect to Investor's investment in the Company, subject to any necessary approvals by the Company's Board of Directors and shareholders and by any third parties. 2.8 TERMINATION OF COVENANTS. (a) The covenants set forth in Sections 2.1 through Section 2.7 shall terminate as to each Holder and be of no further force or effect (i) immediately prior to the consummation of a Qualified IPO, or (ii) when the Company shall sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, provided that this subsection (ii) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Corporation. (b) The covenants set forth in Sections 2.1, 2.2 and 2.4 shall terminate as to each Holder and be of no further force or effect when the Company first becomes subject to the periodic reporting requirements of Sections 13 or 15(d) of the Exchange Act, if this occurs earlier than the events described in Section 2.4(a) above. 3. MISCELLANEOUS. 3.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Agreement, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties (including transferees of any of the Series A or Series B Preferred Stock or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or waived only with the written consent of the Company and the holders of at least 66 2/3% of the Registrable Securities then outstanding, not including the Founders' Stock; provided, that if such amendment has the effect of affecting the Founders' Stock (i) in a manner different than securities issued to the Investors and (ii) in a manner adverse to the interests of the holders of the Founders' Stock, then such amendment shall require the consent of the holder or holders of a majority of the Founders' Stock. Any amendment or waiver effected in accordance -17- with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. 3.3 NOTICES. Unless otherwise provided, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or 10 days after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth on the signature page on EXHIBIT A hereto or as subsequently modified by written notice. 3.4 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 3.5 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of laws. 3.6 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.7 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.8 AGGREGATION OF STOCK. All shares of the Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.9 ADDITION OF INVESTORS. Notwithstanding anything to the contrary contained herein, if the Company shall issue additional shares of its Series B Preferred Stock pursuant to the Purchase Agreement, any purchaser of such shares of Series B Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement. In such event, such purchaser shall be deemed a "Holder", such shares purchased shall be deemed "Series B Preferred Stock", and the shares of Common Stock issuable or issued upon conversion of such shares of Series B Preferred Stock shall be deemed to be "Registrable Securities", for all purposes of this Agreement. [Signature Page Follows] -18- The parties have executed this Investors' Rights Agreement as of the date first above written. COMPANY: NextNet, Inc. By: /s/ Isaac Shpantzer ------------------------------ Isaac Shpantzer, President Address: 11173 Meg Grace Lane Eden Prairie, MN 55344 SIGNATURE PAGE TO INVESTOR'S RIGHTS AGREEMENT FOUNDERS: /s/ Isaac Shpantzer - --------------------------------- Isaac Shpantzer /s/ Vladimir Kelman - --------------------------------- Vladimir Kelman /s/ Beverly Waldorf - --------------------------------- Beverly Waldorf SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT RACOTEK, INC. By: /s/ Mike Fabiaschi --------------------------------- Name: Mike Fabiaschi Title: President & CEO Address: 7301 Ohms Lane Suite 200 Minneapolis, MN 55439 INVESTORS: DOLL TECHNOLOGY INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP By: Doll Technology Investment Managment, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT INVESTORS: DOLL TECHNOLOGY AFFILIATES FUND, L.P. By: Doll Technology Investment Managment, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT INVESTORS: DOLL TECHNOLOGY SIDE FUND, L.P. By: Doll Technology Investment Managment, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 INVESTORS: SVM STAR VENTURES MANAGEMENTGESELLSCHAFT MBH NR. 3 & CO. BETEILIGUNGS KG NR. 2 By: SVM Star Ventures Management- gesellschaft mbH No. 3 By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 INVESTORS: SVE STAR VENTURES ENTERPRISES NO. VII, A GERMAN CIVIL LAW PARTNERSHIP (with limitation of liability) By: SVM Star Ventures Management- gesellschaft mbH No. 3 By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 INVESTORS: STAR SEED ENTERPRISES, A GERMAN CIVIL LAW PARTNERSHIP (with limitation of liability) By: Star-Seed Managementgesellschaft mbH By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 INVESTORS: JAFCO Co., Ltd. By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Avenue Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-6 (A) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Avenue Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-6 (B) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Avenue Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-7 (A) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Avenue Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-7 (B) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Avenue Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO USIT Fund III, L.P. By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Its Executive Partner Address: JAFCO America Ventures, Inc. 505 Hamilton Avenue Suite 310 Palo Alto, CA 94301 INVESTORS: DON GREEN By: \s\ Don Green Don Green Address: 1 Willowbrook Court Petaluma, CA 94954 INVESTORS ____________________________________ Dovrat, Shrem & Co., Ltd. ____________________________________ Horizon Fund Ltd. ____________________________________ Dovrat, Shrem-Skies Fund 92' Ltd. ____________________________________ Dovrat, Shrem-Rainbow Fund, Ltd. ____________________________________ Canada Israel Opportunity Fund L.P. _____________________________________ The Canada-Israel Opportunity Fund II ____________________________________ Dovrat, Shrem Founders Group, Limited Partnership Address: Dovrat, Shrem & Co. Shaul Hamelech Avenue #37 Tel Aviv 64928 ISRAEL EX-8 8 EXHIBIT 8 EXHIBIT 8 NEXTNET, INC. RIGHT OF FIRST REFUSAL AGREEMENT This Right of First Refusal Agreement (the "AGREEMENT") is made and entered into as of September 21, 1998 by and among Racotek, Inc. ("RACOTEK"), NextNet, Inc., a Delaware corporation (the "COMPANY"), and the holders of Series B Preferred Stock of the Company listed on EXHIBIT A to this Agreement (each a "SERIES B PURCHASER" and together with Racotek, the "INVESTORS"). RECITALS The Company and Racotek have entered into a Series A Preferred Stock Purchase Agreement (the "SERIES A PURCHASE AGREEMENT"), of even date herewith, pursuant to which the Company desires to sell to Racotek and Racotek desires to purchase from the Company shares of the Company's Series A Preferred Stock. The Company and the Series B Purchasers have entered into a Series B Preferred Stock Purchase Agreement (the "SERIES B PURCHASE AGREEMENT"), of even date herewith, pursuant to which the Company desires to sell to the Series B Purchasers and the Series B Purchasers desire to purchase from the Company shares of the Company's Series B Preferred Stock. A condition to Racotek's obligations under the Series A Purchase Agreement and to the Series B Purchasers' obligations under the Series B Purchase Agreement is that the Company, Racotek and the Series B Purchasers enter into this Agreement in order to provide the Investors the opportunity to purchase, upon the terms and conditions set forth in this Agreement, shares of the Company's Preferred Stock or Common Stock issued upon conversion of such Preferred Stock (the "SHARES") in the event that an Investor proposes to sell or transfer such Shares. AGREEMENT The parties agree as follows: 1. COMPANY RIGHT OF FIRST REFUSAL. Before any Shares held by an Investor or any transferee of an Investor (either being referred to herein as the "HOLDER") may be sold or otherwise transferred to any person or entity (each a "PROPOSED TRANSFEREE"), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 1 (the "RIGHT OF FIRST REFUSAL"). 1.1 NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company and to each Investor a written notice stating: (A) the Holder's bona fide intention to sell or otherwise transfer such Shares; (B) the name of each Proposed Transferee; (C) the number of Shares to be transferred to each Proposed Transferee; and (D) the terms and conditions of each proposed sale or transfer (the "NOTICE"). The Holder shall offer the Shares at the same price (the "OFFERED PRICE") and upon the same terms (or terms as similar as reasonably possible) to the Company or its assignee(s). 1.2 EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within 30 days after receipt of the Notice or for such period of time as required so that exercise of the Right of First Refusal does not constitute a significant redemption under Section 1202(c)(3)(b) of the Internal Revenue Code of 1986, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with Subsection 1.3 below. 1.3 PURCHASE PRICE. The purchase price ("PURCHASE PRICE") for the Shares purchased by the Company or its assignee(s) under this Section 1 shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. 1.4 PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. 2. INVESTORS' RIGHT OF FIRST REFUSAL. 2.1 ASSIGNMENT OF COMPANY RIGHT OF FIRST REFUSAL. The Company agrees that in the event that the Company declines to exercise in full the Right of First Refusal set forth in Section 1, the Company will provide each Investor with notice (the "COMPANY NOTICE") of such determination at least fifteen (15) days after the end of the period in which the Right of First Refusal expires pursuant to Section 1.2. Each Investor shall then have the right to submit, prior to the end of such period, notice of its irrevocable commitment to exercise such Right of First Refusal within thirty (30) days after receipt of the Company Notice. As the Company's assignee, each Investor shall have the right to exercise the Right of First Refusal on a pro rata basis which shall be determined by the number of shares of Common Stock of the Company issued or issuable upon conversion of Preferred Stock, or Common Stock received in connection with any stock dividend, stock split or other reclassification thereof (the "CONVERSION SHARES") held by such Investor relative to the aggregate number of Conversion Shares held by all Investors. If any Investors do not exercise their right of first refusal, the Shares that would otherwise be allocated to such non-exercising Investors shall be allocated to each exercising Investor on a pro-rata basis (based upon the number of Conversion Shares held by such exercising Investor relative to the aggregate number of Conversion Shares held by all such exercising Investors). Upon expiration or exercise of the Right of First Refusal, the Company will provide notice to all Investors as to whether or not the Right of First Refusal has been or will be exercised by the Company or the Investors. -2- 2.2 NO ADVERSE EFFECT. The exercise or non-exercise of the Right of First Refusal of the Investors hereunder shall not adversely affect their rights to exercise the Right of First Refusal in the event of subsequent proposed sales of Shares by an Investor. 2.3 HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in Section 1 or the Investors as provided in this Section 2, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 60 days after the date of the Company Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Agreement shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, or if the Holder proposes to change the price or other terms to make them more favorable to the Proposed Transferee, a new Notice shall be given to the Company, and the Company and/or its assignees and the Investors shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. 3. TRANSFER RESTRICTIONS. 3.1 RIGHTS UPON PROHIBITED TRANSFERS. Any attempt by an Investor to transfer Shares in violation of this Agreement shall be void and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such Shares without the written consent of the holders of a majority of the Conversion Shares. In addition, the Company may proceed to protect and enforce its rights by suit in equity or by action at law, whether for specific performance of any term certified in this Agreement, or for an injunction agreement to breach any such term or performance or the exercise of any power granted in this Agreement, or to enforce any other legal or equitable right of the Company to rule one or more of such actions. 3.2 LEGENDED CERTIFICATES. Each certificate representing shares of the Company owned by any Investor shall bear the following legend: "THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN RIGHT OF FIRST REFUSAL AGREEMENT BY AND BETWEEN THE STOCKHOLDER, THE CORPORATION AND CERTAIN HOLDERS OF PREFERRED STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION." -3- 4. TERMINATION. 4.1 TERMINATION EVENTS. Except as otherwise provided herein, this Agreement shall terminate upon the earliest to occur of any one of the following events (and shall not apply to any transfer by Racotek in connection with any such event): (a) The liquidation, dissolution or indefinite cessation of the business operations of the Company; (b) The execution by the Company of a general assignment for the benefit of creditors or the appointment of a receiver or trustee to take possession of the property and assets of the Company; (c) The consummation of the Company's initial public offering of shares of its Common Stock; provided that all shares of the Company's Preferred Stock are converted into Common Stock prior to or in connection with such offering; or (d) The sale, conveyance, disposal, or encumbrance of all or substantially all of the Company's property or business or the Company's merger into or consolidation with any other corporation (other than a wholly-owned subsidiary corporation) or if the Company effects any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, PROVIDED that this Section 4.1(d) shall not apply a merger effected exclusively for the purpose of changing the domicile of the Company. 4.2 REMOVAL OF LEGEND. At any time after the termination of this Agreement in accordance with Section 4.1, any holder of a stock certificate legended pursuant to Section 3.2 may surrender such certificate to the Company for removal of such legend, and the Company will duly reissue a new certificate without the legend. 5. MISCELLANEOUS. 5.1 PERMITTED TRANSFERS. Neither the Company nor its assignees shall have a Right of First Refusal, pursuant to this Agreement, to purchase shares transferred by an Investor which is a partnership to its partners, former partners or an affiliated partnership managed by the same manager or managing partner or management company, or managed by an entity controlling, controlled by, or under common control with, such manager or managing partner or management company in accordance with partnership interests. 5.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, the parties' respective successors, assigns and legal representatives. 5.3 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or waived only with the written consent of the Company and the holders of at least 66 2/3% of the Series A and Series B Preferred Stock. Any amendment or waiver effected in -4- accordance with this Section 5.3 shall be binding upon the Company, the holders of Series A Preferred Stock and the holders of the Series B Preferred Stock, and each of their respective successors and assigns. 5.4 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient on the date of delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth below on the signature page or on EXHIBIT A hereto, or as subsequently modified by written notice. 5.5 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 5.6 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. 5.7 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 5.8 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 5.9 ADDITION OF INVESTORS. Notwithstanding anything to the contrary contained herein, if the Company shall issue additional shares of its Series B Preferred Stock pursuant to the Series B Purchase Agreement, any purchaser of such shares of Series B Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and shall be deemed an "Investor" hereunder. [Signature Page Follows] -5- The parties have executed this Agreement as of the date first written above. COMPANY: NEXTNET, INC. By: \s\ Issac Shpantez Isaac Shpantzer, President Address: 11173 Meg Grace Lane Eden Prairie, MN 55344 RACOTEK, INC. By: \s\ Mike Fabiaschi Name: Mike Fabiaschi Title: President and CEO Address: 7301 Ohms Lane Suite 200 Minneapolis, MN 55439 INVESTORS: SVM STAR VENTURES MANAGEMENTGESELLSCHAFT mbH Nr. 3 & CO. BETEILIGUNGS KG Nr. 2 By: SVM Star Ventures Management- gesellschaft mbH No. 3 By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 INVESTORS: SVE STAR VENTURES ENTERPRISES NO. VII, A GERMAN CIVIL LAW PARTNERSHIP (with limitation of liability) By: SVM Star Ventures Management- gesellschaft mbH No. 3 By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 INVESTORS: STAR SEED ENTERPRISES, A GERMAN CIVIL LAW PARTNERSHIP (with limitation of liability) By: Star-Seed Managementgesellschaft mbH By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 INVESTORS: DOLL TECHNOLOGY INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP By: Doll Technology Investment Managment, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 INVESTORS: DOLL TECHNOLOGY AFFILIATES FUND, L.P. By: Doll Technology Investment Managment, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 INVESTORS: DOLL TECHNOLOGY SIDE FUND, L.P. By: Doll Technology Investment Managment, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 INVESTORS: JAFCO Co., Ltd. By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-6 (A) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-6 (B) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-7 (A) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-7 (B) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO USIT Fund III, L.P. By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Its Executive Partner Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: DON GREEN By: \s\ Don Green Don Green Address: 1 Willowbrook Court Petaluma, CA 94954 INVESTORS: ____________________________________ Dovrat, Shrem & Co., Ltd. ____________________________________ Horizon Fund Ltd. ____________________________________ Dovrat, Shrem-Skies Fund 92' Ltd. ____________________________________ Dovrat, Shrem-Rainbow Fund, Ltd. ____________________________________ Canada Israel Opportunity Fund L.P. _____________________________________ The Canada-Israel Opportunity Fund II ____________________________________ Dovrat, Shrem Founders Group, Limited Partnership Address: Dovrat, Shrem & Co. Shaul Hamelech Avenue #37 Tel Aviv 64928 ISRAEL EX-9 9 EXHIBIT 9 EXHIBIT 9 NEXTNET, INC. VOTING AGREEMENT This Voting Agreement (the "AGREEMENT") is made as of the 21st day of September, 1998, by and among NextNet, Inc., a Delaware corporation (the "COMPANY") Racotek, Inc., a Delaware corporation ("RACOTEK"), Isaac Shpantzer, Vladi Kelman, Beverly Waldorf, Eric Dunn, Stuart Froelich, Kerry Shore and Tony Klein (the "FOUNDERS"), and the holders of shares of Series B Preferred Stock listed on EXHIBIT A (collectively, the "INVESTORS" and individually, the "INVESTOR"). RECITALS The Company and the Investors have entered into a Series B Preferred Stock Purchase Agreement (the "SERIES B PURCHASE AGREEMENT") of even date herewith pursuant to which the Company desires to sell to the Investors and the Investors desire to purchase from the Company shares of the Company's Series B Preferred Stock. In addition, the Company and Racotek have entered into a Series A Preferred Stock Purchase Agreement (the "SERIES A PURCHASE AGREEMENT") of even date herewith pursuant to which the Company desires to sell to Racotek and Racotek desires to purchase from the Company shares of the Company's Series A Preferred Stock. A condition to the Investors' obligations under the Series B Purchase Agreement and a condition to Racotek's obligations under the Series A Purchase Agreement is that the Company, Racotek the Founders and the Investors enter into this Agreement for the purpose of setting forth the terms and conditions pursuant to which Racotek, the Investors and the Founders shall vote their shares of the Company's voting stock in favor of certain designees to the Company's Board of Directors. The Company's Amended and Restated Certificate of Incorporation provides as follows: the holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Company, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. In addition, so long as twenty five percent (25%) of the number of shares of Series B Preferred Stock remain outstanding and the total number of outstanding shares of capital stock held by the holders of Series B Preferred Stock represents at least fifteen percent (15%) of the Company's then outstanding capital stock, the holders of the Series B Preferred Stock shall be entitled, voting together as a separate class, to elect two (2) directors of the Company at each annual election of directors. From and after the date that less than twenty five percent (25%) of the number of shares of Series B Preferred Stock remain outstanding or the total number of outstanding shares of capital stock held by the holders of Series B Preferred Stock represents less than fifteen percent (15%) of the Company's then outstanding capital stock, the holders of Series B Preferred Stock shall be entitled, voting together as a separate class, to elect one director of the Company at each annual election of directors (the "SERIES B DIRECTORS"). As long as twenty-five percent (25%) of the number of shares of Series A Preferred Stock remain outstanding and the number of then outstanding shares of Series A Preferred Stock represents greater than fifteen percent (15%) of the Company's then outstanding capital stock, the holders of Series A Preferred Stock shall be entitled, voting together as a separate class, to elect one (1) director of the Company at each annual election of director (the "SERIES A DIRECTOR"). The holders of Common Stock shall be entitled, voting together as a separate class, to elect two (2) directors (the "COMMON DIRECTORS") of the Company at each annual meeting of directors. The holders of Preferred Stock and Common Stock voting together as a single class shall have the right to elect any remaining directors (the "INDEPENDENT DIRECTORS"). The Company, Racotek, the Investors and the Founders each desire to facilitate the voting arrangements set forth in this Agreement, and the sale and purchase of shares of Series B Preferred Stock to the Investors pursuant to the Series B Purchase Agreement and the sale and purchase of shares of Series A Preferred Stock to Racotek pursuant to the Series A Purchase Agreement, by agreeing to the terms and conditions set forth herein. AGREEMENT The parties agree as follows: 1. ELECTION OF DIRECTORS. 1.1 BOARD REPRESENTATION. Until the date on which less than twenty five percent (25%) of the number of Series B Preferred Stock remain outstanding or the Investors hold less than fifteen percent (15%) of the Company's then outstanding capital stock (not including any capital stock issuable upon exercise of outstanding options or warrants of the Company) (the "THRESHOLD DATE"), the Investors agree to vote or act with respect to their shares of Series B Preferred Stock so as to elect as a Series B Director an individual designated by JAFCO America Ventures, Inc. (or its affiliates) (the "JAFCO ENTITIES"), the designee of which shall be Barry Schiffman. Until the Threshold Date, the Investors agree to vote or act with respect to their shares so as to elect as a Series B Director an individual designated by Doll Capital Management (the "DOLL CAPITAL ENTITIES"), the designee of which shall be Dixon Doll. From and after the Threshold Date, the Investors agree to vote or act with respect to their shares of Series B Preferred Stock so as to elect as a Series B Director, an individual designated by the JAFCO Entities. During the term of this Agreement, the Founders agree to vote or act with respect to their shares of Common Stock so as to elect the Company's then-current Chief Executive Officer as a Common Director; PROVIDED, HOWEVER, that until such time as a Chief Executive Officer is appointed, the Founders agree to vote or act with respect to their shares of Common Stock so as to elect Vladimir Kelman as a Common Director. During the term of this Agreement, the Founders agree to vote or act with respect to their shares of Common Stock so as to elect a designee of the holders of a majority of the outstanding shares of Common Stock as a Common Director, the designee of which shall be Isaac Shpantzer. Racotek, as the sole holder of Series A Preferred Stock, agrees to elect Joseph Costello as the Series A Director. During the -2- term of this Agreement, the parties to this Agreement agree to vote or act with respect to their shares so as to elect as the Independent Directors individuals with relevant experience in the Company's industry, which persons shall be unanimously designated by the Company's Board of Directors, one of which shall initially be Don Green. However, if the JAFCO Entities, the Doll Capital Entities, the Founders or Racotek designate a person to serve as a director other than Barry Schiffman, Dixon Doll, Isaac Shpantzer or Joseph Costello, as the case may be, then the person so designated shall be subject to the reasonable approval of a majority of the directors of the Company then serving in such capacity, which directors shall not include the director or directors of the Company that is, or was, serving as the previous designee of the JAFCO Entities, the Doll Capital Entities, the Founders or Racotek on the Company's Board of Directors, as the case may be. 1.2 APPOINTMENT OF DIRECTORS. In the event of the resignation, death, removal or disqualification of a director selected by the JAFCO Entities, the Doll Capital Entities, the Founders or Racotek, as the case may be, the JAFCO Entities, the Doll Capital Entities, the Founders or Racotek, as the case may be, shall promptly nominate a new director, and, after written notice of the nomination has been given by the JAFCO Entities, the Doll Capital Entities, the Founders and/or Racotek, as the case may be, to the other parties (and, with respect to a nominee designated by the JAFCO Entities, the Doll Capital Entities, the Founders and/or Racotek, such nominee has been approved by the Company's directors as provided in Section 1.1 above), each Investor, Founder and Racotek shall vote its shares of capital stock of the Company to elect such nominee to the Board of Directors as provided in Section 1.1. 1.3 REMOVAL. The JAFCO Entities, the Doll Capital Entities, the Founders or Racotek, as the case may be, may remove its designated director at any time and from time to time, with or without cause (subject to the Bylaws of the Company as in effect from time to time and any requirements of law), in their sole discretion, and after written notice to each of the parties hereto of the new nominee to replace such director (and, with respect to a nominee of the JAFCO Entities, the Doll Capital Entities, the Founder and/or Racotek, after such nominee has been approved by the Company's directors in accordance with Section 1.1 above), each Investor, Founder and Racotek shall promptly vote its shares of capital stock of the Company to elect such nominee to the Board of Directors as provided in Section 1.1. 2. RACOTEK AGREEMENT TO VOTE. During the term of this Agreement and unless otherwise provided in the Company's Amended and Restated Certificate of Incorporation (the "CERTIFICATE"), in any Change of Control Transaction, as such term is defined below, Racotek agrees to vote the shares of the Company's capital stock now or hereafter owned by it to approve or not to approve such Change of Control Transaction in the same manner and in the same proportion as the holders of 66 2/3% of the Company's outstanding shares of capital stock not held by Racotek, in the aggregate, voted their shares on such matter. For purposes of this Section 2, a "CHANGE OF CONTROL TRANSACTION" shall mean: (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, or transfer of outstanding equity shares, but excluding any merger effected exclusively for the purpose of changing the domicile of the Company); or (ii) a sale of all or substantially all of the assets of the Company, UNLESS the -3- Company's stockholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Company's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity in approximately the same relative percentages after such acquisition or sale as before such acquisition or sale. Notwithstanding the foregoing, Racotek shall not be obligated to vote the securities of the Company owned by it in favor of a Change of Control Transaction in the manner required by this Section 2 UNLESS the Board of Directors of the Company approved the Change of Control Transaction and Racotek shall receive consideration equal to at least $10.00 per share (as adjusted for stock dividends, combinations, splits, recapitalizations and the like) for each share of the Company's capital stock then held by Racotek upon the consummation of such Change of Control Transaction. 3. ADDITIONAL REPRESENTATIONS AND COVENANTS. 3.1 NO REVOCATION. The voting agreements contained herein are coupled with an interest and may not be revoked during the term of this Agreement. 3.2 CHANGE IN NUMBER OF DIRECTORS. Racotek, the Founders and the Investors will not vote for any amendment or change to the Certificate of Incorporation or Bylaws providing for the election of more or less than six (6) directors, or any other amendment or change to the Certificate of Incorporation Bylaws inconsistent with the terms of this Agreement. 3.3 LEGENDS. Each certificate representing shares of the Company's capital stock held by Racotek, Founders or Investors or any assignee of Racotek, the Founders or Investors shall bear the following legend: "THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT BY AND AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY (A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT." -4- 4. TERMINATION. 4.1 TERMINATION EVENTS. This Agreement shall terminate upon the earlier of: (a) The consummation of the Company's initial public offering of shares of its Common Stock; provided that all shares of the Company's Preferred Stock are converted into Common Stock prior to or in connection with such offering; or (b) The sale, conveyance, disposal, or encumbrance of all or substantially all of the Company's property or business or the Company's merger into or consolidation with any other corporation (other than a wholly-owned subsidiary corporation) or if the Company effects any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, PROVIDED that this Section 4.1(b) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company; or (c) Ten (10) years from the date hereof. 4.2 REMOVAL OF LEGEND. At any time after the termination of this Agreement in accordance with Section 4.1, any holder of a stock certificate legended pursuant to Section 4.3 may surrender such certificate to the Company for removal of the legend, and the Company will duly reissue a new certificate without the legend. 5. MISCELLANEOUS. 5.1 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 5.2 AMENDMENTS AND WAIVERS. Any term hereof may be amended or waived only with the written consent of the Company, the Founders that hold at least a majority (50%) of the Common Stock held by all Founders, and holders of at least 66 2/3% of the Series A and B Preferred Stock, voting together as a single class. Any amendment or waiver effected in accordance with this Section 5.2 shall be binding upon the Company, the holders of Series B Preferred Stock, Racotek and any Founder, and each of their respective successors and assigns. 5.3 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient on the date of delivery, when delivered personally or by overnight courier or sent by telegram or fax, or ten (10) days after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth on the signature page or on EXHIBIT A hereto, or as subsequently modified by written notice. -5- 5.4 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 5.5 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. 5.6 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 5.7 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 5.8 ADDITION OF INVESTORS. Notwithstanding anything to the contrary contained herein, if the Company shall issue additional shares of its Series B Preferred Stock pursuant to the Purchase Agreement, any purchaser of such shares of Series B Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and shall be deemed an "Investor" hereunder. [Signature Page Follows] -6- The parties hereto have executed this Voting Agreement as of the date first written above. COMPANY: NEXTNET, INC. By: \s\ Isaac Shpantzer Isaac Shpantzer, President Address: 11173 Meg Grace Lane Eden Prairie, MN 55344 SIGNATURE PAGE TO VOTING AGREEMENT RACOTEK, INC. By: \s\ Mike Fabiaschi Name: Mike Fabiaschi Title: President and CEO Address: 7301 Ohms Lane Suite 200 Minneapolis, MN 55439 SIGNATURE PAGE TO VOTING AGREEMENT FOUNDERS: \s\ Issac Shpantzer Isaac Shpantzer \s\ Vladimir Kelman Vladimir Kelman \s\ Beverly Waldorf Beverly Waldorf \s\ J. Eric Dunn J. Eric Dunn \s\ Stuart Froelich Stuart Froelich \s\ Kerry Shore Kerry Shore \s\ Tony Klein Tony Klein SIGNATURE PAGE TO VOTING AGREEMENT INVESTORS: SVM STAR VENTURES MANAGEMENTGESELLSCHAFT MBH NR. 3 & CO. BETEILIGUNGS KG NR. 2 By: SVM Star Ventures Management- gesellschaft mbH No. 3 By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 SIGNATURE PAGE TO VOTING AGREEMENT INVESTORS: SVE STAR VENTURES ENTERPRISES NO. VII, A GERMAN CIVIL LAW PARTNERSHIP (with limitation of liability) By: SVM Star Ventures Management- gesellschaft mbH No. 3 By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 SIGNATURE PAGE TO VOTING AGREEMENT INVESTORS: STAR SEED ENTERPRISES, A GERMAN CIVIL LAW PARTNERSHIP (with limitation of liability) By: Star-Seed Managementgesellschaft mbH By: \s\ Dr. Meir Barel Dr. Meir Barel Address: Posartstrasse 9 D-81679 Munich, Germany Facsimile: 49-89-419-43030 SIGNATURE PAGE TO VOTING AGREEMENT INVESTORS: DOLL TECHNOLOGY INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP By: Doll Technology Investment Management, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 SIGNATURE PAGE TO VOTING AGREEMENT INVESTORS: DOLL TECHNOLOGY AFFILIATES FUND, L.P. By: Doll Technology Investment Management, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 SIGNATURE PAGE TO VOTING AGREEMENT INVESTORS: DOLL TECHNOLOGY SIDE FUND, L.P. By: Doll Technology Investment Management, LLC, its General Partner By: \s\ Dixon R. Doll Name: Dixon R. Doll Address: 3000 Sand Hill Road Building 3, Suite 225 Menlo Park, CA 94025 INVESTORS: JAFCO Co., Ltd. By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-6 (A) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-6 (B) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-7 (A) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G-7 (B) Investment Enterprise Partnership By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Attorney-in-fact Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: JAFCO G USIT Fund III, L.P. By: \s\ Hitoshi Imuta Name: Hitoshi Imuta Chairman JAFCO America Ventures, Inc. Its Executive Partner Address: JAFCO America Ventures, Inc. 505 Hamilton Street Suite 310 Palo Alto, CA 94301 INVESTORS: DON GREEN By: \s\ Don Green Don Green Address: 1 Willowbrook Court Petaluma, CA 94954 PURCHASERS: ____________________________________ Dovrat, Shrem & Co., Ltd. ____________________________________ Horizon Fund Ltd. ____________________________________ Dovrat, Shrem-Skies Fund 92' Ltd. ____________________________________ Dovrat, Shrem-Rainbow Fund, Ltd. ____________________________________ Canada Israel Opportunity Fund L.P. _____________________________________ The Canada-Israel Opportunity Fund II ____________________________________ Dovrat, Shrem Founders Group, Limited Partnership Address: Dovrat, Shrem & Co. Shaul Hamelech Avenue #37 Tel Aviv 64928 ISRAEL SIGNATURE PAGE TO VOTING AGREEMENT EX-99 10 EXHIBIT 99 EXHIBIT 99 RACOTEK SPINS OFF NEXTNET TO INVESTORS MINNEAPOLIS, Sept 23 - (NASDAQ: RACO) - Consulting and technology firm Racotek Inc. said Wednesday it spun off its NextNet Inc. wireless mobile computing unit to an unidentified investment group. The investors provided initial funding of $8 million for NextNet, whose patented wireless technology is designed to let users send data over cellular telephone networks at rates up to 100 times faster than existing systems. NextNet seeks to develop a system that lets users get online without having to physically "plug in" to a network. Racotek said it has transferred its patented wireless data transmission technology to NextNet, and retains 44 percent ownership in the company. 1. -----END PRIVACY-ENHANCED MESSAGE-----