-----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, B0bdESeUiM0NSctCX3ls8U0HSi3e+ZZV3XZU7PHCKcLyOIuW6xTFr3lj/waby/Po e5w0wfk9sBQNs3AeR2znCA== 0000891020-96-000721.txt : 19960703 0000891020-96-000721.hdr.sgml : 19960703 ACCESSION NUMBER: 0000891020-96-000721 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960701 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA ON LINE INC CENTRAL INDEX KEY: 0000724991 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770164293 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17154 FILM NUMBER: 96589849 BUSINESS ADDRESS: STREET 1: 3380 146TH PL SE STE 300 CITY: BELLEVUE STATE: WA ZIP: 98007 BUSINESS PHONE: 2066499800 MAIL ADDRESS: STREET 1: 3380 1 46TH PLACE SE SUITE 300 CITY: BELLEVUE STATE: WA ZIP: 98007 10-K 1 SIERRA ON-LINE FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____ to ____ Commission file number 0-17154 SIERRA ON-LINE, INC. (Exact name of registrant as specified in its charter) Delaware 77-0164293 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 3380 - 146th Place SE., Suite 300, Bellevue, Washington 98007 (Address of principal executive offices) (206) 649-9800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ------ Aggregate market value of the voting stock held by non-affiliates of the Registrant based on the shares outstanding and the closing sale price as of June 17, 1996: $980,860,343. Number of shares of Common Stock, $0.01 par value, outstanding as of June 17, 1996: 20,869,369 Documents Incorporated by Reference Portions of the Registrant's definitive proxy statement for its 1996 Annual Meeting of Stockholders, to be filed within 120 days after the end of the Registrant's fiscal year to which this Form 10-K relates, are incorporated by reference in Part III hereof. Page 1 2 SIERRA ON-LINE, INC. FORM 10-K TABLE OF CONTENTS PART I
PAGE Item 1. Business .............................................................................. 3 Item 2. Properties ............................................................................ 11 Item 3. Legal Proceedings ..................................................................... 11 Item 4. Submission of Matters to a Vote of Security Holders ................................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......................................................... 12 Item 6. Selected Financial Data ............................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 13 Item 8. Financial Statements and Supplementary Data ........................................... 18 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .................................................. 34 PART III Item 10. Directors and Executive Officers of the Registrant .................................... 35 Item 11. Executive Compensation ................................................................ 35 Item 12. Security Ownership of Certain Beneficial Owners and Management ...................................................................... 35 Item 13. Certain Relationships and Related Transactions ........................................ 36 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................................................. 37 SIGNATURES ................................................................ 41 INDEX TO EXHIBITS ............................................................ 42
Page 2 3 PART I ITEM 1. BUSINESS Sierra On-Line, Inc. ("Sierra" or the "Company") is a leading publisher and distributor of interactive entertainment, education and personal productivity software titles for multimedia personal computers ("PCs"), including CD-ROM-based PC systems, and selected emerging platforms. Sierra uses its design and development capabilities, as well as outside acquisitions, to create branded products and product series with complex and interesting storylines and sophisticated graphics, sound and other features. Sierra offers more than 50 software titles, including popular products such as the King's Quest series, Leisure Suit Larry series, Police Quest series, Phantasmagoria, Gabriel Knight: The Beast Within, Front Page Sports: Football Pro '96, IndyCar Racing II, The Lost Mind of Dr. Brain and Print Artist. Sierra sells its products through a domestic field sales force and a network of independent domestic and foreign distributors. The Company sells through a variety of distribution channels, including computer and electronic superstores, software specialty stores, mass merchants, wholesale clubs, direct mail and bundling arrangements. Internationally, the Company sells primarily through independent distributors in specified territories and, in the United Kingdom, directly to software retailers. The Company is continually evaluating new and potentially promising distribution channels, including on-line distribution through commercial on-line services and the Internet. The multimedia PC consumer software market has grown dramatically in recent years, driven by the increasing installed base of multimedia PCs in the home, the proliferation of new software titles and new and expanding distribution channels. These factors have led to the development of a mass market for software products, which has been characterized by a rise in importance of strong distribution channels, a significant increase in the number of new software titles offered in the market, increased competition for limited retail shelf space to accommodate the abundance of new titles, and increased price pressure. Consumer reaction to different software titles is often unpredictable. Certain titles may gain broad popularity while others may not be received well in the market. Generally, entertainment and education software producers differentiate themselves by their ability to design products that are fun and/or educational, while at the same time exploiting the graphics, image, animation, audio and video capabilities of various hardware platforms. During the fiscal year ended March 31, 1996, the Company significantly expanded its product line and brand awareness by continuing to develop high-quality entertainment and education titles incorporating state-of-the-art software technology and by acquiring other successful or promising titles from third parties. The Company released 40 new internally developed titles in fiscal 1996 (ended March 31, 1996) and acquired an additional 18 titles in the entertainment, education, simulation and personal productivity categories. In addition, the Company entered into a joint venture agreement with Pioneer Electronics Corporation relating to development of titles for the Japanese market. New platform technologies for consumer software continue to emerge. The introduction of CD-ROM technology for use with PCs has stimulated the development and introduction of new software that is more sophisticated and complex than has been available to date on PCs or other video game platforms. The Company believes that growth in the installed base of CD-ROM drives for PCs has led to increased sales of more complex, CD-ROM-based consumer software. In addition, several companies are developing new hardware platforms which promise greater processing power, more advanced three-dimensional graphics, realistic sound and increased memory and storage devices such as CD-ROM and DVD (Digital Video Disk). These systems are expected to offer a more realistic experience than their video game predecessors through the use of real-time responses, computer-generated character interaction, compression and networking capabilities. The Company believes that the introduction of CD-ROM based PCs and emerging platforms represents a significant market opportunity for software producers that can design creative and interesting products while taking advantage of the technological capabilities of new hardware platforms. RECENT DEVELOPMENTS The Company has entered into an Agreement and Plan of Merger with CUC International Inc., a Delaware corporation ("CUC"), and a wholly owned subsidiary of CUC, dated as of February 19, 1996, as amended (the "Merger Agreement"), pursuant to which the Company has agreed, upon the terms and subject to the conditions set forth in the Merger Agreement, including without limitation approval of the Company's stockholders, to be acquired by CUC in a transaction (the "Merger") in which each share of common stock of the Company outstanding immediately prior to the effective time of the Merger will be converted into 1.225 shares of common stock of CUC. CUC's common stock is traded on the New York Stock Exchange, and CUC is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files reports, proxy statements and other information with the Commission. The Merger is subject to numerous conditions precedent, and the Merger Agreement may be terminated under certain circumstances. A special meeting of the Company's stockholders to vote upon the merger has been scheduled for July 24, 1996. Attention is directed to the Company's definitive Proxy Statement/Prospectus dated June 21, 1996 Page 3 4 for a complete description of the Merger, the Merger Agreement, the special meeting and other matters related thereto. Although the Company's Board of Directors has approved the Merger and recommended that the Company's stockholders approve the Merger, there can be no assurance that the Merger will be approved or consummated. FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS The Company's business, results of operations and financial condition are subject to many risks, including without limitation those set forth below. Each statement made in the following discussion, and elsewhere in this report, containing any form of the words "anticipate" or "expect" or "could" or "believe" or words of similar prospective import is a forward-looking statement that may involve a number of such risk factors and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unexpected events or developments. DEPENDENCE ON NEW PRODUCTS; RISK OF PRODUCT DELAYS The Company's success depends on its ability to develop and make timely introductions of successful new products or enhancements of existing products to replace declining revenues from older products. The effective lives of the Company's products have tended to become shorter due to the introduction of new hardware platforms, technologies and competitive products, the increase in competition for retail shelf space among software products and other factors. As a result, the Company's ability to introduce new products on a timely basis has become increasingly important, as revenues from new products are essential to replace declining revenues from older products. On many occasions in the past the Company has experienced significant delays and cost overruns in product introductions. As its products have become more complex and costly to develop, it has become more difficult to bring products to market on schedule and on budget. It is highly likely that the Company will experience delays in developing and introducing at least some future new products. There can be no assurance that such delays will not have a material adverse effect on the Company's business and operating results. INCREASING COST AND COMPLEXITY OF PRODUCT DEVELOPMENT As the Company's products have become increasingly complex and technologically sophisticated, it has become more difficult and expensive to produce new products on a timely basis. Typically, nine to fifteen months or more are required to complete a new title and one to two months or more are required to convert existing titles to new hardware platforms or foreign languages. This time period can increase if, as has occurred in the past, the Company experiences unanticipated difficulties in the product development process. In order to introduce titles incorporating high-quality graphics, animation, images, video and audio, the Company has had to devote increasing financial and human resources to new product development. Due to competitive pressures, however, only a portion of the Company's increased development costs to date have been offset by product price increases. Greater product development expenditures also result in greater financial risk to the Company if the product is not successful. The Company expects that the trend toward more complex products and increasing product development costs will continue for the foreseeable future. In addition, in attempting to meet product introduction deadlines, the Company may incur higher than normal production and development costs, placing additional pressure on gross margins. Any material delays or cost overruns in the development or introduction of, or the presence of a material defect in, one or more new products could materially and adversely affect the success of the products and the Company's business and operating results. UNCERTAINTY OF MARKET ACCEPTANCE Consumer preferences for entertainment and education software products are continually changing and are extremely difficult to predict. Few such products achieve sustained market acceptance. There can be no assurance that new products introduced by the Company will achieve any significant degree of market acceptance or that any such acceptance, if achieved, will be sustained for a sufficient period of time to permit the Company to recover its development and marketing costs. In addition, the Company believes that as ownership of PCs, CD-ROM-based PCs and other emerging platforms becomes more widespread, and as the Company diversifies its product offerings, it must market its products to a broader market than it has in the past. The Company plans to introduce products and interfaces designed to appeal to this broader market and to adjust its marketing activities accordingly. In seeking to appeal to a broader market, the Company will face significant new challenges, including intense competition from larger companies with established market positions. The Company will also face the risk that it may lose existing customers who may dislike the changes in the Company's products and marketing approach. There can be no assurance that the Company will be able to compete successfully in this broader market. Page 4 5 RAPID TECHNOLOGICAL CHANGES The market for entertainment and education software is undergoing rapid technological change. The Company's products must operate on widely accepted hardware platforms and software environments in order to achieve significant market acceptance. New hardware and software platforms are continuously being introduced, and these and other new technologies could render existing products of the Company unmarketable. As a result, the Company must continually anticipate market trends and adapt its products to emerging hardware and software platforms and changing technologies and consumer preferences. The design and development of entertainment and education software products for new platforms and software environments requires substantial investment and lead time. There can be no assurance that the Company will be successful in developing and marketing products for new platforms or that any of these platforms will achieve significant market acceptance. Sales of the Company's current products are highly dependent on the size of the installed base of PCs and sales of new PCs for home use. The Company has devoted significant resources to develop products that will operate on selected CD-ROM formats. It is not clear whether all of the formats now supported by the Company will be adopted as industry standards. A change in hardware or software standards could lead to significant expenditures by the Company to adapt existing products or develop new products to support the new standards. The Company also faces the risk that proprietary platforms that are designed to restrict the ability of independent software developers, including the Company, to adapt their products to run on such platforms will become widely accepted. For example, Nintendo of America, Inc. ("Nintendo") and Sega of America, Inc. ("Sega") have each adopted such a "closed" platform strategy in the video game console and cartridge market. If closed platforms developed by these companies or others become widely accepted, the Company's business and operating results could be materially and adversely affected. SEASONALITY; SUBSTANTIAL QUARTERLY FLUCTUATIONS The Company's business is highly seasonal, with the highest level of net sales and earnings typically occurring during the third fiscal quarter ending December 31, and substantially lower levels in the other fiscal quarters, particularly the fourth fiscal quarter ending March 31 and the first fiscal quarter ending June 30. This seasonal pattern is due primarily to increased demand for the Company's products during the calendar year-end holiday season. If the Company's European sales increase as a percentage of its total revenues, the Company anticipates that this seasonality may become even more pronounced, as sales in Europe exhibit an even stronger seasonal tendency than sales in the United States. This seasonality can lead to overstocking by the Company's retail customers and higher than normal returns following the holiday season. The Company's quarterly operating results may fluctuate throughout the year as a result of a variety of additional factors, including delays in market acceptance, changes in platform standards, the timing of new product introductions by the Company or its competitors, the timing of orders for the Company's products and increases in product returns. Because a majority of the unit sales for a particular product typically occurs in the first several months after the product is introduced, the Company's revenues may increase in a quarter in which a major product introduction occurs and may decline in subsequent quarters. As a result, if net revenues are below expectations, the Company's operating results are likely to be materially and adversely affected. DEPENDENCE ON KEY PERSONNEL The Company's success depends on the continued service of its key product design, development, sales, marketing and management personnel and its ability to continue to attract, motivate and retain highly qualified employees and contractors. In order to introduce timely and successful sequels in its key product lines, the Company must retain its key design and development personnel. The Company does not have employment agreements with any employees. Competition for skilled product designers, artists and technical personnel is intense. The location of one of the Company's principal product development facilities in Oakhurst, a relatively remote rural area of California, may adversely affect the Company's ability to compete for skilled development personnel at that facility. The inability of the Company to attract or retain key design and development personnel could have a material and adverse effect on the Company's business and operating results. UNCERTAINTIES OF DISTRIBUTION CHANNELS A substantial portion of the Company's revenues is derived from a limited number of distributors and software specialty retail chains. Loss of any of the Company's major customers, or a significant decrease in product shipments to, or an inability to collect receivables from, any of these customers could have a material adverse effect on the Company's operating results. Consistent with industry practice, the Company may accept product returns from or provide price protection to distributors and retailers. Although the Company provides reserves for price protection and product returns that it believes to be adequate, there can be no assurance that the Company will not be forced to offer greater price protection or to accept substantially more product returns than anticipated in order to maintain its relationships with retailers and its access to distribution channels. The Company is currently developing methods to more effectively monitor the sell-through activity and product inventory of its retail and distribution channels. Until such methods have been developed and implemented, the Company may have greater levels of inventory at particular retailers or distributors, and be subject to greater amounts of potential product returns, than currently anticipated. It is also possible that the Company may have lower levels of inventory at particular retailers and distributors than Page 5 6 anticipated, thereby adversely affecting the sales of its products. Consumer software distribution channels have been undergoing rapid change, including consolidations and financial difficulties of certain retailers and distributors, along with the emergence of new distribution channels, such as mass merchandisers, for entertainment and education software. An increasing number of companies and software products are competing for access to these distribution channels, and there is intense competition for the limited amount of available retail shelf space and promotional resources. There can be no assurance that distributors or retailers will continue to purchase the Company's products or provide the Company's products with adequate levels of shelf space and promotional support. As ownership of platforms for entertainment and education software products becomes more widespread, there may be further changes in the principal distribution channels for reaching the broader consumer market for these products. There can be no assurance that the Company will be able to market its products successfully through these distribution channels. COMPETITION The entertainment and education software industry is intensely competitive. The Company competes primarily with other developers of multimedia PC entertainment, education and home productivity software. Significant companies that compete with Sierra in the entertainment software market include Broderbund Software, LucasArts, Virgin Interactive Entertainment, Electronic Arts and GT Interactive Software. Manufacturers and developers of cartridge-based video games, such as Nintendo and Sega and their licensees, also are indirect competitors of the Company, but may become more direct competitors if technologies evolve in a manner that encourages these companies and Sierra to develop products for similar hardware platforms. The principal competitors in the education software market are Davidson & Associates, Disney, SoftKey International (through its acquisitions of The Learning Company and Minnesota Educational Computing Corporation) and Broderbund Software, Inc. Products in the market compete primarily on the basis of subjective factors such as entertainment value and objective factors such as price, graphics and sound quality. Large diversified entertainment, cable and telecommunications companies, in addition to large software companies such as Microsoft Corporation, are increasing their focus on the interactive entertainment and education software market, which will result in even greater competition for the Company. Many of these companies have substantially greater financial, marketing and technical resources than the Company. As competition increases, significant price competition and reduced profit margins may result. In response to increased competition for shelf space, the Company may need to increase marketing expenditures. In addition, competition from new technologies (such as new hardware platforms) may reduce demand in markets in which the Company has traditionally competed. Prolonged price competition or reduced demand as a result of competing technologies would have a material adverse effect on the Company's business, financial condition and operating results. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, operating results or financial condition. INTERNATIONAL SALES RISKS The Company anticipates that international sales will continue to account for a significant share of the Company's total revenues in the future. International sales are subject to inherent risks, including changes in export controls, tariffs and other regulatory requirements and fluctuating exchange rates. European distribution channels are more decentralized and hence more difficult to enter efficiently. International markets also require the Company to translate and culturally adapt its products and documentation. This results in higher levels of specialized inventory and a greater risk of inventory obsolescence. Furthermore, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as do the laws of the United States. RISK OF GOVERNMENTAL REGULATION; PRODUCT RATINGS SYSTEM Legislation has been proposed to establish an independent agency to work with the video game industry to create a system for providing parents and other purchasers with information about graphic violence or sexually explicit material contained in video games. The implementation of such a system may require entertainment and education software publishers to communicate information regarding the content of their products (particularly violent or sexually explicit material) to consumers through appropriate package labeling, advertising and marketing presentations. Similar developments are also taking place outside the United States. The Company is unable to predict what effect, if any, a rating system may have on the Company's business and there can be no assurance that such a rating system would not adversely affect the Company's results of operations. LIMITED PROTECTION OF PROPRIETARY RIGHTS The Company regards its software as proprietary and relies on a combination of patent, trade secret, copyright and trademark laws, nondisclosure agreements and certain technical measures to protect its proprietary rights. There can be no assurance that these efforts will be successful. The Company is aware that unauthorized copying occurs within the entertainment and education software industry. It may be possible for third parties to copy the Company's products or otherwise obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult and costly, and Page 6 7 software piracy and unauthorized copying can be expected to be a major persistent problem. The laws of the United States provide only limited protection of intellectual property rights, and the laws of certain other countries in which the Company's products are or may be distributed provide less protection. As the number of entertainment and education software products increases and the functionality of these products overlaps, the Company believes that software developers and publishers may increasingly become subject to infringement claims. From time to time, the Company may receive communications from third parties asserting that features or content of certain of its products may infringe upon intellectual property rights of such parties. There can be no assurance that claims against the Company will not result in costly litigation and require the Company to license the intellectual property of others. There can be no assurance that such licenses will be available on reasonable terms, or at all. PRODUCTION RISKS Substantially all the Company's products are stored on CD-ROM media. As is typical in the industry, the Company outsources the CD-ROM manufacturing and replication function to third parties. In the future, it is possible that there may be periodic shortages of CD-ROM media and potentially late deliveries of CD-ROM products from outside duplicating sources. While the Company has not experienced material problems in duplicating products on CD-ROM, its dependence on third parties to perform the manufacturing function could result in material problems if production were substantially delayed. The Company produces its diskette-based products by duplicating master software diskettes onto blank diskettes acquired in quantity from a number of sources. The Company occasionally has difficulty in obtaining blank diskettes of appropriate quality. In addition, the Company has occasionally incurred higher than normal production expenses as a result of supplementing its internal production staff with outside contractors to meet production deadlines. ACQUISITIONS The Company is in the process of beginning to integrate into its overall operations the businesses and personnel acquired in the Acquisitions, as well as in four additional acquisitions completed in calendar year 1995 and one completed in April 1996. This process will present various management challenges to the Company, and there can be no assurance that the Company will not experience difficulties in completing this integration process, or that key personnel of the acquired businesses will not determine to leave the Company's employment. Any such departures could have a material adverse effect on the value of one or more of the acquisitions to the Company. The Company, in the ordinary course of its business, considers acquisitions of, and mergers and other strategic transactions with, third parties on a regular basis, and it is likely that the Company will engage in more such transactions in the future. Such transactions often involve substantial risks, and, although the Company's management will endeavor to mitigate these risks and to negotiate the best possible terms for the Company and its stockholders, there can be no assurance that any such transactions that are consummated will prove to be beneficial. PRODUCTS The Company currently offers entertainment, education and personal productivity consumer software product lines targeted at the home consumer. ENTERTAINMENT PRODUCTS The Company's principal entertainment products consist of adventure, simulation, strategy, sports and action categories, which are described in greater detail below. ADVENTURE PRODUCTS. The Company's most popular product category is adventure products, which feature high-quality graphics, animation, music, sound effects, art and text to create interactive stories similar to cartoons or animated films. The player guides a major character, and thus the flow and direction of the adventure, in order to solve problems and puzzles, escape from perilous situations, experience different environments and interact with other characters. These games are intricate and may take several weeks of play to complete. In connection with these products, many customers call Sierra's 900-number telephone hint line and purchase hint books to assist them in playing the adventures. In fiscal 1994, 1995 and 1996, adventure products accounted for 41%, 32% and 38% of the Company's net sales, respectively. The Company's principal adventure products series are as follows: - PHANTASMAGORIA The first product of this series was released in the second quarter of fiscal 1996. The product uses the Company's high-quality proprietary video capture process whereby the player assumes the role of the main character in a "horror" environment. More than 600,000 copies of this product have been sold. Page 7 8 - KING'S QUEST The player takes on a leading role in a world of brave knights, noble kings, wicked wizards and evil sorcerers. The Company has released seven titles plus an anthology and sold more than 3.8 million copies in this series. - LEISURE SUIT LARRY This series parodies the singles bar scene. The player guides a libidinous 40-year old through awkward social encounters. The Company has released five titles plus an anthology, and sold more than 1.4 million copies in this series. - SPACE QUEST This series parodies popular outer space films and television shows. The player is a sanitation engineer turned space-age swashbuckler. The Company has released six titles plus an anthology, and sold more than 1.2 million copies in this series. - POLICE QUEST A cop fights cunning and dangerous criminals and solves intriguing cases while following correct police procedures. The Company has released five titles and sold more than 1.2 million copies in this series. SIMULATION AND SPORTS GAME PRODUCTS. Most of the Company's simulation products are sports related, or simulation games set in historical combat contexts. In Sierra's sports games, the user chooses the role of player, coach or manager. Sports games challenge the user's ability to use strategy in realistic situations. In fiscal 1994, 1995, and 1996, simulation and sports products accounted for 25%, 33%, and 23%, respectively, of the Company's net sales. These products include the following: - ACES This series of historically accurate flight simulations enable the player to fly warplanes from different eras. The Company has released four products, Red Baron, Aces of the Pacific, Aces Over Europe, and Aces of the Deep, plus an anthology, and sold more than 1 million copies in this series. - FRONT PAGE SPORTS This series consists of numerous titles that simulate football, baseball, golf, bass fishing, flying and auto racing. Many of the titles use advanced graphics and actual player statistical data, with highly realistic results. The Company has sold more than 500,000 copies in this series. The Company intends to expand the series to include other sports. - A-10 TANK KILLER This series consists of two titles whereby the player flies the 25-ton A-10 Thunderbolt II through daring tank-killing missions to support ground troops in various hostile locations. The Company has sold more than 250,000 copies of this product. STRATEGY AND ACTION GAME PRODUCTS. The Company's strategy products offer the game player a combination of depth and detail whereby the user can set up the game and enjoy playing without being buried in minuscule details. Action titles generally have a broader appeal than strategy products. They are characterized by their strong game play, 3D graphics and networking capabilities. In fiscal 1994, 1995 and 1996, strategy and action game products accounted for 13%, 20% and 19%, respectively, of the Company's net sales. Strategy and action products include the following: - OUTPOST In this simulation, the Earth has been destroyed by a catastrophic event providing the challenge of rebuilding civilization on another planet. The Company has sold more than 200,000 copies of this series. - CAESAR The player becomes the protege of the great Julius Caesar and is taken back to the days of the Roman Empire. Creativity and realism are two of the attractive characteristics of this series. The Company has sold more than 400,000 copies of this product series. - 3D ULTRA PINBALL This product combines authentic 3D graphics, realistic ball motion and the arcade-table feel of real pinball. Released in fiscal 1996, this title has sold more than 250,000 copies. EDUCATION AND FAMILY PRODUCTS. The Company's education and family products provide education and fun to children and adults in an animated, interactive environment. Several of the Company's education products promote learning through adventure stories or by providing an amusing, playground environment. Others deliver personal instruction through animated characters whose mouths move realistically in synchronization with their spoken words. In fiscal 1994, 1995, and 1996, education and family products accounted for approximately 12%, 12%, and 13%, respectively, of the Company's net sales. The Company's education products include: Page 8 9 - DR. BRAIN This series has been among the most successful of its kind at presenting children with pure problem-solving skills. The child is presented with multiple puzzles in an attempt to help Dr. Brain. The Company has sold more than 350,000 copies in this series. - ADI The Adi series offers academic subjects for students at different age levels based on the national school curricula of several European countries. Adi products use a specialized core user environment for which subjects can be purchased as modular add-on disks. The series includes Adi Jr. for preschool children, Adi for elementary students and Adi Senior for high school students. PRODUCTIVITY PRODUCTS. The Company's productivity line provides consumers with a broad array of general interest products, ranging from home graphics to home design. In fiscal 1994, 1995, and 1996, productivity products accounted for approximately 2%, 1%, and 5%, respectively, of the Company's net sales. The Company's productivity products include: - PRINT ARTIST The Print Artist series allows the user to create their own custom projects, such as greeting cards, signs, business cards, letterhead, calendars, labels and many others. The product is designed to make all such products easy and fast, with touches of multimedia fun. The Company has sold more than 200,000 copies in this series. - MASTERCOOK The Company's cooking series provides the consumer a means to organize and locate all their favorite recipes and print out attractive custom-made cookbooks of their own. Built-in special functions, such as health guides and automatic shopping lists, give the series a user-friendly touch. The Company has sold more than 90,000 copies in this series. All of the Company's titles are available for IBM PCs and PC-compatibles. Many titles also are available for Apple Macintosh computers. The Company has also developed certain of its products for emerging platforms. THE IMAGINATION NETWORK, INC. The Company is a party to a multi-year publishing agreement with AT&T to provide content for its subsidiary, The ImagiNation Network ("INN"), a multi-player interactive on-line entertainment service that enables subscribers at different geographic locations, using modem-equipped personal computers, to communicate and play interactive games in real time. The publishing agreement provides for AT&T to fund up to $23 million of Sierra's development expenditures, subject to certain limitations, through non-refundable royalty advances. The agreement provides that Sierra will not own a network that competes with INN for a period of two years following expiration of the funding term. INN is free to provide products on the INN network that are developed by third parties other than the Company, and it can be anticipated that INN will do so. AT&T has announced that it plans to sell INN, and the Company expects that the publishing agreement will be revised in connection with any such sale. PRODUCT DEVELOPMENT The creation of the Company's products takes place in two stages: design and development. Products are designed by the Company's internal staff and independent designers working under contract with the Company. In recent years, the Company has increased the number of employees engaged in product design relative to the number of independent designers. Once a design is selected for production by the Company's senior management, a production team, budget and production schedule are established. The development of a product, which consists of implementing the design through artwork, animation, script, music, sound effects, voice and computer programming, is done almost entirely by the Company's internal development staff. In certain instances, the Company hires independent contractors to assist with product development. Prior to release, each product undergoes careful quality assurance testing that involves a technical review of each component of the final product and testing on the applicable hardware platform. Typically, nine to fifteen months or more are required to complete a new title and one to two months are required to convert existing titles to new hardware platforms or foreign languages. Since its inception, the Company has recognized that a strong technical base is essential to its long-term success and has made a substantial investment in research and development. As of March 31, 1996, the Company had approximately 519 employees and several independent contractors engaged in product design and development. Page 9 10 MARKETING AND SUPPORT The Company's marketing activities include print advertising in consumer and trade periodicals, retail-supported print advertising, targeted direct mail programs, retail in-store promotions, trade shows and product publicity programs. In addition, the Company communicates with its existing customer base by direct mail, primarily through the Company's full-color quarterly news magazine called INTERAction!. The Company's marketing expenses will likely increase in fiscal 1997, as the Company continues to direct more marketing spending towards the consumer and increase the distribution of its INTERAction! magazine. The Company supports its products directly through its customer support department, which can be contacted by mail, by telephone during ordinary business hours, or through various on-line services. The Company's support personnel also sell upgraded and replacement software, inform customers about new products and conduct spot market surveys. SALES In the United States, the Company sells its products primarily to large computer superstores, software specialty retail chains, wholesale clubs and mass merchandisers through a domestic field sales force. The Company reaches smaller computer and software specialty stores through independent distributors and also sells its products direct to its customers. In fiscal 1996, sales to the top four customers were 28% of gross sales, compared to 26% and 30% of gross sales for fiscal 1995 and 1994, respectively. The Company's international sales are primarily to customers in Europe and Asia. The Company sells its products internationally through various local distributors for specified territories and, in the United Kingdom, also directly to software retailers. During fiscal 1996 the Company entered into a joint venture agreement with Pioneer Electronic Corporation ("Pioneer") to market and develop entertainment and other software titles for the Japanese market. Large software specialty chains are uncommon in foreign markets, and, consequently, the Company's distributors sell primarily to small software retailers. To generate additional international revenues, the Company sells foreign language versions of some of its more popular products. The Company expects that the level of its international sales may fluctuate, particularly as the Company seeks to become more established in international markets. See also Note 12 of Notes to the Consolidated Financial Statements included in Item 8 below, which includes a table setting forth information on the Company's international sales for fiscal years 1994, 1995 and 1996. The Company anticipates that international sales will continue to account for a significant share of the Company's revenues in the future. International sales are subject to inherent risks, including changes in export controls, tariffs and other regulatory requirements and fluctuating exchange rates. European distribution channels are more decentralized and hence more difficult to enter efficiently. International sales also require the Company to translate and culturally adapt its products and documentation. This results in higher levels of specialized inventory and a greater risk of inventory obsolescence. Furthermore, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as do the laws of the United States. The Company may accept product returns or provide price protection to distributors and retailers. Under price protection arrangements, the Company allows its customers a credit against future purchases equal to the difference between the price at which the customer bought a certain product from the Company and the Company's reduced price for that product. PRODUCTION The Company performs its own disk duplicating and packaging for diskette-based products at its Oakhurst, California and Paris, France facilities. The Company does not internally replicate CD-ROM-based products but rather subcontracts that work to third parties. To date the Company has not experienced difficulties in procuring CD-ROMs or in having its CD-ROM programs replicated, but in the future, it is possible that there may be periodic shortages of CD-ROM media and potentially late deliveries of CD-ROM products from outside replication sources. Printing of user manuals and manufacturing of packaging and related materials are performed to the Company's specifications by outside sources. Generally, complete packages are assembled by the Company at its two production facilities, although the Company has used external companies to assemble packages during times of peak demand. The Company has occasionally incurred higher than normal production expenses as a result of supplementing its internal production staff with outside contractors to meet product introduction deadlines. Shipments are generally made within one week of receiving an order. In light of the short time between order and shipment of the Company's products, the Company has relatively little backlog at any given date, and its backlog is not indicative of potential sales for any future period. Page 10 11 PROPRIETARY PROTECTION The Company relies upon a combination of patent, copyright, trade secret and trademark laws, as well as nondisclosure agreements and certain technical measures, to protect its rights in its software products. The Company has filed seventeen patent applications to protect certain of its technology and has been issued eight United States patents and has registered trademarks in the United States and foreign jurisdictions. However, the Company does not believe that the ownership of patents is presently a significant factor in its business. The Company believes that intellectual property rights protection is less significant to the Company's success than factors such as the ability to cost-effectively release timely and innovative products with consumer appeal. Sierra does not impose license agreements on its end-user customers and does not copy-protect its software. Sierra believes that copyright laws provide only limited protection for its products. The Company is aware that unauthorized copying occurs within the consumer software industry. It may be possible for third parties to copy the Company's products or otherwise obtain and use information that the Company regards as proprietary. Policing unauthorized use or copying of the Company's products is difficult and costly, and software piracy can be expected to be a major and persistent problem. The Company does, however, take certain practical precautions in addition to relying on legal protections, such as including in its software coded references to materials shipped with the products that are required to complete play of the game. In addition, the Company has adopted various methods to confirm that persons seeking customer support have purchased a copy of the product. As the number of consumer software products increases and the functionality of these products overlaps, the Company believes that software developers and publishers may increasingly become subject to infringement claims. From time to time, the Company may receive communications from third parties asserting that features or content of certain of its products may infringe upon intellectual property rights of such parties. There can be no assurance that existing or future claims against the Company will not result in costly litigation and require the Company to license the intellectual property of others. There can be no assurance that such licenses will be available on reasonable terms, or at all. EMPLOYEES As of March 31, 1996, the Company and its subsidiaries employed approximately 888 persons, including 113 in operations, 90 in marketing and sales, 519 in product development and 166 in customer service, administration, and finance. None of the employees are represented by a labor union. Competition for employees in the software industry is intense. The Company believes that its future success will depend in part on its continued ability to recruit and retain highly skilled management, marketing and technical personnel. ITEM 2. PROPERTIES The Company maintains facilities, including its headquarters in Bellevue, Washington, where the Company leases approximately 45,000 square feet of office space. The Company owns a 56,200 square foot building on 6-1/2 acres in Oakhurst, California. The Company also leases approximately 48,000 square feet of office space in Eugene, Oregon, approximately 2,400 square feet of office space in Austin, Texas, approximately 37,000 square feet of office space in Boston, Massachusetts, approximately 21,000 square feet of office space near Paris, France, and office space near Reading, England and Dreieich, Germany. The Company believes that these facilities are adequate for its current needs and that suitable additional or substitute space will be available as needed to accommodate its future needs. ITEM 3. LEGAL PROCEEDINGS On February 20, 1996, a lawsuit captioned: Meridian Capital Funding, Inc. v. Sierra On-Line, Inc. et al. (Civil Action No. 14848) was filed in the Court of Chancery for the State of Delaware. The lawsuit was brought on behalf of the public shareholders of the Company and names the Company, each of the Company's individual directors and CUC International as party defendants. The lawsuit alleges certain violations of such directors' fiduciary duties to the Company's shareholders in connection with the Merger and other alleged improper conduct. The plaintiffs, among other things are seeking to enjoin consummation of the Merger and, in the event of such consummation, rescission of the Merger and monetary damages in an unspecified amount. There have been no material developments in this litigation since the filing of the complaint, and no discovery or other proceedings have occurred. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of fiscal 1996 to a vote of security holders. Page 11 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market under the Symbol SIER. According to the records of the Company's transfer agent, the Company had approximately 900 stockholders of record, in addition to shares held in street name, with 20,869,369 shares outstanding as of June 17, 1996. The Company has never paid cash dividends on its stock and anticipates that, for the foreseeable future, it will continue to retain any earnings for use in the operation of its business. The high and low closing prices during each quarter for the Company's last two fiscal years were (all prices are adjusted to reflect the two-for-one stock split effective February 17, 1995):
TRANSACTION PRICES ------------------- Quarter Ended: High Low -------------- ---- --- June 30, 1994 13-3/8 7-1/8 September 30, 1994 12-1/8 7-5/8 December 31, 1994 18-1/8 10 March 31, 1995 23-1/4 14-5/8 June 30, 1995 25-3/8 16-1/2 September 30, 1995 48-3/4 24 December 31, 1995 39-1/2 22-3/4 March 31, 1996 40 17-1/2
ITEM 6. SELECTED FINANCIAL DATA The financial data included in the following table should be read in conjunction with Item 8 (Financial Statements and Supplementary Data) and with Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) below. The selected financial data as of and for each of the five years in the period ended March 31, 1996 have been derived from the Consolidated Financial Statements of the Company. The financial statements of the Company for the three years ended March 31, 1996, have been audited by Deloitte & Touche LLP, independent auditors, whose report is included herein.
Year Ended March 31 ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (in thousands, except per share amounts) Revenues ............................... $ 158,177 $ 97,879 $ 73,101 $ 56,320 $ 47,887 Net income (loss) ...................... 16,170 12,992 (7,872) (9,611) 3,856 Net income (loss) per share: Primary .............................. 0.77 0.70 (0.46) (0.57) 0.28 Fully diluted(1) ..................... 0.76 0.68 --- --- --- Total assets............................ 178,897 145,354 68,905 65,194 70,346 Long-term liabilities................... 24,419 40,541 634 236 6
(1) The difference between primary and fully diluted net income (loss) per share is not significant for fiscal years 1994, 1993, and 1992. Page 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW This following discussion and analysis should be read in conjunction with the audited financial statements and related notes. The discussion of results, causes or trends should not be construed to imply that such results, causes or trends will necessarily continue in the future. Each statement made in this discussion and analysis containing any form of the words "anticipate" or "expect" or words of similar prospective nature is a forward looking statement that may involve a number or risk factors and uncertainties. Among other factors that would cause actual results to differ materially are the following: business conditions and other changes in the Company's industry; competitive factors, such as rival products and price pressures both domestically and internationally; availability of adequate CD-ROM media and CD replication services on reasonable terms and at reasonable prices; significant delays or excessive costs associated with product research, development and/or introduction; the loss of any large single customer; and fluctuations in U.S. Dollar exchange rates for non-U.S. currencies. In addition, readers should review the discussion of factors affecting future results and forward-looking statements appearing in Part I of this report. The Company has entered into the Merger Agreement with CUC pursuant to which the Company has agreed, upon the terms and subject to the conditions set forth in the Merger Agreement, including without limitation approval of the Company's stockholders, to be acquired by CUC. In the Merger, each share of common stock of the Company outstanding immediately prior to the effective time of the Merger will be converted into 1.225 shares of common stock of CUC. CUC's common stock is traded on the New York Stock Exchange, and CUC is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files reports, proxy statements and other information with the Commission. The Merger is subject to numerous conditions precedent, and the Merger Agreement may be terminated under certain circumstances. A special meeting of the Company's stockholders to vote upon the merger has been scheduled for July 24, 1996. Attention is directed to the Company's definitive Proxy Statement/Prospectus dated June 21, 1996 for a complete description of the Merger, the Merger Agreement, the special meeting and other matters related thereto. Although the Company's Board of Directors has approved the Merger and recommended that the Company's stockholders approve the Merger, there can be no assurance that the Merger will be approved or consummated. During the year, the Company completed several acquisitions. The companies acquired include The Pixellite Group ("Pixellite"), Software Inspiration Limited ("Inspiration"), Papyrus Design Group, Inc. ("Papyrus"), Arion Software, Inc. ("Arion"), and Green Thumb Software, Inc. ("Green Thumb"). These companies were instrumental in broadening the Company's product line. Each transaction was accounted for as a pooling-of-interests. A total of 2,293,493 shares of Sierra Common Stock were issued in these transactions. The historical financial statements of the Company have been restated for the Pixellite, Inspiration, and Papyrus mergers. The financial statements have not been restated for the Arion and Green Thumb mergers as these companies did not impact the Company's operations significantly. The Company derives its revenues primarily from the sale of entertainment and education software products. During fiscal 1996 the Company introduced a budget product category, consisting of repackaged Sierra products designed to wholesale at $9 per unit, as well as variety packs consisting of assortments of six different Sierra titles. Introduction of Sierra titles under the budget line has had the effect of increasing product lives by creating an intermediate category in a product's life cycle. However, the Company has also experienced increased pricing pressure in this category as it targets these products to the mass consumer. Substantially all of net sales, ninety-five percent in both fiscal 1995 and fiscal 1996, represent products sold primarily through large computer superstores, software specialty retail chains, wholesale clubs, and mass merchandisers. The remainder represents income from licensing of software products for software bundling arrangements. Other revenues consist of income from the Company's 900 telephone number hintline and advertising revenue from the Company's INTERAction! magazine. Although no one single customer accounted for over ten percent of gross revenues in fiscal years 1996 and 1995, the Company estimates that its top ten customers accounted for approximately 40% of revenues in fiscal 1995 and 50% of revenues in fiscal 1996. The estimated market for consumer software was $4.8 billion in 1994 and $5.6 billion in 1995 and is estimated to increase to $9.5 - $10 billion by 2000. Approximately 40% of the market consists of entertainment, educational and productivity software while the remainder of the market represents business, finance and reference software. The market growth is fueled by an increasing installed base of multimedia PCs. CD-ROM titles have continued to represent the bulk of entertainment, educational and productivity software unit sales, representing nearly 80% of units shipped of these products in 1995. Sales arrangements with retailers and mass merchandisers permit them to exchange products or receive price protection under certain circumstances. Net sales reflects allowances for estimated returns and exchanges and price protection. During fiscal Page 13 14 1996, the Company increased direct distribution sales to wholesale clubs and mass merchandisers which have higher levels of returns and exchanges than the Company's other distribution channels. This change has led to a disproportionate increase in the reserve for sales returns and allowances, included in accounts receivable, relative to net sales. A majority of product development is done internally through employees and independent contractors. The increasing technological sophistication of the Company's products has resulted in increased product development costs and increased the likelihood of product release delays. The Company has been unable to pass along these increased development costs by way of price increases due to increasing competition. In prior periods, the Company has been able to mitigate the adverse impact of increased development costs on operating profit through increased unit sales and improved manufacturing margins. There can be no assurances, however, that the Company will be able to continue to do so in future periods. The Company estimates that product life cycles for entertainment software products are continuing to decrease. Education software continues to have a somewhat longer shelf life. Due to the compression of product life cycles, increasing competition, and the increasing technological sophistication of its products, the Company has focused its development resources on fewer titles. This has increased the risk of revenue volatility which the Company is seeking to minimize through a broadening of its product offerings into home productivity and strategy categories. The Company typically owns all rights to contributions to products by independent contractors under license or assignment agreements requiring the payment of royalties by the Company. Aggregate royalty rates on the Company's current principal software products generally range from approximately 1% to 20% of gross revenue derived from the product, less certain associated costs. Royalties as a percentage of net sales were 6%, 8% and 8% in fiscal 1994, 1995 and 1996, respectively. The Company's revenues and earnings are highly seasonal due to traditional consumer buying habits. The Company expects the historical trend of realizing its highest revenues and earnings during the holiday shopping season in the quarter ended December 31 and its seasonal lows in revenues and earnings in the quarter ended June 30 to continue. The Company's quarterly operating results may fluctuate throughout the year as a result of a variety of additional factors, including delays in market acceptance, changes in platform standards, the timing of the introduction of the Company's or its competitors' products, the timing of orders for the Company's products and increases in product returns. Because a majority of the unit sales for a particular product typically occurs in the first several months after the product is introduced, the Company's revenues may increase in a quarter in which a major product introduction occurs and may decline in following quarters. The Company's expenses are based, in part, on expected future revenues. A significant amount of the Company's marketing, administrative, design and development expenses do not vary in relation to revenues. As a result, if net revenues are below expectations, the Company's operating results are likely to be materially and adversely affected. During any given fiscal year, a substantial proportion of the Company's gross sales is generated from titles introduced during that fiscal year. During fiscal years 1994, 1995, and 1996, sales of new titles represented 55%, 69%, and 64% of gross sales, respectively. Over the next several years, the Company expects that an increasing portion of its revenues will come from sales of simulation, action and home productivity products, as well as new product lines. The Company believes that the impact of inflation and changing prices has not had a significant impact on income. The entertainment and education software industry is intensely competitive. Products in the market compete primarily on the basis of subjective factors such as entertainment value and objective factors such as price, graphics and sound quality. Large diversified entertainment, cable and telecommunications companies, in addition to large software companies such as Microsoft Corporation, are increasing their focus on the interactive entertainment and education software market, which will result in even greater competition for the Company. Many of these companies have substantially greater financial, marketing and technical resources than the Company. If the Merger with CUC is completed, the Company believes that its ability to compete effectively in its marketplace will be improved. As competition increases, significant price competition and reduced profit margins may result. In response to increased competition for shelf space, the Company may need to increase marketing expenditures. In addition, competition from new technologies (such as new hardware platforms) may reduce demand in markets in which the Company has traditionally competed. Prolonged price competition or reduced demand as a result of competing technologies would have a material adverse effect on the Company's business, financial condition and operating results. The Company generates revenues from customers throughout the world, maintains sales and representative offices in its major foreign markets and holds certain deposits and accounts in foreign currencies. The majority of the Company's foreign operations are conducted by its France and United Kingdom subsidiaries in French Francs (the Franc) and British Pound Sterling (the Pound). Foreign revenues, expenses, currency and other accounts can be affected by foreign currency fluctuations. Revenues generally exceed expenses and assets exceed liabilities in non-U.S. currencies. For the fiscal year ended March 31, 1996, there was a strengthening of the U.S. Dollar in Europe which had the effect of decreasing the dollar value of net revenues denominated in these non-U.S. currencies. The Company estimates that the strengthening of the U.S. Dollar reduced consolidated net revenues by approximately $0.5 million and reduced consolidated net income by approximately $50,000 for the fiscal year ended March 31, 1996. In fiscal 1995 the weakening of the U.S. Dollar Page 14 15 accounted for approximately $1.1 million of the Company's consolidated net revenues and approximately $70,000 of the consolidated net income. Foreign currency denominated transactions and the respective fluctuations in foreign currency in fiscal 1994 did not have a significant impact on results of operations. RESULTS OF OPERATIONS FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995 REVENUES Net sales of $156.1 million and total revenues of $158.2 million for fiscal year 1996 represented increases of 63% and 62%, respectively, over the prior fiscal year. European net sales were $37.1 million for fiscal 1996 compared to $19.5 million in the prior year, an increase of 90%. Sales outside of the United States and Europe increased $2.8 million primarily due to growth in Asia. During fiscal 1996, 40 internally developed new products were released and an additional 18 were acquired compared to 23 new products released in the prior year. In fiscal 1996, 64% of gross software sales were derived from titles released in that fiscal year while 69% of gross software sales were derived from current releases in fiscal 1995. The following table provides a comparison of net sales by category:
Fiscal Year Ended March 31 -------------------------- 1996 1995 ---- ---- Category: Adventure ................... 38% 32% Simulation/Sports ........... 23% 33% Strategy/Action ............. 19% 20% Education/Family ............ 13% 12% Productivity................. 5% 1% Other ....................... 2% 2% ------------ ----------- 100% 100% ============ =========== Net Sales ........................ $156,123,000 $95,821,000
Adventure titles increased from 32% to 38% of net sales, or $28.7 million, due principally to the strength of the Company's hit title Phantasmagoria which sold over 600,000 copies worldwide during fiscal 1996. Simulation and sports titles increased $4.3 million due principally to the strength of the Company's car racing products acquired in the Papyrus merger. However, simulation/sports titles decreased from 33% to 23% of net sales due in part to the fact that the Company did not release any new titles in its Aces series of simulation games. Lastly, sales of productivity titles increased $6.8 million due to the Company's entrance into the home productivity market via the acquisitions of Pixellite, Green Thumb and Arion resulting in increased sales of Print Artist, Land Designer and the Master Cook series. The provision for customer returns and price protection reduced sales by $29.5 million in fiscal 1996 and $17.6 million in fiscal 1995, an increase of 68%. This increase in the provision for sales returns was disproportionate relative to the 63% increase in net sales due to increased sales to wholesale clubs and mass merchandisers. The Company has experienced higher rates of product returns with these two distribution channels due to experimental promotion efforts and higher levels of inventory required to support these new classes of trade. Other revenues include income from the Company's telephone hint line and advertising in its INTERAction magazine. These revenues remained constant at approximately $2.1 million. OPERATING EXPENSES Manufacturing costs, which include material costs and manufacturing labor and overhead, increased $11.2 million, but decreased from 23% to 21% of net sales over the prior fiscal year. This decrease was due primarily to improvements in product procurement practices through such means as negotiated prices for boxes and disks, the shift from disk-based to CD-based products, and decreases in material costs for CDs. Decreases in material costs were the result of an increased availability of CD- Page 15 16 ROMs resulting in lower costs to the Company. CD costs decreased approximately 15% from fiscal 1995 and had the effect of decreasing manufacturing costs approximately $0.5 million in fiscal 1996. Amortization of software development costs decreased $8.8 million as the result of a decrease in costs qualifying for capitalization under the criteria set forth in SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed ("SFAS 86"). A number of significant changes in product development, including the use of more sophisticated development tools, the development of serial titles, and development for the Windows 95 operating system, have resulted in less cost meeting the definition of technological feasibility and accordingly not eligible for capitalization pursuant to SFAS 86. Royalty costs increased $4.4 million, but remained constant at 8% of net sales, due in part to the Company's efforts at standardizing its royalty agreements. The Company pays royalties to independent product developers with rates ranging from approximately 1% to 20% of gross revenue. Selling, general and administrative expense, which includes sales, marketing, technical support and administrative expense, increased $19.4 million, but remained constant at 33% of total revenues. The Company increased sales and marketing expense by $12.0 million in order to promote its products. After accounting for $2.3 million in merger and acquisition costs and an additional $0.7 million in administrative expenses for the Company's joint venture with Pioneer Electronic Corporation, general and administrative expenses increased $4.4 million but decreased from 13% to 11% of total revenues. The decrease in the growth rate of administrative expenses was largely attributable to the substantial increase in revenues. Research and development expense, which reflects total research and development expenditures less capitalized software development costs, increased $13.9 million, or 63%, from 22% to 23% of total revenues. After excluding deferred software development costs of $5.0 million in fiscal 1995, development costs actually increased only $8.9 million, or 33%. Of this increase, approximately $0.9 million was attributable to the acquisitions of Arion and Green Thumb. Prior year financial statements do not include information for these companies since they were considered insignificant to the results of operations and financial position of the Company. The remaining $8.0 million increase was attributable to the increased number of products under development as reflected in the increase in the number of new products released from 23 to 40. FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994 REVENUES Net sales of $95.8 million and total revenues of $97.9 million for fiscal year 1995 represented increases of 36% and 34%, respectively, over the prior fiscal year. European net sales were $19.5 million for fiscal 1995 compared to $9.8 million in the prior year. Sales outside the United States and Europe increased $1.3 million primarily due to growth in Asia. During fiscal 1995, 23 new products were released compared to 39 new product releases in the prior year. In addition, four collections of series titles were released in fiscal 1995. In fiscal 1995, 69% of gross software sales were derived from titles released in that fiscal year while 55% of gross software sales were derived from current releases in fiscal 1994. The provision for customer returns and price protection reduced sales by $17.6 million in fiscal 1995 and $11.3 million in fiscal 1994, an increase of 56%. This increase in the provision for sales returns was disproportionate relative to the 36% increase in net sales due to increased sales to superstores and wholesale clubs. Other revenues include income from the Company's telephone hint line and advertising. These revenues decreased from $2.4 million to $2.1 million. OPERATING EXPENSES Manufacturing costs, which include material costs and manufacturing labor and overhead, increased $1.6 million, but decreased from 28% to 23% of net sales over the prior fiscal year. This decrease was due primarily to increased manufacturing efficiencies, the shift from disk-based to CD-based products, and decreases in material costs, primarily disks and CDs. Increased manufacturing efficiencies resulted from a decrease in the total amount spent on manufacturing labor and overhead costs from $5.0 million, or 7% of net sales, in fiscal 1994, to $3.9 million, or 4% of net sales, in fiscal 1995. These savings were achieved through a restructuring of the Company's manufacturing operations and implementation of various cost cutting measures. Decreases in material costs were the result of an increased availability of CD-ROMs and disks resulting in lower costs to the Company. CD costs decreased approximately 19% and disk costs decreased approximately 23% from fiscal 1994 to fiscal 1995. These cost reductions had the effect of decreasing manufacturing costs approximately $1.0 million in fiscal Page 16 17 1995 from fiscal 1994. In addition to the decrease in cost of disks and CDs, the Company has reduced its overall material cost by shifting to CD-based products. A single CD can hold significantly more information than a single disk. Amortization of software development costs increased $1.3 million, but decreased as a percentage of net sales from 12% to 10%. The increase in software amortization costs was the result of a corresponding increase in revenue derived from current year releases. Royalty costs increased $3.4 million, from 6% to 8% of net sales, due to increased sales of sports titles, which have higher royalties and increased payments to authors due to the increasing complexity of developing multimedia products. Selling, general and administrative ("SG&A") expense increased $7.1 million, but decreased from 35% to 33% of total revenues. Of this increase, $3.4 million was attributable to increased spending on sales and marketing activities, and $1 million was due to increased spending on technical and customer support. The amount of SG&A expense attributable to the Company's European operations increased $3.3 million but was partially offset by the $2.6 million decrease in SG&A expense attributable to INN for the period through July 1993 when INN was consolidated. Research and development expense, which reflects total research and development expenditures less capitalized software development costs, increased $4.3 million but decreased from 24% to 22% of total revenues. NON-OPERATING INCOME OR EXPENSE The Company recorded a gain of $19.7 million as a result of the sale of its remaining equity ownership interest in INN to AT&T on December 19, 1994. In December 1994 the Company also recorded $1.5 million in shareholder litigation costs in settlement of a securities class action lawsuit filed in December 1992. The Company determined that this settlement was in the best interests of its shareholders by obviating the burden and expense of the litigation process even though it believed that it had good defenses to the claims asserted and that the Company would have prevailed at trial. Amortization of goodwill increased approximately $0.5 million due to approximately $1.6 million in accrued incentive payments attributable to prior acquisitions being added to goodwill at March 31, 1994. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, the Company had cash, cash equivalents and marketable investment securities aggregating approximately $89 million, a decrease of $12 million from March 31, 1995. The majority of this decrease was attributable to an increase in accounts receivable of $31.9 million offset by an increase in accounts payable and by net income. The increase in receivables was due in part to a $13.4 million increase in revenues during the fourth quarter of fiscal 1996 over the comparable prior year quarter and to a slowdown of domestic customer receivable payments. The Company's working capital requirements are seasonal and are primarily for accounts receivable. In addition, the Company has a $10.0 million line of credit available. There was no outstanding balance under this line at March 31, 1996. In the normal course of business the Company evaluates business acquisition opportunities that will broaden its product selection for the home consumer. The Company believes its existing cash, cash equivalents and marketable investment securities, are sufficient to meet its expected requirements for the next several years. Page 17 18 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Sierra On-Line, Inc. Bellevue, Washington We have audited the accompanying consolidated balance sheets of Sierra On-Line, Inc. and subsidiaries (the "Company") as of March 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1996. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Seattle, Washington June 24, 1996 Page 18 19 SIERRA ON-LINE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS - ------ 1996 1995 -------- ------- CURRENT ASSETS: Cash and cash equivalents ....................................................... $ 40,220 $ 50,186 Marketable investment securities ................................................ 48,741 50,573 Accounts receivable, net of allowances of $14,022 and $7,265........................ 43,677 12,984 Inventories ........................................................................ 8,054 4,903 Deferred income taxes .............................................................. 8,159 1,777 Other current assets (including $792 note receivable from related parties at March 31, 1995) .................................................. 5,945 4,932 ---------- ---------- Total Current Assets ..................................................... 154,796 125,355 PROPERTY, PLANT AND EQUIPMENT, net ................................................. 11,490 9,068 GOODWILL, net of accumulated amortization of $4,635 and $2,871...................... 9,785 6,498 DEFERRED INCOME TAXES .............................................................. 1,241 1,522 OTHER ASSETS ...................................................................... 1,585 2,911 ---------- ---------- $ 178,897 $ 145,354 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................................................... $ 15,536 $ 6,127 Accrued compensation and related benefits ...................................... 7,012 4,118 Accrued incentive payments ..................................................... 538 1,562 Royalties payable (including $10 and $633 payable to a related party)............ 2,327 2,938 Deferred revenue ............................................................... 3,906 1,261 Accrued interest ................................................................ 33 1,160 Other accrued expenses (including $1,954 and $247 payable to related parties).... 7,268 5,028 ---------- ---------- Total Current Liabilities .................................................. 36,620 22,194 ADVANCES UNDER PUBLISHING AGREEMENT AND OTHER LIABILITIES .............................................................. 1,030 5,907 MINORITY INTEREST IN JOINT VENTURE ................................................. 1,233 --- CONVERTIBLE DEBT, net of unamortized discount and issuance costs of $586 and $1,066.............................................................. 23,389 34,634 COMMITMENTS AND CONTINGENCIES (Note 9) ........................................... --- --- STOCKHOLDERS' EQUITY: Preferred stock, par value $.01 per share; 1,000,000 shares authorized, none outstanding ................................ --- --- Common stock and paid-in capital, par value $.01 per share; 40,000,000 shares authorized; 20,518,871 and 18,726,519 shares issued and outstanding..... 93,018 70,052 Retained earnings ............................................................... 24,728 12,696 Net unrealized holding gains (losses)............................................ (67) 101 Cumulative translation adjustment .............................................. (705) 119 ---------- ---------- 116,974 82,968 Less common stock in treasury, 94,154 shares, at cost .......................... 349 349 ---------- ---------- Total Stockholders' Equity ............................................... 116,625 82,619 ---------- ---------- $ 178,897 $ 145,354 ========== ==========
See Notes to Consolidated Financial Statements. Page 19 20 SIERRA ON-LINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 --------- --------- ------- REVENUES: Net sales.............................................. $ 156,123 $ 95,821 $ 70,712 Other ................................................. 2,054 2,058 2,389 ---------- ---------- ---------- 158,177 97,879 73,101 ---------- ---------- ---------- OPERATING EXPENSES: Manufacturing costs ................................... 32,821 21,663 20,058 Amortization of software development costs ............ 865 9,689 8,379 Royalties (including $1,294, $819, and $256 earned by related party)................................... 11,777 7,370 4,005 Selling, general and administrative ................... 52,135 32,777 25,685 Research and development .............................. 35,899 21,967 17,686 Purchased in-process research and development ......... --- --- 1,102 Amortization .......................................... 2,075 1,212 722 ---------- ---------- ---------- 135,572 94,678 77,637 ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS .............................. 22,605 3,201 (4,536) ---------- ---------- ---------- OTHER INCOME (EXPENSE): Gain on sale of The ImagiNation Network ............... --- 19,739 --- Equity in loss from The ImagiNation Network............ --- (1,990) (5,066) Shareholder litigation costs........................... --- (1,500) --- Contract termination and consulting fees .............. (2,302) Interest income (including $12, $84 and $152 earned from related parties)........................ 5,022 3,713 1,331 Interest expense ...................................... (2,690) (4,306) (280) ---------- ---------- ---------- 30 15,656 (4,015) ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES .......................... 22,635 18,857 (8,551) INCOME TAX PROVISION (BENEFIT) ............................. 7,680 5,865 (679) CHANGE IN VALUATION ALLOWANCE .............................. (1,215) --- --- ---------- ---------- ---------- NET INCOME (LOSS) .......................................... $ 16,170 $ 12,992 $ (7,872) ========== ========== ========== NET INCOME (LOSS) PER SHARE: Primary ............................................... $ 0.77 $ 0.70 $ (0.46) Fully diluted ......................................... 0.76 0.68 (0.46) WEIGHTED AVERAGE SHARES OUTSTANDING: Primary ............................................... 21,007 18,513 17,143 Fully diluted ......................................... 23,009 22,216 17,143
See Notes to Consolidated Financial Statements. Page 20 21 SIERRA ON-LINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock Net Total and Paid-in Capital Retained Unrealized Cumulative Treasury Stock Stock- ------------------- Earnings Holding Translation -------------- holders' Shares Amount (Deficit) Gains Adjustment Shares Amount Equity ------------ -------- ---------- ---------- ----------- ---------------- --------- BALANCE, APRIL 1, 1993 16,776,183 $44,311 $ 7,898 $ --- $ (247) 104,474 $ (392) $ 51,570 Net loss (7,872) (7,872) Stock options exercised 595,108 3,256 3,256 Tax benefit of stock option transactions 442 442 INN liquidation preference 3,977 3,977 S Corporation distributions (295) (295) Foreign currency translation adjustment 28 28 ---------- ------- ------- --------- ---------- ------- ------- -------- BALANCE, MARCH 31, 1994 17,371,291 51,986 (269) (219) 104,474 (392) 51,106 Net income 12,992 12,992 Equity contributions 266 266 Stock options exercised 333,807 2,131 2,131 Tax benefit of stock option transactions 1,772 1,772 Conversion of convertible debt 1,021,421 13,897 13,897 Treasury stock issued (10,320) 43 43 S Corporation distributions (27) (27) Net unrealized holding gains on marketable investment securities available-for-sale 101 101 Foreign currency translation adjustment 338 338 ---------- ------- ------- --------- --------- ------- ------- -------- BALANCE, MARCH 31, 1995 18,726,519 70,052 12,696 101 119 94,154 (349) 82,619 Net income 16,170 16,170 Stock options exercised and stock purchased under the Employee Stock Purchase Plan 624,611 3,758 3,758 Tax benefit of stock option transactions 3,624 3,624 Conversion of convertible debt 837,498 11,379 11,379 S Corporation distributions (4,138) (4,138) Stock issued for bonuses and an amendment to an incentive payment plan 182,285 4,107 4,107 Stock issued in business acquisitions 147,958 98 98 Net unrealized holding gains on marketable investment securities available-for-sale (168) (168) Foreign currency translation adjustment (824) (824) ---------- ------- ------- --------- --------- ------- ------- --------- BALANCE, MARCH 31, 1996 20,518,871 $93,018 $24,728 $ (67) $ (705) 94,154 $ (349) $ 116,625 ========== ======= ======= ========= ========= ======= ======= =========
See Notes to Consolidated Financial Statements. Page 21 22 SIERRA ON-LINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 ----------- ----------- -------- OPERATING ACTIVITIES: Net income (loss) ................................................... $ 16,170 $ 12,992 $ (7,872) Reconciliation to net cash provided by (used for) operating activities: Depreciation ....................................................... 4,187 3,298 3,085 Amortization of intangible assets and issuance costs ............... 2,763 11,153 9,102 Gain on sale of The ImagiNation Network ............................ --- (19,739) --- Equity loss from The ImagiNation Network ........................... --- 1,990 5,066 Sierra Pioneer Joint Venture minority interest...................... 1,233 --- --- Purchased in-process research and development ......................................................... --- --- 1,102 Provision for doubtful accounts ................................... 1,205 829 650 Deferred income taxes ............................................. (2,476) (2,840) (1,394) Other ............................................................. --- 1,880 (661) Cash provided (used) by changes in assets and liabilities: Accounts receivable ............................................... (32,370) (2,670) (5,020) Inventories ....................................................... (3,151) 127 (898) Other current assets .............................................. (1,013) 2,937 1,880 Software development costs ........................................ --- (5,037) (6,060) Research and development acquired ................................. --- --- (2,452) Other assets ...................................................... 461 (1,090) (225) Accounts payable .................................................. 9,125 1,498 (219) Accrued compensation and related benefits ........................................................ 2,894 2,067 212 Royalties payable ................................................. (611) 1,583 570 Deferred revenue......................................................... 2,645 268 993 Accrued interest ................................................... (1,127) 1,160 --- Other accrued expenses ............................................ 218 1,093 489 Advances under publishing agreement and other liabilities.......................................... (4,877) 4,692 (14) ----------- ----------- ----------- Net cash provided by (used for) operating activities ............ (4,724) 16,191 (1,666) INVESTING ACTIVITIES: Proceeds from sale of The ImagiNation Network ........................ --- 19,739 --- Proceeds from matured marketable investment securities................ 93,556 40,319 67,865 Purchases of marketable investment securities ............................................................. (91,724) (69,880) (65,550) Net purchases of property, plant and equipment .............................................................. (6,609) (4,901) (3,628) Loan to The ImagiNation Network ......................................... --- (2,895) --- Payment for purchase of subsidiaries, net of cash acquired and research and development ....................................... (1,987) (1,620) (2,797) Net repayment of advances to The ImagiNation Network ................. --- --- 1,646 ----------- ----------- ----------- Net cash used by investing activities ............................. (6,764) (19,238) (2,464) FINANCING ACTIVITIES: Net proceeds from convertible debt offering .......................... --- 48,250 --- Proceeds from exercise of options and warrants ...................... 3,758 2,131 3,255 S Corporation distributions .......................................... (2,184) (27) (295) Other ................................................................ (312) (780) 40 ----------- ----------- ----------- Net cash provided by (used for) financing activities .............. 1,262 49,574 3,000 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................................................... (10,226) 46,527 (1,130) EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................ 260 96 --- CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR................................................... 50,186 3,563 4,693 ----------- ----------- ----------- END OF YEAR ....................................................... $ 40,220 $ 50,186 $ 3,563 =========== =========== ===========
See Notes to Consolidated Financial Statements Page 22 23 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosure of cash flow and noncash investing and financing information for the years ended March 31 is as follows (in thousands):
1996 1995 1994 ------- ------ ---- Cash paid (received) during the year for: Income taxes, net ...................... $ 9,584 $ 7,181 $ (739) Interest ............................... $ 3,817 $ 4,578 $ ---
During fiscal 1996 and 1995, the Company converted $11,725,000 and $14,300,000 of convertible debt into 837,500 and 1,021,421 shares of common stock, respectively. In fiscal 1994, the Company purchased all of the capital stock of Coktel Vision for $5,332,000. In connection with the acquisition, liabilities assumed were as follows (in thousands): Fair value of net assets acquired ............................................... $ 7,641 Cash paid ...................................................................... (5,332) -------- Liabilities assumed ............................................................ $ 2,309 ========
See Notes to Consolidated Financial Statements. Page 23 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 NOTE 1: BASIS OF PRESENTATION AND ACCOUNTING POLICIES PENDING SALE OF THE COMPANY TO CUC INTERNATIONAL, INC. On February 17, 1996, the Board of Directors approved the sale of the Company to CUC International Inc. (CUC). Under the terms of the merger agreement, the shareholders of the Company will receive 1.225 shares of CUC common stock for each share of the Company's common stock. The sale is subject to shareholder approval. Consulting fees related to the merger have been expensed as incurred and approximate $0.6 million. Upon shareholder approval of the merger, the Company will be obligated to pay approximately $7.7 million in additional consulting fees. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Sierra On-Line, Inc. (Sierra), a Delaware corporation, its wholly-owned subsidiaries, and its 51% interest in a corporate joint venture (collectively referred to as the Company). Significant subsidiaries include Sierra On-Line Limited (Sierra U.K.), Dynamix, Inc. (Dynamix), Bright Star Technology, Inc. (Bright Star), Coktel Vision, S.A. (Coktel), Software Inspiration, Ltd. (Inspiration), PXL Acquisition Corp. (Pixellite), Papyrus Design Group, Inc. (Papyrus), and Sierra/Pioneer Joint Venture (Pioneer). The accounts of The ImagiNation Network, Inc. (INN) were consolidated with those of the Company through July 26, 1993 and accounted for under the equity method from July 1993 to December 1994 when the Company sold its remaining interest in INN to AT&T Corp. All significant intercompany balances and transactions are eliminated. NATURE OF OPERATIONS The Company designs, develops, publishes, markets and distributes interactive entertainment and education software for personal computers, CD-ROM-based PC systems and selected emerging platforms. Using its design and development capabilities, the Company creates branded product series for existing and emerging hardware platforms. The Company's products are distributed in North America, Europe, and Asia. Sales are generated through a domestic field sales organization and electronic superstores, software specialty stores, mass merchants, direct mail, and bundling arrangements. The Company performs its own disk duplicating and packaging for diskette-based products at its Oakhurst, California and Paris, France facilities. The Company does not internally replicate CD-ROM-based products but rather subcontracts that work to several third parties. The Company is subject to certain business risks which could affect future operations and financial performance. These risks include changing computing environments, rapid technological change, development of new products, concentrations in manufacturing facilities, competitive pricing, and reliance on distribution channels. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions may have a material impact on the financial statements. The Company has used estimates in determining certain provisions including sales returns, uncollectible trade accounts receivable, useful lives for fixed assets and intangible assets, and tax liabilities. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, certificates of deposit and short term investments with original maturities of three months or less. MARKETABLE INVESTMENT SECURITIES Marketable investment securities consist of corporate bonds, U.S. Treasury notes, and commercial paper. All securities are classified as available-for-sale and are reported at fair value with net unrealized holding gains and losses excluded from earnings and reported in stockholders' equity. Fair value is based upon quoted market prices using the specific identification method. Page 24 25 INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation and amortization are provided using a straight-line method over estimated useful lives ranging from two to 18 years. SOFTWARE DEVELOPMENT COSTS AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES Under the criteria set forth in SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, capitalization of software development costs begins upon the establishment of technological feasibility of the product. The establishment of technological feasibility and the on-going assessment of the recoverability of costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life and changes in software and hardware technology. Amounts that have been capitalized under this statement, after consideration of the above factors, are amortized on either a straight-line basis over the estimated useful lives of the products (six to 24 months) or the ratio of current product revenues to the total revenues expected over the life of the product, whichever produces the greater expense. Purchased in-process research and development is charged to expense on the date acquired if it has no alternative future use and technological feasibility is not established. GOODWILL Goodwill represents the excess purchase price paid over the net assets of acquired companies. Goodwill is amortized on a straight-line basis over seven years. The carrying value of goodwill is reviewed on a regular basis for the existence of facts or circumstances both internally and externally that may suggest impairment. To date, no such impairment has been indicated. Should there be an impairment in the future, the Company will measure the amount of the impairment based on the discounted expected future cash flows from the impaired assets. FOREIGN CURRENCY Assets and liabilities denominated in foreign currencies are translated to U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at average rates of exchange prevailing during the year. The translation adjustment resulting from this process is presented separately in shareholders' equity. The gains and losses from foreign currency transactions are included in selling, general and administrative expense in the statements of operations. REVENUE RECOGNITION The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) No. 91-1, Software Revenue Recognition. Revenue from product sales is recognized upon shipment, provided no significant vendor obligations remain and collection of the resulting receivable is deemed probable. Other insignificant vendor obligations consisting primarily of costs associated with telephone support to customers after delivery of software are accrued. Revenue from royalty and service arrangements is insignificant. The Company's agreements with certain distributors and retailers permit them to exchange products or provide price protection under certain circumstances. The Company provides an allowance for estimated exchanges and price protection. ADVERTISING The Company accounts for advertising costs in accordance with SOP No. 93-7, Reporting on Advertising Costs. Direct response advertising is capitalized only if customer sales can be directly correlated to the advertising and if future benefit can be demonstrated. Capitalized advertising costs are amortized using the straight-line method over the estimated benefit period of three months. Advertising expense for fiscal 1996, 1995 and 1994 was $7,530,000, $8,750,000 and $7,850,000, respectively. Amounts capitalized at March 31, 1996 and 1995 approximated $561,000 and $598,000, respectively. Page 25 26 INCOME TAXES (BENEFIT) The Company computes income taxes using an asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. NET INCOME (LOSS) PER SHARE Net income (loss) per share is based upon the weighted average number of common shares outstanding during the period and after consideration of the dilutive effect, if any, of stock options granted using the treasury stock method. In addition, conversion of the Company's 6-1/2% Convertible Subordinated Notes are included in fully diluted income per share using the if-converted method when such securities are dilutive. As a result of applying the if-converted method, net income for the purposes of computing fully diluted net income per share amounts has been adjusted for the assumed decrease in interest expense, net of income taxes, as follows (in thousands):
1996 1995 --------- --------- Net income.................................. $ 16,170 $ 12,992 Adjustment.................................. 1,205 2,115 --------- --------- $ 17,375 $ 15,107 ========= =========
STOCK SPLIT On March 3, 1995, the Company recorded a two-for-one stock split to holders of record on February 17, 1995. Outstanding shares, stock options and per share data have been retroactively restated for all periods to give effect to the stock split. CONCENTRATION OF CREDIT RISK Accounts receivable include amounts from geographically dispersed dealers and distributors in the computer software industry. Concentrations of credit risk are considered minimal and bad debts have not been significant. The Company does not require collateral or other security to support credit sales. RECLASSIFICATIONS Certain reclassifications have been made to the 1994 and 1995 balances to conform with the 1996 presentation. Page 26 27 NOTE 2: BUSINESS COMBINATIONS PIXELLITE, INSPIRATION AND PAPYRUS On May 31, 1995 the Company merged with Pixellite, a developer of personal printing software, in exchange for 245,779 shares of Sierra's common stock. On June 20, 1995 the Company also merged with Inspiration, a developer of strategy games, in exchange for 730,352 shares of Sierra's common stock. On November 30, 1995 the Company merged with Papyrus, developers of NASCAR Racing and Indy Car Racing, in exchange for 1,169,404 shares of Sierra's common stock. These mergers have been accounted for as poolings-of-interests. The pooling-of-interests method of accounting is intended to present as a single interest two or more common shareholders' interests which were previously independent; accordingly, the historical financial statements for the periods prior to the mergers are restated as though the companies had been combined. The following summarizes amounts previously reported by Sierra prior to the transaction for the years ended March 31, 1995 and 1994 (in thousands, except per share data):
1995 1994 ---------- ---------- REVENUES: Sierra............................................................ $ 83,440 $ 62,745 Pixellite, Inspiration and Papyrus .............................. 14,439 10,356 ---------- ---------- Combined ......................................................... $ 97,879 $ 73,101 ========== ========== NET INCOME (LOSS) Sierra............................................................ $ 11,938 $ (8,676) Pixellite, Inspiration and Papyrus ............................... 1,054 804 ---------- ---------- Combined ......................................................... $ 12,992 $ (7,872) ========== ========== PRIMARY NET INCOME (LOSS) PER SHARE: Sierra ........................................................... $ 0.74 $ (0.59) Pixellite, Inspiration and Papyrus ............................... (0.04) 0.13 ---------- ---------- Combined ......................................................... $ 0.70 $ (0.46) ========== ========== FULLY DILUTED NET INCOME (LOSS) PER SHARE: Sierra ........................................................... $ 0.71 $ (0.59) Pixellite, Inspiration and Papyrus................................ (0.03) 0.13 ---------- --------- Combined ......................................................... $ 0.68 $ (0.46) ========== =========
GREEN THUMB AND ARION The Company also merged with Green Thumb in July 1995 and with Arion in September 1995 in exchange for 87,762 and 60,196 shares of Sierra Common Stock, respectively. The financial statements have not been restated for the Green Thumb and Arion mergers as these companies did not impact the Company's operations significantly. All fees and expenses related to the Pixellite, Inspiration, Papyrus, Green Thumb and Arion mergers have been expensed as required under the pooling-of-interests accounting method. Such fees and expenses approximated $2.3 million and include legal, accounting and finders fees. COKTEL On October 29, 1993, the Company acquired Coktel Vision S.A. ("Coktel"), a French developer and publisher of educational and entertainment software products, for an initial purchase price of approximately $5,332,000. This business combination was accounted for as a purchase, and, accordingly, the net assets and operations of Coktel have been included in the Company's consolidated financial statements since October 29, 1993. Approximately $1,102,000 of the purchase price was attributed to in-process research and development and accordingly was charged to expense at the date of acquisition. Amounts allocated to software development costs approximated $1,350,000 and amounts allocated to goodwill were approximately $2,419,000. Goodwill is being amortized over an estimated useful life of seven years on a straight-line basis. Contingent purchase payments were due under an incentive payment plan. During fiscal years 1995 and 1994, approximately $1,562,000 and $1,313,000 was earned and paid under this plan. At March 31, 1995, incentive payments due approximated $1,562,000. In December 1995, the Company amended the Coktel acquisition agreement whereby it issued 150,000 shares of Common Stock in exchange for each former Coktel shareholder relinquishing their rights to receive any further incentive payments. As a result of this amendment, the Company recorded goodwill of approximately $4.1 million which is being amortized over its remaining useful life of approximately five years on a straight-line basis. The Company could be obligated Page 27 28 to make additional payments as provided in the agreement, however, management believes that the likelihood of additional payments is remote. NOTE 3: MARKETABLE INVESTMENT SECURITIES The Company's investments, including aggregate fair values, cost, gross unrealized holding gains, and gross unrealized holding losses, consist of the following at March 31 (in thousands):
GROSS GROSS UNREALIZED UNREALIZED FAIR HOLDING HOLDING VALUE COST GAINS LOSSES ----- ---- ----- ------ 1996: U.S. Government obligations $ 15,471 $ 15,481 $ --- $ 10 Corporate debt securities 27,438 27,521 24 107 Commercial paper 5,832 5,832 --- --- ----------- ----------- ----------- ----------- $ 48,741 $ 48,834 $ 24 $ 117 =========== =========== =========== =========== 1995: U.S. Government obligations $ 10,394 $ 10,357 $ 39 $ 2 Corporate debt securities 23,050 22,996 80 26 Commercial paper 17,129 17,067 64 2 ----------- ----------- ----------- ----------- $ 50,573 $ 50,420 $ 183 $ 30 =========== =========== =========== ===========
Fair values of investments are based on quoted market prices on the last business day of the fiscal year. All investments available-for-sale at March 31, 1996 will mature within one year. NOTE 4: INVENTORIES Inventories consist of the following at March 31 (in thousands):
1996 1995 --------- --------- Raw materials ............................. $ 3,207 $ 2,841 Work in progress .......................... --- 65 Finished goods ............................ 4,847 1,997 --------- --------- $ 8,054 $ 4,903 ========= =========
NOTE 5: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at March 31 (in thousands):
1996 1995 ---------- ---------- Land ...................................... $ 142 $ 203 Buildings and improvements ................ 3,858 3,591 Computers and equipment ................... 20,669 16,703 Furniture and fixtures .................... 1,936 1,312 ---------- ---------- 26,605 21,809 Less accumulated depreciation and amortization.............................. (15,115) (12,741) ---------- ---------- $ 11,490 $ 9,068 ========== ==========
Page 28 29 NOTE 6: FINANCING ARRANGEMENTS LINE OF CREDIT In fiscal 1996, the Company entered into an unsecured bank line of credit that provides for borrowings of up to $10 million, expiring August 31, 1996. Any borrowings under this line of credit would be collateralized by substantially all the Company's assets and incur interest at either the bank's prime rate or IBOR plus 150 basis points, at the Company's choice. The line contains covenants requiring the Company to maintain certain financial ratios and minimum balances in cash and cash equivalents. The Company is in compliance with all covenants under this line of credit as of March 31, 1996. There have been no borrowings by the Company under this line of credit to date. CONVERTIBLE NOTES On April 12, 1994, the Company issued $50,000,000 in principal amount of 6-1/2% convertible subordinated notes due April 1, 2001 (the "Notes"). Interest on the Notes is payable semi-annually on April 1 and October 1 of each year. The Notes are convertible into common stock of the Company, at a conversion price of $14.00 per share, subject to adjustment under certain conditions. The Notes are redeemable after April 2, 1997, at the option of the Company, at specified redemption prices. The Notes will be subordinated to all existing and future Senior Indebtedness (as defined in the Indenture governing the Notes) of the Company. Issuance costs have been netted against the principal convertible debt balance are being amortized on a straight-line basis over seven years. The fair value of these notes at March 31, 1996 was $58.3 million as determined by the Private Offerings, Resales and Trading through Automated Linkages Market. During fiscal 1996 and 1995 the Company paid $0.9 million and $1.0 million, included in interest expense, to induce conversion of $11,725,000 and $14,300,000 of convertible debt into 837,500 and 1,021,421 shares of common stock. Page 29 30 NOTE 7: INCOME TAX PROVISION (BENEFIT) A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows for the years ended March 31:
1996 1995 1994 ---- ---- ---- Statutory rate .............................................. 35.0% 35.0% (35.0)% State income taxes, net of federal income tax benefit ....... 3.0 3.0 --- Utilization of net operating losses ......................... --- (3.9) --- Non-consolidated losses ..................................... --- (4.5) 18.3 Foreign subsidiaries ........................................ --- (2.2) 3.4 Non-deductible expenses ..................................... 8.9 4.5 2.1 Subchapter S Corporation earnings ........................... (5.5) (1.3) (0.6) Reduction in valuation allowance ............................ (14.3) --- --- Other ....................................................... 1.4 0.5 3.9 ----- ---- ----- Effective rate ............................................. 28.5% 31.1% (7.9)% ===== ==== =====
The provision for income taxes (benefit) consists of the following for the years ended March 31 (in thousands):
1996 1995 1994 ---------- ---------- ---------- Current: Federal .................................................. $ 6,095 $ 7,772 $ 540 State .................................................... 516 922 32 Foreign .................................................. 1,207 (55) 143 ---------- ---------- ---------- 7,818 8,639 715 Deferred: Federal .................................................. (1,179) (2,298) (1,003) State .................................................... (183) (268) (391) Foreign ................................................... --- (208) --- ---------- ---------- ---------- (1,362) (2,774) (1,394) ---------- ---------- ---------- $ 6,456 $ 5,865 $ (679) ========== ========== ==========
Deferred income tax liabilities (assets) reflect the tax effect of temporary differences between the amounts of assets and liabilities for financial reporting purposes and amounts as measured for tax purposes. A valuation allowance against deferred tax assets has been provided for when it is more likely than not that some or all of the deferred tax assets will not be realized. The effect of temporary differences that cause significant portions of deferred tax assets and liabilities are as follows at March 31 (in thousands):
1996 1995 ---------- --------- Deferred Assets: Inventory overhead allocation ...................... $ (327) $ (398) Accrued expenses ................................... (7,012) (5,638) Tax credits ......................................... --- (77) Stock Option Benefit ................................ (1,509) --- Net operating losses ................................ --- (334) Other ............................................... (651) (187) --------- --------- Subtotal ........................................... (9,499) (6,634) Valuation allowance.................................. --- 3,230 --------- --------- (9,499) (3,404) Deferred Liabilities: Software development costs ......................... 99 105 --------- --------- $ (9,400) $ (3,299) ========= =========
Page 30 31 NOTE 8: STOCK OPTION AND STOCK PURCHASE PLANS STOCK OPTION PLANS The Company has reserved 6,170,000 shares of common stock for issuance under its 1995 Stock Option and Award Plan and the 1987 Stock Option Plan for officers, employees, directors, vendors, consultants and independent contractors. Options granted under these plans may be either incentive stock options or nonqualified stock options and are granted at the fair market value of the Company's common stock at the date of grant. Options vest and expire under the terms established at the date of grant. The Company also has 218,556 shares reserved for issuance under an option plan it acquired through its merger with Papyrus. A summary of stock option transactions under all plans follows:
Range of Price Shares Per Share ----------- ----------------- Options outstanding, April 1, 1993 ................ 2,114,768 $0.47 - $10.13 Granted ....................................... 760,838 0.09 - 11.50 Exercised ..................................... (541,108) 0.47 - 10.13 Canceled ...................................... (457,366) 3.86 - 10.13 --------- ----------------- Options outstanding, March 31, 1994................. 1,877,132 0.09 - 11.50 Granted ........................................ 963,217 0.09 - 22.00 Exercised ...................................... (333,807) 0.47 - 11.50 Canceled ....................................... (215,482) 4.59 - 11.88 --------- ----------------- Options outstanding, March 31, 1995 ................ 2,291,060 0.09 - 22.00 Granted ........................................ 754,613 0.80 - 41.75 Exercised ...................................... (616,592) 0.09 - 17.69 Canceled ....................................... (229,161) 4.92 - 35.13 --------- ----------------- Options outstanding, March 31, 1996 ................ 2,199,920 $0.09 - $41.75 ========= =================
Of the options outstanding at March 31, 1996, 501,888 options are currently exercisable at prices ranging from $0.09 to $22.00 per share, and 1,770,873 options remain available for future grants. EMPLOYEE STOCK PURCHASE PLAN The Company has reserved 200,000 shares of common stock for issuance under the Employee Stock Purchase Plan for officers and full-time employees with six months of service. Under the Plan, stock may be purchased at the completion of the semi-annual purchase periods at a price equal to 85% of the lowest fair market value of either the first or last day of the purchase period. During fiscal 1996, 8,019 shares of common stock was purchased under the Plan. The Board of Directors has approved the termination of the Plan effective June 30, 1996, subject to completion of the merger with CUC International Inc. NEW ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, Accounting for Stock-Based Compensation (SFAS 123), which will be effective for the Company beginning April 1, 1996. SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share. Page 31 32 NOTE 9: COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company has entered into long-term lease obligations for certain office and warehouse facilities in addition to various leases for office equipment and company vehicles. These commitments expire at various times through fiscal 2003. The Company's expense for lease obligations for the years ended March 31, 1996, 1995 and 1994 were $2,774,000, $2,062,000, and $1,356,000, respectively. Future minimum annual lease payments on these obligations are as follows for the years ended March 31 (in thousands):
Payments -------- 1997 .................................... $ 2,852 1998 .................................... 2,672 1999 .................................... 2,190 2000 .................................... 2,071 2001 .................................... 1,537 Thereafter .............................. 1,192 ---------- Total ................................ $ 12,514 ==========
CONTINGENCIES The Company is a defendant in various lawsuits arising in the ordinary course of business. Management believes that losses to the Company from these lawsuits, if any, will not have a material adverse effect on its financial condition or results of operations. In fiscal 1995, the Company paid approximately $1.5 million in shareholder litigation costs in settlement of a securities class action lawsuit filed in December 1992. NOTE 10: SALE OF THE IMAGINATION NETWORK The operating activities of INN were consolidated with those of the Company through July 26, 1993. On July 27, 1993, the Company sold 42% of INN's voting stock and reduced its ownership interest to 58% and reduced its voting control such that the Company began recording INN operations utilizing the equity method. Upon sale of its 42% interest, the Company recorded its liquidation preference in excess of recorded book value as shareholders' equity. In December 1994, the Company sold its remaining equity interest in INN to AT&T and recorded a gain of $19,739,000. The Company also entered into a multi-year publishing agreement with AT&T to provide content for INN. The publishing agreement provides for AT&T to fund up to $4,000,000 of the Company's development expenditures under an existing publishing agreement and up to $23,000,000 of Sierra's development expenditures, subject to certain limitations, through non-refundable royalty advances. The non-refundable royalty advances are reflected net of research and development expense. A summary of gross research and development expense and non-refundable royalty advances for the years ended March 31, are as follows (in thousands):
1996 1995 --------- ------- Research and development expense $ 39,685 $23,552 Non-refundable royalty advances (3,786) (1,585) --------- ------- $ 35,899 $21,967 ========= =======
Page 32 33 NOTE 11: RELATED PARTY TRANSACTIONS The Company pays royalties to certain independent developers, including a director of the Company. Royalty expense related to this director was approximately $1,294,000, $819,000, and $256,000 during the years ended March 31, 1996, 1995 and 1994, respectively. Royalties payable to the director at March 31, 1996 and 1995 were $10,000 and $633,000, respectively. From July 1993 through December 1994, the Company paid certain operating expenses on behalf of INN. Total amounts advanced under this arrangement totaled $456,000 and $3,271,000 during fiscal 1995 and fiscal 1994, respectively. In April 1994, the Company accepted an unsecured Promissory Note from INN for approximately $2,895,000. This amount was paid in full, including interest accrued at Bank of America's prime rate, in December 1994. The Company held certain notes receivable from officers of a subsidiary. Amounts receivable from those officers at March 31, 1995 was $792,000. Interest earned under these agreements was $12,000, $84,000, and $152,000 for the years ended March 31, 1996, 1995 and 1994, respectively. The notes were paid in full in May 1995. During fiscal years 1996, 1995 and 1994, the Company has reported distributions which represent dividends for undistributed S Corporation earnings to the shareholders of Pixellite and Papyrus. At March 31, 1996 and 1995, notes payable associated with these dividends approximated $2.0 million and $247,000, respectively. NOTE 12: GEOGRAPHIC INFORMATION The following schedule presents financial information of the Company classified by geographic area for the years ended March 31 (in thousands):
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED ------ ------ ------------ ------------ 1996 Sales to unaffiliated customers $ 119,014 $ 37,109 $ --- $ 156,123 =========== =========== =========== =========== Income from operations $ 17,914 $ 4,691 $ --- $ 22,605 =========== =========== =========== =========== Identifiable assets $ 161,788 $ 17,109 $ --- $ 178,897 =========== =========== =========== =========== 1995 Sales to unaffiliated customers $ 76,305 $ 19,516 $ --- $ 95,821 Intercompany transfers 880 --- (880) --- ----------- ----------- ----------- ----------- $ 77,185 $ 19,516 $ (880) $ 95,821 =========== =========== =========== =========== Income from operations $ 1,291 $ 1,910 $ --- $ 3,201 =========== =========== =========== =========== Identifiable assets $ 137,116 $ 8,238 $ --- $ 145,354 =========== =========== =========== =========== 1994 Sales to unaffiliated customers $ 61,606 $ 9,106 $ --- $ 70,712 Intercompany transfers 3,901 720 (4,621) --- ----------- ----------- ----------- ----------- $ 65,507 $ 9,826 $ (4,621) $ 70,712 =========== =========== =========== =========== Income (loss) from operations $ (4,962) $ 514 $ (88) $ (4,536) =========== =========== =========== =========== Identifiable assets $ 63,003 $ 5,902 $ --- $ 68,905 =========== =========== =========== ===========
Intercompany transfers primarily represent shipments of finished goods inventory to international subsidiaries. The intercompany transfers are made at transfer prices which approximate prices charged to unaffiliated customers and have been eliminated from consolidated net sales. In the years ended March 31, 1996, 1995 and 1994, the majority of the Company's sales in Europe were conducted by Coktel, a French corporation, and Papyrus and Sierra U.K., both U.K. corporations. Page 33 34 NOTE 13: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Summarized quarterly financial information for fiscal 1996 and fiscal 1995 is as follows (in thousands, except per share data):
Primary Fully Net Diluted Net Income Net Income (Loss) Income Revenues (Loss) Per Share Per Share -------- ------ --------- --------- Quarter ended: June 30, 1995 $ 24,872 $ 852 $ 0.04 $ 0.04 September 30, 1995 34,522 3,609 0.17 0.15 December 31, 1995 63,220 12,284 0.58 0.55 March 31, 1996 35,563 (575) (0.03) (0.03) ---------- ---------- $ 158,177 $ 16,170 ========== ========== Quarter ended: June 30, 1994 $ 13,550 $ (4,304) $ (0.25) $ (0.25) September 30, 1994 20,966 (1,220) (0.07) (0.07) December 31, 1994(1) 41,213 17,796 0.97 0.83 March 31, 1995 22,150 720 0.05 0.05 ---------- ---------- $ 97,879 $ 12,992 ========== ==========
- ------------ (1) Includes $19,739,000 gain on sale of the Company's 58% interest in The ImagiNation Network to AT&T. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable Page 34 35 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Company's directors and executive officers is incorporated by reference from the Company's definitive proxy statement for its 1996 Annual Meeting of Stockholders (the "1996 Proxy Statement") under the caption "Proposal No. 1 - Election of Directors." ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference from the Company's 1996 Proxy Statement under the caption "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to Sierra, as of June 17, 1996, with respect to the beneficial ownership of Sierra's Common Stock as of that date by (i) each stockholder known by Sierra to be a beneficial owner of more than 5% of Sierra's Common Stock, (ii) each director and nominee, (iii) each executive officer, and (iv) all current executive officers and directors as a group.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP OF CLASS - ----------------------- -------------------- -------- Kenneth A. and Roberta L. Williams (2) 1,803,918 8.64% 3380 146th Place SE, Suite 300, Bellevue, Washington 98007 The Equitable Companies Incorporated (3) 1,677,100 8.04% 787 Seventh Avenue, New York, New York 10019 FMR Corp. (4) 997,010 4.78% 82 Devonshire Street, Boston, Massachusetts 02109 Fidelity Management & Research Company (4) 739,210 3.54% 82 Devonshire Street, Boston, Massachusetts 02109 Roland Oskian (2) 100,104 * Thomas L. Beckmen (2) 73,120 * David C. Hodgson (2)(5) 52,620 * Walter A. Forbes (2) 39,620 * Michael A. Brochu (2) 21,549 * Dennis Cloutier (2) 18,210 * Jarold W. Bowerman (2) 7,000 * Michael G. Berolzheimer (2) 6,620 * Richard K. Thumann (2) 2,313 * Marvin H. Green, Jr. (2) 3,620 * Executive officers and directors as a group (12 persons) (2) 2,128,694 10.2%
- ------------ * less than 1% (1) Except as otherwise noted, the Company believes that each director, executive officer and 5% or greater stockholder has sole voting and sole investment power, subject to community property laws where applicable, with respect to all shares shown in the table as beneficially owned by such person. Each beneficial owner's percentage ownership is determined by assuming that options beneficially owned by such person (but not those owned by any other person) that are exercisable within 60 days have been exercised. The number of shares outstanding at the close of business on June 17, 1996 was 20,869,369. Page 35 36 (2) Includes, as indicated in note (1) above, shares subject to options exercisable within 60 days after June 17, 1996 in the following amounts: 23,200 shares for Mr. and Mrs. Williams; 8,000 shares for Mr. Oskian; 3,600 shares for Mr. Beckmen; 3,600 shares for Mr. Hodgson; 33,600 shares for Mr. Forbes; 14,000 shares for Mr. Brochu; 18,000 shares for Mr. Cloutier; 7,000 for Mr. Bowerman; 6,600 for Mr. Berolzheimer; 2,100 for Mr. Thumann; and 3,600 shares for Mr. Green. (3) Based on the Schedule 13G filed with the SEC by AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie Mutuelle and Uni Europe Assurance Mutuelle (collectively, the "Mutuelles AXA"), as a group, AXA, The Equitable Companies Incorporated and their subsidiaries pursuant to a joint filing agreement and dated February 9, 1996. The Equitable Companies Incorporated are considered to beneficially own 1,677,100 shares, or 8.6% of shares outstanding of the Company's Common Stock, to which the Mutuelles AXA and AXA disclaim beneficial ownership. (4) Based on the Schedule 13D/A filed by FMR with the SEC and dated June 3, 1996, FMR Corp. ("FMR") beneficially owns (1) through its wholly-owned subsidiary, Fidelity Management & Research Company ("Fidelity"), as adviser to certain investment companies, 739,210 shares of the Company's Common Stock, as to which FMR, through its control of Fidelity, has the power to dispose of the shares but not voting power, and (b) through FMTC, the managing agents for the Accounts, 257,800 shares of the Company's Common Stock, as to which FMR has voting and dispositive power. (5) Includes 4,000 shares owned beneficially by Mr. Hodgson's children. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference from the Company's 1996 Proxy Statement under the caption "Certain Transactions." Page 36 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1 Financial Statements The following consolidated Financial Statements are filed in Part II, Item 8 of this Form 10-K: - Independent Auditors' Report - Consolidated Financial Statements Balance Sheets as of March 31, 1996 and 1995 Statements of Operations for the years ended March 31, 1996, 1995 and 1994 Statements of Stockholders' Equity for the years ended March 31, 1996, 1995 and 1994 Statements of Cash Flows for the years ended March 31, 1996, 1995 and 1994 Notes to Financial Statements (a)2 Financial Statement Schedules - The following financial statement schedule is included in Item 14(d) below. Schedule II - Valuation and Qualifying Reserves All other schedules are omitted because they are not required or the required information is shown in the Consolidated Financial Statements or notes thereto. (a)3 Exhibits 2.01 Agreement and Plan of Merger dated as of May 31, 1995 among the Registrant, Pixel Acquisition Corp., Pixellite Group, Pixellite Software, Ken Grant, Inc., Ken Grant, Sherrill Grant, Martin Kahn, Inc., Martin Kahn, David Balsam, Inc., and David Balsam. (12) 2.02 Share Exchange Agreement dated as of June 20, 1995 among the Registrant, Software Inspiration, Ltd., and the Shareholders of Software Inspiration, Ltd. (12) 2.03 Agreement and Plan of Merger dated as of July 17, 1995 among the Registrant, Green Thumb Acquisition Corp., Green Thumb Software, Inc., and the Shareholders of Green Thumb Software, Inc. (12) 2.04 Agreement and Plan of Merger dated as of September 12, 1995 among the Registrant, Arion Acquisition Corp., Arion Software, Inc. and the Shareholders of Arion Software, Inc. (12) 2.05 Agreement and Plan of Merger dated as of November 30, 1995 among the Registrant, PDG Acquisition Corp., Papyrus Design Group, Inc. and the Shareholders of Papyrus Design Group, Inc. (9) 2.06 Amended and Restated Agreement and Plan of Merger dated as of February 19, 1996 among the Registrant, Larry Acquisition Corp, and CUC International, Inc. (11) 2.07 Agreement and Plan of Merger dated as of April 12, 1996 among the Registrant, Birdie Acquisition Corp., Headgate, Inc., and the Shareholders of Headgate, Inc. (12) 3.01 Registrant's Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on March 3, 1995. (7) 3.02 Registrant's Bylaws. (4) 4.01 Indenture dated April 15, 1994 between the Registrant and The First National Bank of Boston, as Trustee. (5) Page 37 38 10.01 Registrant's 1987 Stock Option Plan as amended through August 26, 1993. (6) 10.02 Registrant's 1995 Stock Option and Award Plan. (7) 10.03 Registrant's 1995 Employee Stock Purchase Plan. (7) 10.04 Key Man Renewable Term Life Insurance Policy on Kenneth A. Williams with Delaware American Life Insurance Policy. (1) 10.05 The Old Line Life Insurance Policy on the Life of Roberta L. Williams. (2) 10.06 Personal Services and Assignment Agreement between the Registrant and Roberta L. Williams dated October 1, 1989 for King's Quest V. (3) 10.07 Form of Indemnity Agreement between the Registrant and each of its directors. (3) 10.08 Product Development Agreement between the Registrant and Roberta L. Williams dated July 19, 1991 for King's Quest VI. (3) 10.09 Product Design Agreement between the Registrant and Al Lowe Associates, Inc. dated November 1, 1992 for Leisure Suit Larry 6, Freddy Pharkas: Frontier Pharmacist and other products. (4) 10.10 Lease Agreement between the Registrant and Lincoln Executive Center Bellevue III Limited Partnership dated October 7, 1993. (6) 10.11 Amendments to Lease Agreement between the Registrant and Lincoln Executive Center Bellevue III Limited Partnership. (7) 10.12 Product Design Agreement between Roberta L. Williams and the Registrant dated July 5, 1994 for Phantasmagoria, King's Quest VII, and King's Quest Anthology. (7) 10.13 Addendum to 1994 Product Design Agreement between the Registrant and Roberta L. Williams. (7) 10.14 Publishing Agreement dated November 16, 1994 between the Registrant and AT&T Corp. (8) 10.15 Limited Liability Company Agreement of Collier Sierra L.L.C. dated October 31, 1995. (10) 10.16 Amendment to Acquisition Agreement between the Registrant and Roland Oskian, Arnaud Delrue and Manuelle Chapoullie-Mauger. (10) 10.17 Joint Venture Agreement between the Registrant and Pioneer Electronic Corporation dated July 12, 1995. (12) 11.01 Statement re Computation of Per Share Earnings. (12) 21.01 Subsidiaries of the Registrant. (12) 23.01 Consent of Deloitte & Touche LLP. (12) 24.01 Power of Attorney (see page 41). (12) ---------- (1) Incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-1 (No. 33-23904) filed on August 22, 1988. (2) Incorporated by reference to exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended March 31, 1991. (3) Incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-2 (No. 33-45411) filed on March 16, 1992. (4) Incorporated by reference to exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended March 31, 1993. Page 38 39 (5) Incorporated by reference to exhibit filed with the Registrant's Current Report on Form 8-K filed April 19, 1994. (6) Incorporated by reference to exhibit filed with the Registrant's Annual Report on Form 10-K. for the year ended March 31, 1994. (7) Incorporated by reference to exhibit filed with the Registrant's Annual Report on Form 10-K. for the year ended March 31, 1995. (8) Incorporated by reference to exhibit filed with the Registrant's Amended Annual Report on Form 10-K/A filed August 17, 1995. (9) Incorporated by reference to exhibit filed with the Registrant's Current Report on Form 8-K filed December 6, 1995. (10) Incorporated by reference to exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995. (11) Incorporated by reference to exhibit filed with the Registrant's Current Report on Form 8-K filed on March 1, 1996. (12) Filed herewith as exhibits to this Annual Report on Form 10-K. (b) Reports on Form 8-K During the quarter ended March 31, 1996, the Registrant filed on March 1, 1996 a Current Report on Form 8-K dated February 19, 1996. Page 39 40 SIERRA ON-LINE, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING RESERVES YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (in thousands)
Balance at Charged to Balance beginning of costs and at end Description period expenses Deductions of period ----------- ------ -------- ---------- --------- 1996 ---- Reserve for sales returns and allowances ................................. $ 5,835 $ 29,473 $ 23,023 (1) $ 12,285 Reserve for doubtful accounts ................................... 1,430 1,205 898 (2) 1,737 ----------- ----------- ----------- ----------- $ 7,265 $ 30,678 $ 23,921 $ 14,022 =========== =========== =========== =========== 1995 ---- Reserve for sales returns and allowances ................................. $ 2,902 $ 17,621 $ 14,688 (1) $ 5,835 Reserve for doubtful accounts ................................... 1,306 829 705 (2) 1,430 ----------- ----------- ----------- ----------- $ 4,208 $ 18,450 $ 15,393 $ 7,265 =========== =========== =========== =========== 1994 ---- Reserve for sales returns and allowances ................................. $ 2,541 $ 11,338 $ 10,977 (1) $ 2,902 Reserve for doubtful accounts ................................... 1,028 817 539 (2) 1,306 ----------- ----------- ----------- ----------- $ 3,569 $ 12,155 $ 11,516 $ 4,208 =========== =========== =========== ===========
- ----------------- (1) Represents products returned primarily because of stock balancing by customer, defective items, as well as special allowances. (2) Represents write-off of accounts deemed to be uncollectible. Page 40 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIERRA ON-LINE, INC. By: /s/ Kenneth A. Williams Date: June 28, 1996 - -------------------------------------------- ------------------- Kenneth A. Williams, Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Kenneth A. Williams, and Michael A. Brochu, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfully do or cause to be done or by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ---- /s/ Kenneth A. Williams Chairman of the Board and June 28, 1996 - -------------------------------------------- Chief Executive Officer --------------- Kenneth A. Williams (Principal Executive Officer) /s/ Michael A. Brochu President and June 28, 1996 - -------------------------------------------- Chief Operating Officer --------------- Michael A. Brochu (Principal Financial Officer) /s/ Fred Schapelhouman Chief Accounting Officer June 28, 1996 - -------------------------------------------- (Principal Accounting Officer) --------------- Fred Schapelhouman /s/ Thomas L. Beckmen Director June 28, 1996 - -------------------------------------------- --------------- Thomas L. Beckmen /s/ Michael G. Berolzheimer Director June 28, 1996 - -------------------------------------------- --------------- Michael G. Berolzheimer /s/ Walter A. Forbes Director June 28, 1996 - -------------------------------------------- --------------- Walter A. Forbes /s/ Marvin H. Green, Jr. Director June 28, 1996 - -------------------------------------------- --------------- Marvin H. Green, Jr. /s/ David C. Hodgson Director June 28, 1996 - -------------------------------------------- --------------- David C. Hodgson /s/ Roberta L. Williams Director June 28, 1996 - -------------------------------------------- --------------- Roberta L. Williams
Page 41 42 SIERRA ON-LINE, INC., AND SUBSIDIARIES LIST OF EXHIBITS FILED WITH THIS REPORT
Exhibit No. Item - ----------- ---- 2.01 Agreement and Plan of Merger dated as of May 31, 1995 among the Registrant, Pixel Acquisition Corp., Pixellite Group, Pixellite Software, Ken Grant, Inc., Ken Grant, Sherrill Grant, Martin Kahn, Inc., Martin Kahn, David Balsam, Inc., and David Balsam. 2.02 Share Exchange Agreement dated as of June 20, 1995 among the Registrant, Software Inspiration, Ltd., and the Shareholders of Software Inspiration, Ltd. 2.03 Agreement and Plan of Merger dated as of July 17, 1995 among the Registrant, Green Thumb Acquisition Corp., Green Thumb Software, Inc., and the Shareholders of Green Thumb Software, Inc. 2.04 Agreement and Plan of Merger dated as of September 12, 1995 among the Registrant, Arion Acquisition Corp., Arion Software, Inc. and the Shareholders of Arion Software, Inc. 2.07 Agreement and Plan of Merger dated as of April 12, 1996 among the Registrant, Birdie Acquisition Corp., Headgate, Inc., and the Shareholders of Headgate, Inc. 10.17 Joint Venture Agreement between the Registrant and Pioneer Electronic Corporation dated July 12, 1995 11.01 Statement re Computation of Per Share Earnings. 21.01 Subsidiaries of the Registrant. 23.01 Consent of Deloitte & Touche LLP. 24.01 Power of Attorney.
Page 42 EX-2.01 2 AGREEMENT & PLAN OF MERGER DATED MAY 31, 1995 1 AGREEMENT AND PLAN OF MERGER AMONG SIERRA ON-LINE, INC., PIXEL ACQUISITION CORP. AND PIXELLITE GROUP PIXELLITE SOFTWARE KEN GRANT, INC. KEN GRANT SHERRILL GRANT MARTIN KAHN, INC. MARTIN KAHN DAVID BALSAM, INC. DAVID BALSAM MAY 31, 1995 2 CONTENTS ARTICLE I - THE MERGER .................................................................. 1 1.1 The Merger ...................................................................... 1 1.2 The Closing ..................................................................... 2 1.3 Effective Date and Time ......................................................... 2 1.4 Articles of Incorporation of the Surviving Corporation .......................... 2 1.5 Bylaws of the Surviving Corporation ............................................. 2 1.6 Conversion of Shares ............................................................ 3 1.6.1 Exchange Ratios ...................................................... 3 1.6.2 Special Definitions .................................................. 3 1.6.3 Exchange of Certificates ............................................. 4 1.6.4 No Fractional Shares ................................................. 4 1.6.5 No Further Transfers ................................................. 4 1.7 Pooling Restrictions on Transfer of the Securities .............................. 5 1.8 Tax Treatment ................................................................... 5 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE CORPORATIONS, THE PARTNERSHIPS AND THE SHAREHOLDERS ............................................... 5 2.1 Title and Other Shareholder Matters ............................................. 5 2.2 Organization .................................................................... 6 2.3 Enforceability .................................................................. 7 2.4 Capitalization .................................................................. 7 2.5 Subsidiaries and Affiliates ..................................................... 8 2.6 No Approvals or Notices Required; No Conflicts With Instruments ................. 8 2.7 Financial Statements ............................................................ 9 2.8 Absence of Certain Changes or Events ............................................ 10 2.9 Taxes ........................................................................... 12 2.10 Property ........................................................................ 14 2.11 Contracts ....................................................................... 14 2.12 Customers and Suppliers ......................................................... 16 2.13 Orders, Commitments and Returns ................................................. 16
- ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page i 3 2.14 Claims and Legal Proceedings .................................................... 16 2.15 Labor Matters ................................................................... 17 2.16 Employee Benefit Plans .......................................................... 17 2.17 Intellectual Property ........................................................... 18 2.18 Accounts Receivable ............................................................. 21 2.19 Inventory ....................................................................... 21 2.20 Books and Records ............................................................... 22 2.21 Licenses, Permits, Authorizations, etc. ......................................... 22 2.22 Compliance With Laws ............................................................ 22 2.23 Brokers or Finders .............................................................. 24 2.24 Absence of Questionable Payments ................................................ 24 2.25 Personnel ....................................................................... 24 2.26 Bank Accounts ................................................................... 25 2.27 Insider Interests ............................................................... 25 2.28 Securities Act Matters .......................................................... 26 2.29 Pooling Matters ................................................................. 28 2.30 Full Disclosure ................................................................. 28 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SIERRA .................................. 29 3.1 Organization .................................................................... 29 3.2 Enforceability .................................................................. 29 3.3 No Approvals or Notices Required; No Conflicts With Instruments ................. 29 3.4 Capitalization .................................................................. 30 3.5 SEC Documents ................................................................... 30 3.6 Claims and Legal Proceedings .................................................... 30 3.7 Brokers or Finders .............................................................. 30 3.8 Full Disclosure ................................................................. 31 ARTICLE IV - DELIVERIES BY THE CORPORATIONS, THE PARTNERSHIPS AND THE SHAREHOLDERS .................................................................... 31 4.1 Opinion of Counsel for the Corporations, the Partnerships and the Shareholders .................................................................... 31
- ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page ii 4 4.2 Resignations .................................................................... 31 4.3 Consents to Merger .............................................................. 31 4.4 Approvals and Consents .......................................................... 31 4.5 Secretaries' Certificates ....................................................... 32 4.6 Amendments of Consultant Agreements ............................................. 32 4.7 Operative Documents ............................................................. 32 4.8 Termination of Employee Benefit Plans ........................................... 32 ARTICLE V - DELIVERIES BY SIERRA ........................................................ 32 5.1 Opinion of Counsel .............................................................. 32 5.2 Operative Documents ............................................................. 32 ARTICLE VI - COVENANTS .................................................................. 33 6.1 Confidentiality ................................................................. 33 6.2 Further Action .................................................................. 33 6.3 Publicity ....................................................................... 33 ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER ......................................... 34 7.1 Termination ..................................................................... 34 7.2 Effect of Termination ........................................................... 34 7.3 Amendment ....................................................................... 35 7.4 Waiver .......................................................................... 35 ARTICLE VIII - SURVIVAL AND INDEMNIFICATION ............................................. 35 8.1 Survival ........................................................................ 35 8.2 Indemnification by the Shareholders ............................................. 35 8.3 Indemnification by Sierra ....................................................... 36 8.4 Deductible and Limitations ...................................................... 36 8.5 Procedure for Indemnification ................................................... 36 ARTICLE IX - GENERAL .................................................................... 38 9.1 Expenses ........................................................................ 38 9.2 Notices ......................................................................... 38 9.3 Severability .................................................................... 39 9.4 Entire Agreement ................................................................ 39
- ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page iii 5 9.5 Assignment ...................................................................... 39 9.6 Parties in Interest ............................................................. 40 9.7 Specific Performance ............................................................ 40 9.8 Governing Law ................................................................... 40 9.9 Headings ........................................................................ 40 9.10 Waiver of Jury Trial ............................................................ 40 9.11 Counterparts .................................................................... 40
- ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page iv 6 EXHIBITS Exhibit A - Articles of Merger Exhibit B - Disclosure Memorandum Exhibit C - Form of Registration Rights Agreement Exhibit D - Form of Noncompetition Agreement Exhibit E - Form of Designer Bonus Agreement Exhibit F - Opinion of Cooley Godward Castro Huddleson & Tatum Exhibit G - Opinion of Perkins Coie - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page v 7 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "Agreement") is made and entered into as of May 31, 1995 by and among Sierra On-Line, Inc., a Delaware corporation ("Sierra"), Pixel Acquisition Corp., a Washington corporation and indirect wholly owned subsidiary of Sierra (the "Purchaser"), Pixellite Group, a California general partnership whose partners are Ken Grant, Inc. and Pixellite Software ("Pixellite Group"), Pixellite Software, a California general partnership whose partners are Martin Kahn, Inc. and David Balsam, Inc. ("Pixellite Software"), Ken Grant, Inc., a California corporation, Martin Kahn, Inc., a California corporation, David Balsam, Inc., a California corporation, Ken Grant, Sherrill Grant, Martin Kahn and David Balsam. Ken Grant, Inc., Martin Kahn, Inc. and David Balsam, Inc. are collectively referred to herein as the "Corporations," Pixellite Group and Pixellite Software are collectively referred to herein as the "Partnerships," and Ken Grant, Sherrill Grant, Martin Kahn and David Balsam are collectively referred to herein as the "Shareholders"). RECITALS A. The Corporations, the Partnerships, the Purchaser and Sierra believe it advisable and in the best interests of such corporations to effect the merger of the Corporations with and into the Purchaser (the "Merger") pursuant to this Agreement. B. The Boards of Directors and the Shareholders of the Corporations have approved the Merger. C. The Boards of Directors of Sierra and the Purchaser, and the sole shareholder of the Purchaser, have approved the Merger. AGREEMENT In consideration of the terms hereof, the parties hereto agree as follows: ARTICLE I - THE MERGER 1.1 THE MERGER Upon the terms and subject to the conditions hereof, (a) at the Effective Time (as defined in Section 1.3 hereof) the separate existence of the Corporations shall cease and each of the Corporations shall be merged with and into the Purchaser (the Purchaser is sometimes referred to herein as the "Surviving Corporation"), and (b) from and after the Effective Time, the Merger shall have all the effects of a merger under the laws of the State of Washington, the State of California and other applicable law. The separate existence of the Partnerships shall cease upon the Effective Time and the business of the Partnerships shall be merged with and into the Purchaser. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 1 8 1.2 THE CLOSING The closing of the Merger pursuant to this Agreement (the "Closing") shall take place on May 31, 1995 (the "Closing Date") at 10:00 a.m. local time at the offices of Perkins Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington, or such other time or location as Sierra and the Shareholders shall agree. At the Closing, each of the parties hereto shall deliver all such documents, instruments, certificates and other items as may be required under this Agreement or the other Operative Documents (as defined in Section 2.1) or otherwise. 1.3 EFFECTIVE DATE AND TIME On the Closing Date and subject to the terms and conditions hereof, articles of merger and related documents (collectively, the "Articles of Merger") complying with the applicable provisions of the Washington Business Corporations Act ("Washington Law") and the California Corporations Code ("California Law"), substantially in the form or forms attached hereto as Exhibit A, and in such form as required by, and executed in duplicate in accordance with, Washington Law and California Law, shall be delivered for filing to the Secretary of State of the State of Washington (the "Washington Secretary of State") and the Secretary of State of the State of California (the "California Secretary of State"), respectively. The Merger shall become effective on the date (the "Effective Date") and at the time (the "Effective Time") specified in the Articles of Merger as so filed. If the Washington Secretary of State or the California Secretary of State requires any changes in the Articles of Merger as a condition to filing the Articles of Merger or issuing its certificate to the effect that the Merger is effective, Sierra, the Purchaser, the Corporations and the Shareholders will execute any necessary revisions incorporating such changes, provided such changes are not inconsistent with and do not result in any substantial change in the terms of this Agreement. 1.4 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION At the Effective Time, the Articles of Incorporation of the Purchaser shall be the Articles of Incorporation of the Surviving Corporation. Thereafter, the Articles of Incorporation of the Surviving Corporation may be amended in accordance with their terms and as provided by law. 1.5 BYLAWS OF THE SURVIVING CORPORATION At the Effective Time, the Bylaws of the Purchaser shall be the Bylaws of the Surviving Corporation. Thereafter, the Bylaws of the Surviving Corporation may be amended or repealed in accordance with their terms, the Articles of Incorporation of the Surviving Corporation, and applicable law. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 2 9 1.6 CONVERSION OF SHARES 1.6.1 EXCHANGE RATIOS As of the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof: (a) All shares of any class of capital stock of the Corporations held by the Corporations as treasury shares shall be canceled; (b) Each issued and outstanding share of capital stock of Ken Grant, Inc. shall be converted into the right to receive directly from Sierra a number of shares of common stock of Sierra, $.01 par value per share ("Sierra Common Stock"), determined by dividing the Grant Closing Shares (as defined below) by the total number of shares of capital stock of Ken Grant, Inc. outstanding immediately prior to the Effective Time; (c) Each issued and outstanding share of capital stock of Martin Kahn, Inc. shall be converted into the right to receive directly from Sierra a number of shares of Sierra Common Stock determined by dividing the Kahn Closing Shares (as defined below) by the total number of shares of capital stock of Martin Kahn, Inc. outstanding immediately prior to the Effective Time; (d) Each issued and outstanding share of capital stock of David Balsam, Inc. shall be converted into the right to receive directly from Sierra a number of shares of Sierra Common Stock determined by dividing the Balsam Closing Shares (as defined below) by the total number of shares of capital stock of David Balsam, Inc. outstanding immediately prior to the Effective Time; and (e) Each issued and outstanding share of capital stock of the Purchaser shall be converted into one share of common stock of the Surviving Corporation. 1.6.2 SPECIAL DEFINITIONS (a) The term "Grant Closing Shares" shall mean a number of whole shares of Sierra Common Stock determined by dividing $1,186,009 by the Closing Average (as defined below). (b) The term "Kahn Closing Shares" shall mean a number of whole shares of Sierra Common Stock determined by dividing $1,675,558 by the Closing Average (as defined below). (c) The term "Balsam Closing Shares" shall mean a number of whole shares of Sierra Common Stock determined by dividing $1,675,558 by the Closing Average (as defined below). (d) The term "Closing Average" shall mean $18.46. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 3 10 (e) The term "Securities" shall mean the aggregate number of shares of Sierra Common Stock constituting the Grant Closing Shares, the Kahn Closing Shares and the Balsam Closing Shares, and the term "Merger Consideration" shall mean an amount in cash equal to the number of shares of Sierra Common Stock constituting the Securities multiplied by the Closing Average. 1.6.3 EXCHANGE OF CERTIFICATES As soon as practicable after the Effective Date, Sierra shall make available, and each Shareholder will be entitled to receive, upon surrender to Sierra of one or more certificates representing the capital stock of the Corporation owned by such Shareholder for cancellation, certificates representing the number of shares of Sierra Common Stock that such Shareholder is entitled to receive at Closing pursuant to Section 1.6.1 hereof. The shares of Sierra Common Stock that each Shareholder shall be entitled to receive at the Closing pursuant to the Merger shall be deemed to have been issued by Sierra at the Effective Time. No interest shall accrue on the Merger Consideration. If the Merger Consideration (or any portion thereof) is to be delivered to any person other than the person in whose name the certificate or certificates representing shares of capital stock of each Corporation surrendered in exchange therefor is registered, it shall be a condition to such exchange that the person requesting such exchange shall pay to Sierra any transfer or other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the certificate or certificates so surrendered, or shall establish to the satisfaction of Sierra that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither Sierra nor any other party hereto shall be liable to a holder of shares of capital stock of the Corporations for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat and similar laws. 1.6.4 NO FRACTIONAL SHARES No certificates or scrip representing fractional shares of Sierra Common Stock shall be issued upon the surrender for exchange of certificates representing capital stock of the Corporations pursuant to the Merger, and no dividend, stock split or other distribution with respect to Sierra Common Stock shall relate to any such fractional interest, and any such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder. In lieu of any such fractional shares, each holder of capital stock of a Corporation who otherwise would have been entitled to a fraction of a share of Sierra Common Stock upon surrender of certificates representing such capital stock for exchange pursuant to the Merger will be paid cash upon such surrender in an amount equal to such fraction multiplied by the Closing Average. 1.6.5 NO FURTHER TRANSFERS After the Effective Time, there shall be no transfers of any shares of capital stock of the Corporations on the stock transfer books of the Surviving Corporation. If, after the Effective Time, certificates formerly representing shares of capital stock of any of the - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 4 11 Corporations are presented to the Surviving Corporation, they shall be forwarded to Sierra and be canceled and exchanged in accordance with this Section 1.6, subject to applicable law in the case of Dissenting Shares. 1.7 POOLING RESTRICTIONS ON TRANSFER OF THE SECURITIES The Shareholders shall not transfer the Sierra Common Stock received pursuant to the Merger until at least 30 days after the publication by Sierra of financial results for the first fiscal quarter of Sierra ending after the Closing which contains a period of at least 30 days of combined financial results of Sierra and the Surviving Corporation. 1.8 TAX TREATMENT The parties agree that the Merger will be treated for tax purposes by all parties to this Agreement as a taxable transaction for federal income tax purposes and to take no reporting position inconsistent with this position. The parties will agree to an allocation of the Merger Consideration for tax purposes as soon as practicable after the Closing. ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE CORPORATIONS, THE PARTNERSHIPS AND THE SHAREHOLDERS To induce Sierra to enter into and perform this Agreement and the other Operative Documents (as defined in Section 2.1 hereof), and except as is otherwise set forth in the Disclosure Memorandum attached hereto as Exhibit B (the "Disclosure Memorandum"), which exceptions shall specifically identify the paragraph or paragraphs of this Article II to which such exceptions relate, and which shall constitute in its entirety a representation and warranty under this Article II, the Corporations, the Partnerships and the Shareholders jointly and severally represent and warrant to Sierra as of the date of this Agreement and as of the Closing as follows in this Article II. 2.1 TITLE AND OTHER SHAREHOLDER MATTERS Each Shareholder represents with respect to itself only that (a) such Shareholder owns the shares of capital stock of his Corporation listed opposite such Shareholder's name on Schedule 2.1 to the Disclosure Memorandum; (b) such shares of capital stock are free and clear of any lien, encumbrance, adverse claim, restriction on sale or transfer (other than restrictions imposed by applicable securities laws), preemptive right or option; (c) such Shareholder has all necessary power, right and authority to enter into this Agreement and each of the agreements, certificates, instruments and documents executed or delivered pursuant to the terms of this Agreement by such Shareholder, including, without limitation and as applicable, the Registration Rights Agreement in substantially the form attached hereto as Exhibit C to be entered into as of the Closing among Sierra and the Shareholders, the Noncompetition Agreements in substantially the form attached hereto as Exhibit D to be entered into as of the Closing among Sierra and the Shareholders, and the Designer Bonus Agreements in substantially the form attached hereto as Exhibit E to be entered into as of the - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 5 12 Closing among Sierra and each of the Shareholders and Vince Mills (collectively, and including this Agreement, the "Operative Documents"), to consummate the transactions contemplated hereby and thereby, and to sell and transfer the shares of capital stock of his Corporation held by such Shareholder hereunder without the consent or approval of any other Person (as defined in Section 2.6 hereof), other than as set forth on Schedule 2.6 to the Disclosure Memorandum; and (d) this Agreement and the other Operative Documents to which such Shareholder is a party have each been duly authorized, executed and delivered by such Shareholder and each is a legal, valid and binding obligation of such Shareholder, enforceable in accordance with its terms. 2.2 ORGANIZATION (a) Each Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Corporations have all requisite power and authority (corporate and otherwise) to own, operate and lease their properties and assets, to carry on their respective businesses as now conducted and as proposed to be conducted, and in the case of each of the Corporations to enter into and perform its obligations under this Agreement, and to consummate the transactions contemplated hereby. The Corporations are duly qualified and licensed as foreign corporations to do business and are in good standing in each jurisdiction listed on Schedule 2.2 to the Disclosure Memorandum, which jurisdictions constitute all jurisdictions where the character of the Corporations' properties occupied, owned or held under lease or the nature of the business conducted by the Corporations makes such qualification necessary, except as set forth on Schedule 2.2 or Schedule 2.5, as the case may be, to the Disclosure Memorandum and except where the failure to be so qualified or in good standing would not have a material adverse effect on the business, business prospects, assets, operations or condition (financial or other) of the Corporations or such Subsidiary. (b) Each Partnership is a general partnership validly existing under the laws of the State of California. The Partnerships have all requisite power and authority to own, operate and lease their properties and assets, to carry on their respective businesses as now conducted and as proposed to be conducted, and in the case of each of the Partnerships to enter into and perform its obligations under this Agreement and the Operative Documents, and to consummate the transactions contemplated hereby and thereby. The Partnerships are duly qualified and licensed as foreign partnerships to do business in each jurisdiction listed on Schedule 2.2 to the Disclosure Memorandum, which jurisdictions constitute all jurisdictions where the character of the Partnerships' properties occupied, owned or held under lease or the nature of the business conducted by the Partnerships makes such qualification necessary, except as set forth on Schedule 2.2 to the Disclosure Memorandum and except where the failure to be so qualified or in good standing would not have a material adverse effect on the business, business prospects, assets, operations or condition (financial or other) of the Partnerships. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 6 13 2.3 ENFORCEABILITY All corporate action on the part of the Corporations and its officers, directors and Shareholders, and all requisite action on the part of the Partnerships and their partners, necessary for the authorization, execution, delivery and performance of this Agreement, the consummation of the Merger, and the performance of all of the Corporations' and the Partnerships' obligations under this Agreement have been taken or will be taken prior to the Closing. This Agreement has been, and each of the Operative Documents at the Closing will have been, duly executed and delivered by each of the Corporations, the Partnerships and the Shareholders, as the case may be, and this Agreement is, and each of the Operative Documents to which any of Corporations, the Partnerships or the Shareholders is a party will be at the Closing, a legal, valid and binding obligation of each party thereto other than Sierra and the Purchaser, enforceable against each such party (other than Sierra and the Purchaser) in accordance with its terms. 2.4 CAPITALIZATION (a) The authorized capital stock of Ken Grant, Inc. consists of 307,785 shares of common stock; the authorized capital stock of Martin Kahn, Inc. consists of 10,000 shares of common stock; and the authorized capital stock of David Balsam, Inc. consists of 10,000 shares of common stock. (b) (i) The issued and outstanding capital stock of Ken Grant, Inc. consists solely of 307,785 shares of common stock, which are and as of the Closing will be held of record by Ken Grant and Sherrill Grant. The issued and outstanding capital stock of Martin Kahn, Inc. consists solely of 5,000 shares of common stock, which are and as of the Closing will be held of record by Martin Kahn. The issued and outstanding capital stock of David Balsam, Inc. consists solely of 5,000 shares of common stock, which are and as of the Closing will be held of record and beneficially by David Balsam. The outstanding shares of each of the Corporations are, and immediately prior to the Closing will be, duly authorized and validly issued, fully paid and nonassessable, and issued in compliance with all applicable federal, state and foreign securities laws. No Person other than the Shareholders holds any interest in any of the outstanding shares of the Corporations. (ii) The only partners of Pixellite Group are Pixellite Software and Ken Grant, Inc. The only partners of Pixellite Software are Martin Kahn, Inc. and David Balsam, Inc. No other Person holds any interest in any of the partnership interests of the Partnerships. The partnership agreements relating to the Partnerships were entered into and the partnership interests therein were acquired in compliance with all applicable federal, state and foreign securities laws. (c) There are no outstanding rights of first refusal, preemptive rights, options, warrants, conversion rights or other agreements, either directly or indirectly, for the purchase or acquisition from the Corporations or any Shareholder of the Corporations of any - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 7 14 shares of the Corporations' capital stock or from the Partnerships or any partner of the Partnerships of any interest in either of the Partnerships. (d) None of the Corporations or the Partnerships is a party or subject to any agreement or understanding, and there is no agreement or understanding between any Persons, that affects or relates to the voting or giving of written consents with respect to any securities of any of the Corporations or interests in the Partnerships or the voting by any director of any of the Corporations or any partner of any of the Partnerships. Except as set forth on Schedule 2.4(d) to the Disclosure Memorandum, no Shareholder of any of the Corporations or any affiliate thereof, and no partner of either of the Partnerships, is indebted to any of the Corporations or Partnerships, and none of the Corporations or Partnerships is indebted to any Shareholder or any affiliate of any of the Corporations or any partner of either Partnership. None of the Corporations or the Partnerships is under any contractual or other obligation to register any of its presently outstanding securities or any of its securities which may hereafter be issued. 2.5 SUBSIDIARIES AND AFFILIATES Each of the Corporations and the Partnerships does not own, directly or indirectly, any ownership, equity, profits or voting interest in, or otherwise control, any corporation, partnership, joint venture or other entity, and has no agreement or commitment to purchase any such interest, other than the ownership interest of the Corporations in the Partnerships. 2.6 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS (a) Except as set forth on Schedule 2.6(a) to the Disclosure Memorandum, the execution, delivery and performance of this Agreement by the Corporations and the Partnerships and the consummation of the transactions contemplated hereby will not (i) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to any of the Corporations or the Partnerships, (ii) require any consent, approval or authorization of, or declaration, filing or registration with, any person, corporation, partnership, joint venture, association, organization, other entity or governmental or regulatory authority (a "Person"), except compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Washington Secretary of State and the California Secretary of State (the consent of all such Persons to be duly obtained by the Corporations and the Partnerships at or prior to the Closing), (iii) result in a default (with or without the giving of notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which any of the Corporations or the Partnerships is a party or by which any of them is bound or to which any of their assets are subject, (iv) result in the creation of any lien or encumbrance upon the assets of any of the Corporations or the Partnerships or upon any outstanding shares or other securities of any of the Corporations or the Partnerships, (v) conflict with or result in a breach of or constitute a default under any - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 8 15 provision of the Articles of Incorporation or Bylaws of any of the Corporations or the partnership agreements of either of the Partnerships, or (vi) invalidate or adversely affect any permit, license, authorization or status used in the conduct of the business of the Corporations or the Partnerships. (b) Except as set forth on Schedule 2.6(b) to the Disclosure Memorandum, the execution, delivery and performance of this Agreement and the Operative Documents by each Shareholder and the consummation of the transactions contemplated hereby and thereby will not (i) constitute a violation by such Shareholder (with or without the giving of notice or lapse of time, or both) of any provisions of law or any judgment, decree, order, regulation or rule of any court, agency or other governmental authority applicable to such Shareholder, (ii) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, except for compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Washington Secretary of State and the California Secretary of State (the consent of all such Persons to be duly obtained by the Corporations, the Partnerships or the Shareholder at or prior to the Closing), (iii) result in the creation of any lien or encumbrance upon the shares of the Corporations' capital stock or the Partnership interests owned by such Shareholder, or (iv) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or Bylaws of the Corporations or the partnership agreements of the Partnerships. 2.7 FINANCIAL STATEMENTS The Shareholders have delivered to Sierra (a) balance sheets and income statements of each of the Corporations as of and for the fiscal years ended December 31, 1993, in the case of Martin Kahn, Inc. and David Balsam, Inc. only, and 1994, in the case of all the Corporations, and as of and for the four-month period ended April 30, 1995, and (b) balance sheets and income statements of Pixellite Software as of and for the fiscal years ended December 31, 1993 and 1994, and as of and for the four-month period ended April 30, 1995. The balance sheets of Pixellite Software and the Corporations as of April 30, 1995 are referred to herein as the "Balance Sheets." All of the foregoing financial statements are herein referred to as the "Financial Statements." The Financial Statements present fairly the financial position and revenues and expenses of the Corporations and the Partnerships as of the dates and for the periods indicated. The Corporations and the Partnerships have no liabilities or obligations of any nature (absolute, contingent or otherwise) which are not fully reflected or reserved against in the Balance Sheets, except (a) liabilities or obligations incurred since the date of the Balance Sheets in the ordinary course of business and consistent with past practice which are disclosed to Sierra and are not in excess of $15,000 in the aggregate or (b) as specifically set forth on Schedule 2.7 to the Disclosure Memorandum. Except as set forth on Schedule 2.7 to the Disclosure Memorandum, each of the Corporations and the Partnerships is not a guarantor, indemnitor, surety or other obligor of any indebtedness of any other Person. The Corporations' and the Partnerships' practices with respect to capitalizing software development costs, as reflected in the Financial Statements, are reasonable and in accordance with industry standards. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 9 16 2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS Except as specifically set forth on Schedule 2.8 to the Disclosure Memorandum, since the date of the Balance Sheets, none of the Corporations, the Partnerships nor any of their officers, directors. partners, employees or agents in their representative capacities on behalf of any of the Corporations or the Partnerships has: (a) taken any action or entered into or agreed to enter into any transaction, agreement or commitment other than in the ordinary course of business; (b) forgiven or canceled any indebtedness or waived any claims or rights of material value (including, without limitation, any indebtedness owing by any Shareholder or partner or any officer, director, employee or affiliate of any of the Corporations or the Partnerships); (c) granted, other than in the ordinary course of business and consistent with past practice, any increase in the compensation of partners, directors, officers, employees or consultants (including any such increase pursuant to any employment agreement or bonus, pension, profit-sharing, lease payment or other plan or commitment) or any increase in the compensation payable or to become payable to any partner, director, officer, employee or consultant; (d) suffered any material adverse change in its working capital, assets, liabilities (absolute, accrued, contingent or otherwise), earnings, reserves, financial condition, business, prospects or operations; (e) borrowed or agreed to borrow any funds, assumed or become subject to, whether directly or by way of guarantee or otherwise, any obligations or liabilities (absolute, accrued, contingent or otherwise), or incurred any liabilities or obligations (absolute, accrued, contingent or otherwise), which individually or in the aggregate exceed $10,000, except liabilities and obligations incurred in the ordinary course of business and consistent with past practice not to exceed $25,000 in the aggregate, or increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (f) paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of claims, liabilities and obligations reflected or reserved against in the Balance Sheets or incurred in the ordinary course of business and consistent with past practice since the date of the Balance Sheets, or prepaid any obligation having a fixed maturity of more than 90 days from the date such obligation was issued or incurred; (g) permitted or allowed any of its property or assets (real, personal or mixed, tangible or intangible) to be subjected to any mortgage, pledge, lien, security interest, - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 10 17 encumbrance, restriction or charge, except (i) assessments for current taxes not yet due and payable, (ii) landlord's liens for rental payments not yet due and payable, and (iii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that is in the aggregate less than $5,000, was incurred in the ordinary course of business and is not yet due and payable; (h) written down the value of any inventory (including write-downs by reason of shrinkage or markdown) or written off as uncollectible any notes or accounts receivable, except for write-downs and write-offs that are in the aggregate less than $5,000, incurred in the ordinary course of business and consistent with past practice; (i) sold, transferred or otherwise disposed of any of its properties or assets (real, personal or mixed, tangible or intangible), except the sale of inventory in the ordinary course of business and consistent with past practice; (j) disposed of or permitted to lapse any rights to the use of any trademark, trade name, patent, copyright or license, or disposed of or disclosed to any Person other than representatives of Sierra any trade secret, formula, process or know-how not theretofore a matter of public knowledge; (k) made any single capital expenditure or commitment in excess of $5,000 for additions to property, plant, equipment or intangible capital assets or made aggregate capital expenditures in excess of $20,000 for additions to property, plant, equipment or intangible capital assets; (l) made any change in any method of accounting or accounting practice or internal control procedure; (m) issued any capital stock, partnership interest or other securities, or declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock or partnership interests (other than distributions by the Corporations of undistributed S Corporation profits consisting of the assets listed on Schedule 2.8 to the Disclosure Memorandum), or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of capital stock, partnership interest or other securities, or otherwise permitted the withdrawal by any of the holders of capital stock of the Corporations or partnership interests of the Partnerships of any cash or other assets (real, personal or mixed, tangible or intangible), in compensation, indebtedness or otherwise, other than payments of salaries in the ordinary course of business and consistent with past practice; (n) paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any Shareholder or any partner, officer, director or employee or any affiliate of any Shareholder or any partner, officer, director or employee; - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 11 18 (o) entered into or agreed to enter into, or otherwise suffered to be outstanding, any power of attorney of any of the Corporations or the Partnerships or any obligations or liabilities (absolute, accrued, contingent or otherwise) of any of the Corporations or the Partnerships, as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any other Person; (p) received notice of, or otherwise obtained knowledge of: (i) any claim, action, suit, arbitration, proceeding or investigation involving, pending against or threatened against any of the Corporations or the Partnerships or any employee, officer, director or partner of any of the Corporations or the Partnerships before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person; (ii) any valid basis for any claim, action, suit, arbitration, proceeding, investigation or the application of any fine or penalty adverse to any of the Corporations or the Partnerships or any employee, officer, director or partner of any of the Corporations or the Partnerships before or by any Person; or (iii) any outstanding or unsatisfied judgments, orders, decrees or stipulations to which any of the Corporations or the Partnerships or any employee, officer, director or partner of any of the Corporations or the Partnerships is a party which relate directly to the transactions contemplated herein or which would have any material adverse effect upon the business, business prospects, assets, liabilities or financial condition of any of the Corporations or the Partnerships; (q) entered into or agreed to any sale, assignment, transfer or license of any patents, trademarks, copyrights, trade secrets or other intangible assets of, or used by, the Corporations or the Partnerships or any amendment or change to any existing license or other agreement relating to intellectual property; (r) received notice that there has been a loss of, or contract cancellation by, any current or prospective customer, licensor or distributor of the Corporations or the Partnerships; (s) taken any action, or become aware of any action taken by any Shareholder or partner, which alone or together with other facts or circumstances could affect the ability of Sierra to account for the Merger as a "pooling of interests" transaction consistent with generally accepted accounting principles in the United States consistently applied ("GAAP"); or (t) agreed, whether in writing or otherwise, to take any action described in this Section 2.8. 2.9 TAXES Except as described on Schedule 2.9 to the Disclosure Memorandum, (a) each of the Corporations and the Partnerships has duly and timely filed, including valid extensions, with the appropriate governmental agencies (domestic and foreign) all tax returns, information returns and reports ("Returns") for all Taxes (as defined below) required to have been filed by - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 12 19 such Corporation or Partnership, (b) all such Returns are true, correct and complete, and (c) except as set forth on Schedule 2.9 to the Disclosure Memorandum, each Corporation and Partnership has paid in full or provided for all Taxes that are due or claimed to be due by any governmental agency, after giving effect to any extensions. "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, but not limited to, income, excise, gross receipts, property, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, severance, stamp, occupation, windfall profits, social security and unemployment or other taxes applicable to the Corporations or the Partnerships that are imposed by the United States or any agency or instrumentality thereof, any state, county, local or foreign government, or any agency or instrumentality thereof, and any interest or fines, and any and all penalties or additions relating to such taxes, charges, fees, levies or other assessments. Except as described on Schedule 2.9 to the Disclosure Memorandum, (i) the reserves and provisions, if any, for Taxes reflected in the Financial Statements are adequate for the payment of Taxes not yet due and payable; (ii) no unresolved claim for assessment or collection of Taxes has been asserted or threatened against and of the Corporations or the Partnerships, and no audit or investigation by any governmental authority is under way with respect to Taxes, interest or other governmental charges; (iii) no circumstances exist or have existed which would constitute grounds for assessment against any of the Corporations or the Partnerships of any tax liability with respect to any period for which Returns have been filed, including, but not limited to, any circumstances relating to the existence of a valid S corporation election for the Corporations for any such period; (iv) each of the Corporations and the Partnerships has not filed or entered into any election, consent or extension agreement or any waiver that extends any applicable statute of limitations; (v) any Taxes incurred by any of the Corporations or the Partnerships or accrued by any of them since the date of the Balance Sheets have arisen in the ordinary course of business; and (vi) none of the Corporations has filed any consent to the application of Section 341(f)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), to any assets held, acquired or to be acquired by it. The Corporations and the Partnerships have furnished Sierra with complete and correct copies of Returns for the fiscal years ended December 31, 1994, 1993, 1992, 1991 and 1990, if applicable. There are no tax liens on any property or assets of any of the Corporations or the Partnerships other than liens for current property taxes not yet payable. The Partnerships have always been and are taxable as partnerships and not as associations for federal income tax purposes. No claim has been made by an authority in any jurisdiction where any of the Corporations or the Partnerships does not file Returns that any of the Corporations or the Partnerships is or may be subject to taxation by that jurisdiction. Each of the Corporations and the Partnerships has not made any payments, is not obligated to make any payments, and is not a party to any agreement that could obligate it to make any payments that will not be deductible under Section 280G of the Code. None of the Corporations or the Partnerships is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(2)(i) of the Code. Each of the Corporations and the Partnerships is not a party to any Tax allocation or sharing agreement, and (A) has not been a member of an affiliated group filing a consolidated income Tax Return and (B) does not have any liability for - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 13 20 Taxes of any person under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law) as a transferor or successor by contract or otherwise. 2.10 PROPERTY The Corporations and the Partnerships own or lease no real property. Schedule 2.10 to the Disclosure Memorandum contains a complete and accurate list of each item of personal property having a value in excess of $1,000 which is owned, leased, rented or used by any of the Corporations or the Partnerships (the "Personal Property"); provided that such list need not describe the Listed Intellectual Property or the Intellectual Property Licenses (as defined in Section 2.17 hereof). The Corporations or the Partnerships own all the Personal Property. The Personal Property includes all properties and assets (whether real, personal or mixed, tangible or intangible) (other than property rights with an individual value of less than $1,000, the Listed Intellectual Property and the Intellectual Property Licenses) reflected in the Balance Sheets and all the properties and assets purchased by any of the Corporations or the Partnerships since the date of the Balance Sheets (except for such properties or assets sold since the date of the Balance Sheets in the ordinary course of business and consistent with past practice). The Personal Property includes all property used in the business of the Corporations and the Partnerships. Except as described on Schedule 2.10 to the Disclosure Memorandum, the items of Personal Property used in the business of the Corporations or the Partnerships are of quality consistent with industry standards, are in good operating condition and repair, normal wear and tear excepted, are adequate for the uses to which they are being put, and comply in all material respects with applicable safety and other laws and regulations. Except as set forth on Schedule 2.10 to the Disclosure Memorandum, and except for (i) assessments for current taxes not yet due and payable and (ii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that is in the aggregate less than $2,000, was incurred in the ordinary course of business and is not yet due and payable, the Personal Property is owned by the Corporations or the Partnerships free and clear of all liens, third party interests and encumbrances. None of the Corporations or the Partnerships is a party to any lease, license, rental agreement, contract of sale or other agreement relating to the Personal Property Neither the whole nor any portion of the assets or property of any of the Corporations or the Partnerships is subject to any currently outstanding governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor has any such condemnation, expropriation or taking been proposed. 2.11 CONTRACTS Schedule 2.11 to the Disclosure Memorandum contains a complete and accurate list of all contracts, agreements and understandings, oral or written, to which any of the Corporations or the Partnerships is a party or by which any of them is bound which involve rights or obligations of the Partnerships or the Corporations, actual or contingent, in excess of $5,000 (excluding agreements listed as required on Schedule 2.17 to the Disclosure Memorandum), including, without limitation, security agreements, license agreements, software development agreements, credit agreements, conditional sales agreements, - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 14 21 instruments relating to the borrowing of money, and distributorship agreements. Except as set forth on Schedule 2.11 to the Disclosure Memorandum, all contracts set forth in such Schedule are valid, binding and enforceable in accordance with their terms against each party thereto, are in full force and effect, the Corporations and the Partnerships have performed in all materials respects all obligations thereunder, and neither the Corporations nor the Partnerships, nor to their best knowledge any other party thereto, is in material default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a material default thereunder. True and complete copies of each such contract have been heretofore delivered to Sierra. Except as specifically set forth on Schedule 2.11 to the Disclosure Memorandum, none of the Corporations or the Partnerships has any: (a) agreements, contracts, commitments or restrictions requiring it to make any charitable contribution; (b) purchase contracts or commitments that continue for a period of more than 12 months or are in excess of the normal, ordinary and usual requirements of its business or that are at an excessive price to the extent that such excess would be material to its business; (c) outstanding sales or service contracts, commitments or proposals which are expected to result in any loss or the realization of less than the usual and customary margins upon completion or performance thereof, in excess of the reserves provided in the Balance Sheets, or any outstanding contracts, bids, or sales or service proposals quoting prices which, based upon current operations, are not expected to result in a profit; (d) contracts with partners, directors, officers, Shareholders, employees, agents, consultants, advisors, salesmen, sales representatives, distributors or dealers that are not, except as provided by law to the contrary without regard to the express terms of such contract, cancelable by it within 30 days' notice without liability, penalty or premium, or any agreement or arrangement providing for the payment of any bonus or commission based on sales or earnings, or any compensation agreement or arrangement affecting or relating to former employees of the Corporations; (e) employment agreement, whether express or implied, or any other agreement for services that contains any severance or termination pay liabilities or obligations; (f) collective bargaining or union contracts or agreements; (g) employee to whom it paid in fiscal 1994, or expects to pay in fiscal 1995, total compensation at the annual rate of more than $50,000; (h) restriction by agreement from carrying on its business anywhere in the world; - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 15 22 (i) liability or obligation with respect to the return of inventory or merchandise other than on account of a defective condition, incorrect quantities or missed delivery dates; (j) debt obligation for borrowed money, including guarantees of or agreements to acquire any such debt obligation of others; (k) loans outstanding to any Person; (l) power of attorney outstanding or any obligations or liabilities (whether absolute, accrued, contingent or otherwise) as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any Person; (m) notice that any party to a contract intends to cancel, terminate or refuse to renew such contract or to exercise or decline to exercise any option or right thereunder; or (n) material disagreement with any of its suppliers or customers. 2.12 CUSTOMERS AND SUPPLIERS Schedule 2.12 to the Disclosure Memorandum sets forth: (a) a complete and accurate list of the customers of each of the Corporations and the Partnerships accounting for 5% or more of their aggregate sales during the fiscal year last ended and (b) a complete and accurate list of the suppliers from whom they have purchased an aggregate of 5% or more of the goods or services they purchased in the fiscal year last ended. Each of the Corporations and the Partnerships has no basis to expect any material modification to its relationship with any customer or supplier named on Schedule 2.12 to the Disclosure Memorandum. 2.13 ORDERS, COMMITMENTS AND RETURNS Schedule 2.13 to the Disclosure Memorandum contains an accurate summary of the Corporations' and the Partnerships' total backlog of orders (including all accepted and unfulfilled sales orders) and the aggregate of all outstanding purchase orders in excess of $5,000 issued by them (which include all contracts or commitments for the purchase by any of them of materials or other supplies). All such sale and purchase commitments were made in the ordinary course of business. There are no outstanding claims against any of the Corporations or the Partnerships to return merchandise with an aggregate retail value in excess of $5,000 by reason of alleged overshipments, defective merchandise, missed delivery dates, incorrect quantities or otherwise, or of merchandise in the hands of customers under an understanding that such merchandise would be returnable. 2.14 CLAIMS AND LEGAL PROCEEDINGS Except as set forth on Schedules 2.14 and 2.17 to the Disclosure Memorandum, there are no claims, actions, suits, arbitrations, investigations or proceedings pending or involving or, to any of their best knowledge, threatened against any of the Corporations, the - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 16 23 Partnerships or the Shareholders before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person. To the best knowledge of the Corporations, the Partnerships and the Shareholders, there is no valid basis for any claim, action, suit, arbitration, proceeding or investigation (other than as noted on Schedule 2.14 or 2.17 to the Disclosure Memorandum) which could reasonably be expected to be materially adverse to the business, business prospects, assets, operations or condition (financial or other) of any of the Corporations or the Partnerships taken as a whole before or by any Person. There are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which any of the Corporations, the Partnerships or the Shareholders is a party which involve the transactions contemplated herein or which would have a material adverse effect upon its business, business prospects, assets, operations or condition (financial or other) taken as a whole. 2.15 LABOR MATTERS There are no material labor disputes, employee grievances or disciplinary actions pending or, to any of their best knowledge, threatened against or involving any of the Corporations, the Partnerships or the Shareholders or any of their present or former employees. Each of the Corporations and the Partnerships has complied with all provisions of law relating to employment and employment practices, terms and conditions of employment, wages and hours, the failure to comply with which could have a material adverse effect upon its business, business prospects, assets, operations or conditions (financial or other) taken as a whole. Each of the Corporations and the Partnerships is not engaged in any unfair labor practice and has no liability for any arrears of wages or Taxes or penalties for failure to comply with any such provisions of law. There is no labor strike, dispute, slowdown or stoppage pending or, to any of their best knowledge, threatened against or affecting any of the Corporations or the Partnerships, and none of them has ever experienced any work stoppage or other labor difficulty. Each of the Corporations and the Partnerships has no knowledge of any organizational efforts presently being made or threatened by or on behalf of any labor union with respect to its employees, and none of the Corporations or the Partnerships have been requested by any group of employees or others to enter into any collective bargaining agreement or other agreement with any labor union or other employee organization. To the best knowledge of the Corporations, the Partnerships and the Shareholders, no employee (or person performing similar functions) of any of the Corporations or the Partnerships is in violation of any employment agreement, noncompetition agreement, patent disclosure agreement, invention assignment agreement, proprietary information agreement or other contract or agreement relating to the relationship of such employee with any of the Corporations or the Partnerships or any other party. 2.16 EMPLOYEE BENEFIT PLANS Except as set forth on Schedule 2.16 to the Disclosure Memorandum, each of the Corporations and the Partnerships has no bonus, deferred compensation, incentive, severance pay, pension, profit-sharing, retirement, stock purchase, stock option or any other employee benefit plan, employee fringe benefit plan, arrangement or practice with regard to present or - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 17 24 former employees or partners as to which any of the Corporations or the Partnerships has any liability ("Employee Benefit Plan"), whether formal or informal. Schedule 2.16 to the Disclosure Memorandum contains an accurate and complete description of, and sets forth the annual amount expected to be payable for the current fiscal year pursuant to, each Employee Benefit Plan, whether formal or informal. The Balance Sheets reflect in the aggregate all amounts accrued but unpaid under the aforesaid plans and arrangements as of the date thereof. Each of the Corporations and the Partnerships has no agreement, arrangement or commitment, whether formal or informal and whether legally binding or not, to create any additional plan or arrangement or to modify or amend any existing Employee Benefit Plan. The Corporations and the Partnerships have delivered to Sierra true, correct and complete copies of all written Employee Benefit Plans, all contracts related thereto and the most recently available annual reports, summary plan descriptions, IRS Form 5500s (or 5500-C or 5500-R) and favorable determination letters for such plans. Each of the Corporations and the Partnerships is in compliance in all material respects with the terms of its Employee Benefit Plans and with all applicable laws and regulations, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. Each of the Corporations and the Partnerships has extinguished any liabilities to participants, beneficiaries and the Pension Benefit Guaranty Corporation which may have arisen under any such plans previously maintained by it and expects to incur no future liabilities with regard to such plans. Neither the Corporations, the Partnerships nor any of their "affiliates" is a party to or has ever made any contributions to, or is subject to any liability with respect to, any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA or any defined benefit plan within the meaning of Section 3(35) of ERISA. The term "affiliate" means any company, trade or business which is a member of the same control group, as defined in Code Section 414(b) or 414(c), with any of the Corporations or the Partnerships, or any company, trade or business which is a member of an affiliated service group, as defined in Code Section 414(m) or 414(o) with any of the Corporations or the Partnerships. No prohibited transaction (within the meaning of ERISA Section 406 or Code Section 4975) or failure to meet the requirements of Code Section 4980B(f) has occurred with respect to any Employee Benefit Plan which could subject any of the Corporations or the Partnerships to any liability. There are no actions, suits or claims pending (other than routine claims for benefits) or which could reasonably be expected to be asserted against any Employee Benefit Plan or the assets of any such plan. The Corporations, the Partnerships and the Shareholders have taken all action necessary to terminate each Employee Benefit Plan as of or as soon as possible after the Closing without any liability relating thereto on the part of the Corporations or the Partnerships. 2.17 INTELLECTUAL PROPERTY Set forth on Schedule 2.17 to the Disclosure Memorandum is a true and complete list of all inventions, patents, trademarks, trade names, brand names, copyrights, Software Products (as defined below), trade secrets and formulae (collectively, the "Listed Intellectual Property") of any kind now used or anticipated to be used in the business of any of the Corporations or the Partnerships. Schedule 2.17 contains a complete and accurate list of all licenses or agreements, oral or written, which in any way affect the rights of any of the Corporations or the Partnerships to any of the Listed Intellectual Property (the "Intellectual - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 18 25 Property Licenses"); such list indicates the specific Listed Intellectual Property affected by each such license or agreement. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, neither the operations of any of the Corporations or the Partnerships nor any Listed Intellectual Property or Intellectual Property License infringes upon any validly issued or pending trademark, trade name, service mark, copyright or, to the best knowledge of any of the Corporations or the Partnerships, any issued or pending patent or other right of any other Person, nor, to the best knowledge of any of the Corporations or the Partnerships, is there any infringement by any other Person of any of the Listed Intellectual Property or of the intellectual property to which the Intellectual Property Licenses relate. The consummation of the transactions contemplated hereby and by the other Operative Documents will not alter or impair the rights of any of the Corporations or the Partnerships or the Purchaser as the Surviving Corporation to any of the Listed Intellectual Property or under any Intellectual Property License. Except as set forth on Schedule 2.17 of the Disclosure Memorandum, one or more of the Corporations or the Partnerships is the sole and exclusive owner or licensee of: (a) the Listed Intellectual Property, the Intellectual Property Licenses and the technology, know-how and processes now used by it, or used in connection with any product now being manufactured and sold by it, in the manner that such product is now being manufactured and sold; and (b) all rights, title and interest of whatever kind or nature throughout the world in and to the fully or partially developed computer software products listed on Schedule 2.17 to the Disclosure Memorandum (the "Software"), with all modifications, enhancements and additions thereto, including, without limitation, all rights in and to all versions thereof and all source code, object code, manuals and other documentation and related materials thereof (collectively, the "Software Products"). Without limiting the generality of the above, the Software Products shall also include all of the related programs, trade secrets, algorithms and processes relating to the Software Products or such programs, the copyright in and to each of the Software Products and all works derivative therefrom existing as of the Closing Date (including the registrations of copyright listed on Schedule 2.17 to the Disclosure Memorandum), all current, previous, enhanced and developmental versions of the source and object code and any variations thereof, all user and programmer documentation, all design specifications, all maintenance and installation job control language, all system documentation (including all flow charts, systems procedures and program component descriptions), all procedures for modification and preparation for the release of enhanced versions and all test data available (excluding all proprietary information of third parties) with respect to the Software Products. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, each of the Intellectual Property Licenses is valid, binding and enforceable in accordance with its terms against the parties thereto, each of the Corporations and the Partnerships has performed in all material respects all obligations imposed upon it thereunder, and none of the Corporations nor the Partnerships, nor to their knowledge any other party thereto, is in material default - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 19 26 thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a material default thereunder. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, none of the Corporations or the Partnerships or the Shareholders has received notice that any party to any of the Intellectual Property Licenses intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. No licenses, sublicenses, covenants or agreements have been granted or entered into by any of the Corporations or the Partnerships or the Shareholders in respect of any of the Listed Intellectual Property except the Intellectual Property Licenses. No director, officer, partner, Shareholder or employee of any of the Corporations or the Partnerships owns, directly or indirectly, in whole or in part, any of the Listed Intellectual Property. None of the officers or partners of any of the Corporations or the Partnerships and none of their employees, consultants, distributors, agents, representatives or advisers has entered into any agreement regarding know-how, trade secrets, assignment of rights in inventions, or prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than the Corporations and the Partnerships which relates to any of the Software, the Software Products, the Listed Intellectual Property or the Intellectual Property Licenses. Except as set forth in the Disclosure Memorandum, to each of the Corporations', the Partnerships' and the Shareholders' best knowledge, no Person has asserted any claim of infringement or other interference with third-party rights with respect to the Listed Intellectual Property. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, (i) each of the Corporations, the Partnerships and the Shareholders has not disclosed any source code regarding the Software Products to any person other than an employee or consultant (provided such consultant has signed an appropriate confidentiality or nondisclosure agreement relating thereto) of the Corporations or the Partnerships or to Sierra or the Purchaser, except for any disclosure that would not have a material adverse effect on the business, business prospects, assets, operations or conditions (financial or other) of any of the Corporations or the Partnerships taken as a whole; (ii) the Corporations and the Partnerships have at all times maintained reasonable procedures to protect all their trade secrets; (iii) none of the Corporations, the Partnerships nor any escrow agent is under any contractual or other obligation to disclose the source code or any other proprietary information included in or relating to the Software Products nor, to the knowledge of any of the Corporations, the Partnerships and the Shareholders, is any other party to the Intellectual Property Licenses or any escrow agent under any such obligation to disclose any source code or other proprietary information included in or relating to Software Products, if any, that are licensed to any of the Corporations or the Partnerships, to any person or entity and no event has taken place, including the execution of this Agreement or any related change in any of the Corporations' or the Partnerships' business activities, which would give rise to such obligation; and (iv) each of the Corporations, the Partnerships and the Shareholders has not deposited any source code regarding the Software Products into any source code escrows or similar arrangements. If Schedule 2.17 to the Disclosure Memorandum discloses that any of the Corporations, the Partnerships or the Shareholders has deposited any source code to Software Products into source code escrows or similar arrangements, no event has occurred that has or - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 20 27 could reasonably form the basis for a release of such source code from such escrows or arrangements. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, the Software Products are free from known significant defects and substantially conform to the specifications, documentation and sample demonstration furnished to customers and Sierra. All agreements of the Corporations or the Partnerships with Maxis, Inc., including without limitation the Affiliate Partner Agreement dated as of November 30, 1993, as amended by that certain Software Licensing Amendment dated as of September 23, 1994 and that certain Software Development Amendment dated as of April 28, 1995 (collectively the "Maxis Agreement"), are terminable by the Surviving Corporation immediately after the Closing, effective December 31, 1995, without any continuing liability or obligation, whether absolute, contingent or otherwise, on the part of the Surviving Corporation, except as set forth in the Maxis Agreement or on Schedule 2.17 to the Disclosure Memorandum. A true and correct copy of the Maxis Agreement has been provided to Sierra. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, all advances by Maxis to the Corporations, the Partnerships or the Shareholders under the Maxis Agreement have been recouped in full by Maxis. There are no sublicense, sub-distribution or similar arrangements relating to the Maxis Agreement, other than the sublicense arrangement between Maxis and Compaq (the "Compaq Sublicense"). The terms of the Compaq Sublicense are not materially adverse to the business or prospects of the Corporations and the Partnerships taken as a whole. No sublicense, sub-distribution or similar arrangements or agreements relating to the Maxis Agreement may be entered into between the date on which any notice of termination may be provided to Maxis and the effective date of such termination. All Consultant Agreements between the Partnerships or the Corporations, or any of them, and each of Presage, a California partnership, and Christopher Schardt have been duly and validly amended to provide that the Surviving Corporation may terminate such Consultant Agreements at any time for any reason without any continuing payment liability or obligation, whether absolute, contingent or otherwise, on the part of any of the Partnerships, the Corporations or the Surviving Corporation (as a result of the Merger) other than to make the lump sum payments, consisting of an aggregate of $1,318,750, as set forth in such amendments. 2.18 ACCOUNTS RECEIVABLE Any accounts receivable of each of the Corporations and the Partnerships reflected in the Balance Sheets represent sales actually made in the ordinary course of business. 2.19 INVENTORY Subject to such reserves and write-downs as may be reflected in the Financial Statements, all items in the inventory reflected in the Balance Sheets or as currently owned by the Corporations or the Partnerships are of a quality and quantity usable and salable in the - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 21 28 ordinary course of business. Such inventory consists of materials and supplies used or sold in the business of the Corporations and the Partnerships. 2.20 BOOKS AND RECORDS Each Corporations has furnished to Sierra or its representatives for their examination true and complete copies of (a) the Articles of Incorporation and Bylaws of the Corporations as currently in effect, including all amendments thereto, (b) the minute books of the Corporations and (c) the stock transfer books of the Corporations. Such minutes accurately reflect in all material respects the events of and actions taken at such meetings. Such stock transfer books accurately reflect all issuances and transfers of shares of capital stock of the Corporations since its inception. Each Partnership has furnished to Sierra or its representative for their examination true and complete of its partnership agreements, all amendments thereto and all other documents which govern or affect the right and obligations of its partners. 2.21 LICENSES, PERMITS, AUTHORIZATIONS, ETC. Except as identified in Schedules 2.2 and 2.6 to the Disclosure Memorandum, each of the Corporations and the Partnerships has received all currently required governmental approvals, authorizations, consents, licenses, orders, registrations and permits of all agencies, whether federal, state, local or foreign, the failure to obtain which would have a material adverse effect on its business, business prospects, assets, operations or condition (financial or other) taken as a whole. Each of the Corporations and the Partnerships has not received any notifications of any asserted present failure by it to have obtained any such governmental approval, authorization, consent, license, order, registration or permit, or past and unremedied failure to obtain such items, the failure to obtain which would have a material adverse effect on its business, business prospects, assets, operations or condition (financial or other) taken as a whole. 2.22 COMPLIANCE WITH LAWS (a) Except as described on Schedule 2.22 to the Disclosure Memorandum, each of the Corporations and the Partnerships has complied, and is in compliance, with all federal, state, local and foreign laws, rules, regulations, ordinances, decrees and orders applicable to the operation of its business, to its employees, or to the Personal Property, the failure to comply with which would, individually or in the aggregate, have a material adverse effect on its business, assets or operations, including, without limitation, all such laws, rules, ordinances, decrees and orders relating to antitrust, consumer protection, currency exchange, environmental protection, equal opportunity, health, occupational safety, pension, securities and trading-with-the-enemy matters. Each of the Corporations and the Partnerships has not received any notification of any asserted present or past unremedied failure to comply with any of such laws, rules, ordinances, decrees or orders. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 22 29 (b) Each of the Corporations and the Partnerships is not currently in violation of any applicable building, zoning, environmental or other law, ordinance or regulation. (c) Each of the Corporations and the Partnerships is not in violation of, and has not violated, in connection with the conduct of their businesses, any applicable federal, state, county or local statutes, laws, regulations, guidances, rules, ordinances, codes, licenses, permits, judgments, writs, decrees, injunctions or orders of any governmental entity relating to environmental (air, water, groundwater, soil, noise and odor) matters, including, by way of illustration and not by way of limitation, the Clean Air Act, the Federal Water Pollution Control Act, the Resources Conservation and Recovery Act and the regulations issued thereunder, the Comprehensive Environmental, Response, Compensation, and Liability Act, the Clean Water Act, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the Hazardous Waste Control Act, comparable California laws, and the regulations issued thereunder, and all other applicable federal, state, county, local and foreign environmental requirements where such violation might have a material adverse impact on its business, business prospects, assets, operations or condition (financial or other) taken as a whole. (d) Except as set forth on Schedule 2.22 to the Disclosure Memorandum, none of the Corporations or the Partnerships has transported, stored, treated, recycled, handled or disposed of, or allowed or arranged for any third party to transport, store, treat, recycle, handle or dispose of (i) any flammable substances, explosives, radioactive materials, hazardous substances, hazardous wastes, toxic substances, pollutants, contaminants or any wastes, materials or substances identified in or regulated by any Environmental Laws; (ii) asbestos, polychlorinated biphenyls, urea formaldehyde, nuclear fuel or material, chemical waste, carcinogens and radon, all to the extent regulated by any Environmental Laws; and (iii) gasoline, oil and other petroleum products (collectively, "Regulated Substances"), to or at any location other than a location lawfully permitted to receive such material for such purposes at such time. Set forth on such Schedule 2.22 is a complete and accurate list of all locations to which any of the Corporations or the Partnerships has ever transported, or caused to be transported or allowed or arranged for any third party to transport, any type of Regulated Substances for storage, treatment, handling, processing, burning, recycling or disposal. (e) Except as set forth on such Schedule 2.22, no real property ever owned by any of the Corporations or the Partnerships (the "Real Property"), including, but not limited to, all surface and subsurface soil, sediments, groundwater and surface water located on, in or under such Real Property, was during the period of use by any of the Corporations or the Partnerships being contaminated with any Regulated Substances or constituents thereof, which contamination has given or may give rise to any material obligation under any Environmental Laws, the common law or otherwise. To the knowledge of each of the Corporations and the Partnerships, except as set forth on such Schedule 2.22, no real property adjacent to or adjoining the Real Property has been so contaminated. To the best knowledge of each of the Corporations and the Partnerships, except as set forth on such Schedule 2.22, - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 23 30 no polychlorinated biphenyls, lead-based materials or asbestos are present in or on the Real Property or in any equipment located therein. (f) Except as set forth on such Schedule 2.22, to their best knowledge the Corporations and the Partnerships have recorded or filed and have provided to Sierra true, accurate and complete copies of all reports with respect to any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of drums, barrels, containers or other closed receptacles) (any of the foregoing, a "Release"), required by any Environmental Laws to be filed by the any of the Corporations or the Partnerships with any government authority. Except as disclosed on such Schedule 2.22, to their best knowledge each of the Corporations and the Partnerships has maintained all environmental and operating documents and records substantially in the manner and for the time periods required by any Environmental Laws. (g) Except as disclosed on such Schedule 2.22, none of the Corporations or the Partnerships has caused or permitted the Release of any Regulated Substances or constituents thereof on, from or off-site of its property, or of any Release from any facility owned or operated by third parties but with respect to which any of them is alleged to have liability. 2.23 BROKERS OR FINDERS Each of the Corporations and the Partnerships has not incurred, and will not incur, directly or indirectly, as a result of any action taken by or on behalf of any of them, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Merger, this Agreement or any transaction contemplated hereby. 2.24 ABSENCE OF QUESTIONABLE PAYMENTS Neither the Corporations, the Partnerships, nor any partner, director, officer, agent, employee or other Person acting on behalf of any of them, has used any Corporation or Partnership funds for improper or unlawful contributions, payments, gifts or entertainment, or made any improper or unlawful expenditures relating to political activity to government officials or others. Each of the Corporations and the Partnerships has adequate financial controls to present such improper or unlawful contributions, payments, gifts, entertainment or expenditures. Neither the Corporations, the Partnerships, nor any partner, director, officer, agent, employee or other Person acting on behalf of any of them, has accepted or received any improper or unlawful contributions, payments, gifts or expenditures. 2.25 PERSONNEL Schedule 2.25 to the Disclosure Memorandum sets forth a true and complete list of: - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 24 31 (a) the names and current compensation amounts of all directors and elected and appointed officers of the Corporations and the Partnerships and the family relationships, if any, among such persons; (b) the wage rates for nonsalaried and nonexecutive salaried employees of the Corporations and the Partnerships by classification, and all labor union contracts (if any); (c) all group insurance programs in effect for employees of each of the Corporations and the Partnerships; and (d) the names and current compensation packages of all independent contractors and consultants of each of the Corporations and the Partnerships whose compensation in calendar 1995 to date equals or exceeds an annualized rate of $5,000 per year. 2.26 BANK ACCOUNTS Schedule 2.26 to the Disclosure Memorandum sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which each of the Corporations and the Partnerships maintains safe deposit boxes or accounts of any nature and the names of all Persons authorized to draw thereon, make withdrawals therefrom or have access thereto. 2.27 INSIDER INTERESTS Except as set forth on Schedule 2.27 to the Disclosure Memorandum, no Shareholder, partner, officer, director, employee or other representative of any of the Corporations or the Partnerships, and no Persons related to or affiliated with any of them, has any interest (other than in such Person's capacity as a Shareholder of the Corporations or a partner of the Partnerships) (a) in any property, real or personal, tangible or intangible, used in or directly pertaining to the business of any of the Corporations or the Partnerships, including, without limitation, inventions, patents, trademarks or trade names, or (b) in any agreement, contract, arrangement or obligation relating to any of the Corporations or the Partnerships, its present or prospective business or its operations. Except as set forth on Schedule 2.27 to the Disclosure Memorandum, there are no agreements, understandings or proposed transactions between any of the Corporations or the Partnerships and any of its officers, directors, Shareholders, partners, affiliates or any affiliate thereof. Each of the Corporations and the Partnerships and its partners, Shareholders, officers and directors have no interest, either directly or indirectly, in any entity, including, without limitation, any corporation, partnership, joint venture, proprietorship, firm, licensee, business or association (whether as an employee, officer, director, shareholder, agent, independent contractor, security holder, creditor, consultant or otherwise) that presently (a) provides any services, produces and/or sells any products or product lines, or engages in any activity which is the same, similar to or competitive with any activity or business in which any of the Corporations or the Partnerships is now engaged or proposes to engage; (b) is a supplier, customer, creditor, or has an existing - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 25 32 contractual relationship with any of the Corporations' or the Partnerships' employees (or persons performing similar functions); or (c) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of any of the Corporations or the Partnerships or any property, real or personal, tangible or intangible, that is necessary or desirable for the present or anticipated future conduct of the business of any of the Corporations or the Partnerships. 2.28 SECURITIES ACT MATTERS Each of the Shareholders hereby acknowledges, represents and warrants to the Purchaser and Sierra as follows: (a) Ability to Bear Risk. Such Shareholder is in a financial position to hold the Securities for an indefinite period of time and is able to bear the economic risk and withstand a complete loss of its investment in the Securities. (b) SEC Documents. Such Shareholder acknowledges that it has had the opportunity to review to its satisfaction all publicly available filings and reports of Sierra with the Securities and Exchange Commission (the "SEC"). Such Shareholder acknowledges that an investment in the Securities involves a high degree of risk. (c) Professional Advice. Such Shareholder has obtained, to the extent it deems necessary, its own professional advice with respect to the risks inherent in acquiring the Securities, the condition of Sierra and the suitability of its investment in the Securities in light of its financial condition and investment needs. (d) Sophistication. Such Shareholder, either alone or with the assistance of its professional advisors, is a sophisticated investor, is able to fend for itself in the transactions contemplated by this Agreement relating to the Securities and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment in the Securities. (e) Access to Information. Such Shareholder has been given access to full and complete information regarding Sierra and has utilized such access to its satisfaction for the purpose of obtaining information about Sierra. (f) Acquisition Entirely for Own Account. The Securities are being acquired by such Shareholder for investment for its own account, not as a nominee or agent, and not with a view to the distribution of any part thereof; such Shareholder has no present intention of selling, granting any participation in or otherwise distributing any of the Securities in a manner contrary to the 1933 Act or to any applicable state securities or Blue Sky law, nor does such Shareholder have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant a participation to such person or to any third person with respect to any of the Securities. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 26 33 (g) Due Diligence. Such Shareholder has conducted its own due diligence investigation of Sierra and its business, and its own analysis of the merits and risks of an investment in the Securities being acquired pursuant to this Agreement, and is not relying on anyone else's investigation or analysis of Sierra or its business or the merits and risks of an investment in the Securities, other than professionals, if any, employed specifically by it to assist it. (h) Restricted Securities. Such Shareholder acknowledges that the Securities have not been and will not prior to issuance be registered under the 1933 Act and that the Securities are characterized under the 1933 Act as "restricted securities" and, therefore, cannot be sold or transferred unless such sale or transfer is registered under the 1933 Act or an exemption from such registration is available. The financial condition of such Shareholder is such that it is not likely that it will be necessary to dispose of any of the Securities in the foreseeable future. In this connection, such Shareholder represents that it is familiar with Rule 144 and Rule 145 under the 1933 Act as presently in effect, and understands the resale limitations imposed thereby and by the 1933 Act. (i) Exemption Reliance. Such Shareholder has been advised that the Securities have not been registered under the 1933 Act or any applicable state securities laws, but are being issued under this Agreement pursuant to exemptions from such laws, and that Sierra's reliance upon such exemptions is predicated in part upon the Shareholder's representations contained herein. (j) Further Limitations on Disposition. Without in any way limiting the representations set forth it, each Shareholder further agrees not to make any disposition of all or any portion of the Securities unless and until: (i) There is in effect a registration statement under the 1933 Act covering such proposed disposition and such disposition is made in accordance with such registration statement; (ii) (A) Such Shareholder shall have notified Sierra of the proposed disposition and shall have furnished Sierra with a detailed statement of the circumstances surrounding the proposed disposition and (B) if reasonably requested by Sierra, such Shareholder shall have furnished Sierra with an opinion of counsel, reasonably satisfactory to Sierra, that such disposition will not require registration under the 1933 Act; or (iii) Sierra otherwise shall be satisfied that such proposed disposition complies in all respects with Rule 144 and Rule 145 under the 1933 Act or any successor rules providing a safe harbor for such disposition without registration. (k) Residency. For purposes of the application of state securities laws, each Shareholder is a resident of the jurisdiction specified on Schedule 2.28 to the Disclosure Memorandum. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 27 34 (l) Legend. It is understood that the certificates evidencing the Securities may bear the following legend: The securities evidenced by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and no interest therein may be sold, distributed, assigned, offered, pledged or otherwise transferred unless (i) there is an effective registration statement under the Act and applicable state securities laws covering any such transaction involving such securities, (ii) this corporation receives an opinion of legal counsel for the holder of the securities reasonably satisfactory to this corporation stating that such transaction is exempt from registration, or (iii) this corporation otherwise satisfies itself that such transaction is exempt from registration. 2.29 POOLING MATTERS Each of the Corporations and the Partnerships has not taken and will not take, and the Shareholders of the Corporation have not taken and will not take, directly or indirectly, and the Corporations, the Partnerships and the Shareholders will use their respective best efforts to prevent any other Person from taking, any actions, including without limitation any recapitalization or repurchase or redemption of any securities of the Corporations or any interest in the Partnerships, or any grant or acceleration of any options to acquire securities of the Corporations or any interest in the Partnership, or any purchase or sale of securities of Sierra, and none of the Corporations, the Partnerships or the Shareholders is aware of any facts which otherwise could prevent Sierra from accounting for the transactions contemplated by this Agreement as a "pooling of interests" in accordance with GAAP. 2.30 FULL DISCLOSURE No information furnished by the Corporations, the Partnerships or the Shareholders to Sierra or the Purchaser in connection with this Agreement (including, but not limited to, the Financial Statements and all information in the Disclosure Memorandum and the other Exhibits hereto) or the other Operative Documents, or by the Corporations to the Shareholders in connection with their approval of the Merger and execution and delivery of this Agreement, is false or misleading in any material respect. None of the Corporations, the Partnerships nor any Shareholder has made any untrue statement of a material fact or omitted to state a material fact necessary in order to make not misleading the statements made or information delivered in or pursuant to this Agreement, including, but not limited to, all Schedules to the Disclosure Memorandum and Exhibits hereto, or in or pursuant to the other Operative Documents, or in or pursuant to closing certificates executed or delivered by the Shareholders, the Partnerships or the Corporations. In connection with their consideration and approval of the Merger and the other transactions contemplated hereby, the Corporations have furnished to their Shareholders all information required to be disclosed under all applicable laws (including without limitation applicable securities laws). Such information - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 28 35 does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein not misleading. ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SIERRA To induce the Corporations, the Partnerships and the Shareholders to enter into and perform this Agreement and the Operative Documents, Sierra represents and warrants to the Corporations, the Partnerships and the Shareholders as follows in this Article III. 3.1 ORGANIZATION Sierra is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Sierra has full corporate power and authority to own, operate and lease its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform this Agreement and the Operative Documents to which it is a party, and to carry out the transactions contemplated hereby and thereby. Sierra is qualified to do business and is in good standing in each jurisdiction in which the properties owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except where failure to be so qualified and in good standing would not have a material adverse effect on Sierra's business. 3.2 ENFORCEABILITY All corporate action on the part of Sierra and its officers, directors and Shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Operative Documents, the consummation of the Merger, and the performance of all of Sierra's obligations under this Agreement and the Operative Documents has been taken or will be taken prior to the Closing. This Agreement has been, and each of the Operative Documents to which Sierra is a party will have been at the Closing, duly executed and delivered by Sierra, and this Agreement is, and each of the Operative Documents to which Sierra is a party will be at the Closing, a legal, valid and binding obligation of Sierra, enforceable against Sierra in accordance with its terms. 3.3 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS Except as would not have a material adverse effect on Sierra, the execution, delivery and performance of this Agreement and the Operative Documents by the Purchaser and Sierra and the consummation by them of the transactions contemplated hereby and thereby will not (i) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to Sierra or the Purchaser, (ii) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, except compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Washington Secretary of State and the California Secretary of State (the consent of all such Persons to be duly obtained at or prior to the Closing), - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 29 36 (iii) result in a default (with or without the giving of notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which Sierra or the Purchaser is a party or by which either of them is bound or to which any of their assets are subject, (iv) result in the creation of any lien or encumbrance upon the assets of Sierra or the Purchaser or upon any outstanding shares or other securities of Sierra or the Purchaser, (v) conflict with or result in a breach of or constitute a default under any provision of the Certificate of Incorporation or By-Laws of Sierra or the Articles of Incorporation or Bylaws of the Purchaser, or (vi) invalidate or adversely affect any permit, license, authorization or status used in the conduct of the business of Sierra. 3.4 CAPITALIZATION The authorized capital stock of Sierra consists of 40,000,000 shares of common stock, $.01 par value per share, of which 16,580,984 shares were issued and outstanding as of March 31, 1995, and 1,000,000 shares of preferred stock, $.01 par value per share, none of which are issued and outstanding. Such issued and outstanding shares of Sierra Common Stock are validly issued, fully paid and nonassessable. The Securities to be issued pursuant to this Agreement have been duly authorized for issuance, and such Securities, when issued and delivered to the Shareholders pursuant to this Agreement, shall be validly issued, fully paid and nonassessable. 3.5 SEC DOCUMENTS Sierra has furnished the Shareholders with true and complete copies of its Annual Report on Form 10-K for the fiscal year ending March 31, 1994, its Quarterly Reports on Form 10-Q for the fiscal quarters ending June 30, September 30 and December 31, 1994, its Proxy Statement relating to its 1994 Annual Meeting of Stockholders in August 1994, and its Current Report on Form 8-K filed with the SEC on December 30, 1994 (collectively, the "SEC Documents"). As of their respective filing dates, each of the SEC Documents complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. 3.6 CLAIMS AND LEGAL PROCEEDINGS Except matters disclosed in the SEC Documents, there are no material claims, actions, suits, arbitrations, investigations or proceedings pending or involving or, to Sierra's best knowledge, threatened against Sierra before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person. 3.7 BROKERS OR FINDERS Each of the Corporations and the Partnerships has not incurred, and will not incur, directly or indirectly, as a result of any action taken by or on behalf of any of them, any - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 30 37 liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Merger, this Agreement or any transaction contemplated hereby. 3.8 FULL DISCLOSURE No information furnished by Sierra to the Shareholders in connection with this Agreement or the other Operative Documents is false or misleading in any material respect. Sierra has not made any untrue statement of a material fact or omitted to state a material fact necessary in order to make not misleading the statements made or information delivered in or pursuant to this Agreement or in or pursuant to the other Operative Documents. ARTICLE IV - DELIVERIES BY THE CORPORATIONS, THE PARTNERSHIPS AND THE SHAREHOLDERS The Corporations, the Partnerships and the Shareholders shall deliver to Sierra at the Closing the following documents and materials; provided, however, that any such materials or documents not so delivered shall be deemed irrevocably waived by Sierra and the Purchaser. 4.1 OPINION OF COUNSEL FOR THE CORPORATIONS, THE PARTNERSHIPS AND THE SHAREHOLDERS There shall be delivered to Sierra at the Closing an opinion letter of Cooley Godward Castro Huddleson & Tatum, counsel for the Corporations, the Partnerships and the Shareholders, dated the Closing Date, in the form attached hereto as Exhibit F. 4.2 RESIGNATIONS There shall be delivered to Sierra at the Closing copies of resignations effective as of the Closing Date of all the officers and directors of the Corporations. 4.3 CONSENTS TO MERGER The Corporations shall have received and shall have delivered to Sierra written consents to the Merger from each of the parties (other than the Corporations) to those agreements, leases, notes or other documents identified on Schedules 2.6 and 2.17 to the Disclosure Memorandum. 4.4 APPROVALS AND CONSENTS There shall be delivered to Sierra evidence of all transfers of permits or licenses, all approvals, applications or notices to public agencies, federal, state, local or foreign, the granting or delivery of which is necessary for the consummation of the transactions contemplated hereby or for the continued operation of the Corporations. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 31 38 4.5 SECRETARIES' CERTIFICATES Sierra shall have received a certificate of the Secretary of each of the Corporations as to the authenticity and effectiveness of (a) the actions of the Board of Directors and Shareholders of the Corporations authorizing the Merger and the transactions contemplated by this Agreement and the Operative Documents and (b) the Articles of Incorporation and Bylaws of each of the Corporations. 4.6 AMENDMENTS OF CONSULTANT AGREEMENTS The Amendments to the Consultant Agreements referred to in the last paragraph of Section 2.17 of this Agreement shall have been duly and validly authorized, executed and delivered by all parties thereto, and an original, fully executed copy of each such Amendment shall have been delivered to Sierra. 4.7 OPERATIVE DOCUMENTS The Operative Documents, including without limitation the Inventions Agreement and the Confidentiality Agreement required pursuant to the Designer Bonus Agreements to be entered into by each of Martin Kahn, David Balsam, Ken Grant and Vince Mills, shall have been executed and delivered by all parties thereto other than Sierra and the Purchaser. 4.8 TERMINATION OF EMPLOYEE BENEFIT PLANS There shall be delivered to Sierra at the Closing copies of the documentation effecting the termination of all the Employee Benefit Plans of the Corporations and the Partnerships referred to in Section 2.16 above. ARTICLE V - DELIVERIES BY SIERRA Sierra shall deliver to the Shareholders at the Closing the following documents and materials; provided, however, that any such materials or documents not so delivered shall be deemed irrevocably waived by the Shareholders 5.1 OPINION OF COUNSEL There shall be delivered to the Shareholders at the Closing an opinion letter of Perkins Coie, counsel for Sierra, dated the Closing Date, in the form attached hereto as Exhibit G. 5.2 OPERATIVE DOCUMENTS Sierra shall have executed and delivered to the Shareholders all the Operative Documents to which Sierra is a party. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 32 39 ARTICLE VI - COVENANTS 6.1 CONFIDENTIALITY All information obtained by either party or its officers, directors, employees, auditors or agents pursuant in connection with the transactions contemplated by this Agreement shall be kept confidential in accordance with the confidentiality agreement, dated May 16, 1995 (the "Confidentiality Agreement"), between Sierra and Pixellite Group. No investigation in connection with the transactions contemplated by this Agreement shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. Upon the Effective Time, the Confidentiality Agreement shall be deemed to have terminated without further action by the parties thereto. 6.2 FURTHER ACTION Upon the terms and subject to the conditions hereof, each of Sierra, the Purchaser and the Corporations, the Partnerships and the Shareholders agrees to use its best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby, including, without limitation, using its best efforts to obtain all waivers, licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Corporations, the Partnerships or the Shareholders as are necessary for the consummation of the transactions contemplated hereby and to fulfill the conditions to the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, each of the Corporations, the Partnerships and the Shareholders shall use its best efforts to take all such action. No Corporation, Partnership or Shareholder will undertake any course of action inconsistent with this Agreement or which would make any representations, warranties or agreements made by such party in this Agreement or any other Operative Documents untrue or any conditions precedent to this Agreement unable to be satisfied at or prior to the Closing. After the Closing Date, each party hereto, at the request of and without any further cost or expense to the other parties, will take any further actions necessary or desirable to carry out the purposes of this Agreement or any other Operative Document, to vest in the Surviving Corporation full title to all properties, assets and rights of the Corporations and to effect the issuance of the Sierra Common Stock to the Shareholders pursuant to the terms and conditions hereof. 6.3 PUBLICITY The Shareholders, the Corporations and the Partnerships shall not issue any press release or otherwise make any statements to any third party with respect to this Agreement or the transactions contemplated hereby without the prior written consent of Sierra. Sierra shall consult with the Shareholders prior to issuing any press release relating to the transactions contemplated hereby and shall provide the Shareholders with a reasonable opportunity to comment thereon. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 33 40 ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER 7.1 TERMINATION This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of this Agreement by the Shareholders of the Corporations): (a) by mutual written consent of the Shareholders and Sierra; (b) by either the Shareholders or Sierra, if the Merger has not been consummated by June 15, 1995; provided, however, that the right to terminate this Agreement under this subsection (b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by either the Shareholders or Sierra, if there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Sierra, the Corporations or Purchaser from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and nonappealable; provided, however, that the party seeking to terminate this Agreement pursuant to this subsection (c) shall have used all reasonable efforts to remove such judgment, injunction, order or decree; (d) at any time prior to the Closing by Sierra if, at any time in the course of its legal, accounting, financial or operational due diligence investigation as to the Corporations, it shall have become aware of any facts or circumstances that it was not aware of on the date hereof, or any additional facts and circumstances as to matters of which it was aware on the date hereof, in either case that would, in the sole discretion of Sierra, make it inadvisable to consummate the Merger or the other transactions contemplated hereby; (e) by the Shareholders, in the event of a material breach by Sierra of any representation, warranty or agreement contained herein which has not been cured or is not curable within 10 days after written notice to Sierra by the Shareholders; or (f) by Sierra, in the event of a material breach by any of the Corporations, the Partnerships or the Shareholders of any representation, warranty or agreement contained herein which has not been cured or is not curable within 10 days after written notice to the Shareholders by Sierra. 7.2 EFFECT OF TERMINATION In the event of the termination of this Agreement pursuant to Section 7.1 hereof, there shall be no further obligation on the part of any party hereto, except that nothing herein shall relieve any party from liability for any breach hereof. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 34 41 7.3 AMENDMENT This Agreement may be amended by the parties hereto at any time prior to the Effective Time. This Agreement may not be amended except by an instrument in writing signed by all parties hereto. 7.4 WAIVER At any time prior to the Effective Time, Sierra, on the one hand, and the Shareholders, on the other hand, may (a) extend the time for the performance of any obligation or other act of the other party, (b) waive any inaccuracy in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto or (c) waive compliance with any agreement or condition of the other party contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE VIII - SURVIVAL AND INDEMNIFICATION 8.1 SURVIVAL All representations and warranties contained in this Agreement or in any certificate delivered pursuant hereto shall survive the Closing for a period of one year, and shall not be deemed waived or otherwise affected by any investigation made or any knowledge acquired with respect thereto. The covenants and agreements contained in this Agreement or in the other Operative Documents shall survive the Closing and shall continue until all obligations with respect thereto shall have been performed or satisfied or shall have been terminated in accordance with their terms. 8.2 INDEMNIFICATION BY THE SHAREHOLDERS From and after the Closing Date, the Shareholders shall jointly and severally indemnify and hold Sierra and its officers, directors, employees and control persons (the "Sierra Indemnified Parties") harmless from and against, and shall reimburse the Sierra Indemnified Parties for, any and all losses, damages, debts, liabilities, obligations, judgments, orders, awards, writs, injunctions, decrees, fines, penalties, taxes, costs or expenses (including but not limited to any reasonable legal or accounting fees and expenses) ("Losses") arising out of or in connection with: (a) any inaccuracy in any representation or warranty made by the Corporations, the Partnerships or the Shareholders in this Agreement or in any certificate delivered pursuant hereto, and any inaccuracy in any disclosure documents furnished to Shareholders of the Corporations in connection with their approval of the Merger and this Agreement, or (b) any failure by the Corporations, the Partnerships or any Shareholder to perform or comply, in whole or in part, with any covenant or agreement in this Agreement. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 35 42 8.3 INDEMNIFICATION BY SIERRA From and after the Closing Date Sierra shall indemnify and hold harmless each Shareholder and his successors, assigns, heirs and legatees (the "Shareholder Indemnified Parties"; together with the Sierra Indemnified Parties, the "Indemnified Parties") from and against, and shall reimburse the Shareholder Indemnified Parties for, any and all Losses arising out of or in connection with: (a) any inaccuracy in any representation or warranty made by the Purchaser or Sierra in this Agreement or in any certificate delivered pursuant hereto, or (b) any failure by the Purchaser or Sierra to perform or comply, in whole or in part, with any covenant or agreement in this Agreement. 8.4 DEDUCTIBLE AND LIMITATIONS (a) No Indemnified Party shall be entitled to receive any indemnification payment with respect to any Losses until the aggregate Losses which the Sierra Indemnified Parties or the Shareholder Indemnified Parties, as the case may be, would be otherwise entitled to receive as indemnification with respect to any Claims exceed $25,000 (the "Threshold"). (b) In no event shall the liability of the Shareholders hereunder for Losses incurred by Sierra Indemnified Parties exceed an amount equal to the total number of shares of Sierra Common Stock issued to the Shareholders pursuant to the Merger multiplied by the Closing Average. (c) The remedies set forth in this Article VIII shall be the exclusive remedies of the parties to this Agreement with respect to matters arising out of this Agreement; provided, however, that the foregoing clause of this sentence shall not be deemed a waiver by any party to this Agreement of any of its rights or remedies arising by way of fraud in the inducement or similar matters. 8.5 PROCEDURE FOR INDEMNIFICATION (a) Any Indemnified Party shall notify the indemnifying party in writing reasonably promptly after the assertion against the indemnified party of any claim by a third party (a "Third Party Claim") in respect of which the indemnified party intends to base a Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve it of any obligation or liability that it may have to the indemnified party except to the extent that the indemnifying party demonstrates that its ability to defend or resolve such Third Party Claim is adversely affected thereby. (b) (i) The indemnifying party shall have the right, upon written notice given to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, to assume the defense or handling of such Third Party Claim, - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 36 43 at the indemnifying party's sole expense, in which case the provisions of Section 8.5(b)(ii) below shall govern. (ii) The indemnifying party shall select counsel reasonably acceptable to the Indemnified Party in connection with conducting the defense or handling of such Third Party Claim, and the indemnifying party shall defend or handle the same in consultation with the Indemnified Party and shall keep the Indemnified Party timely apprised of the status of such Third Party Claim. The indemnifying party shall not, without the prior written consent of the Indemnified Party, agree to a settlement of any Third Party Claim. The Indemnified Party shall cooperate with the indemnifying party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (c) (i) If the indemnifying party does not give written notice to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, of the indemnifying party's election to assume the defense or handling of such Third Party Claim, the provisions of Section 8.5(c)(ii) below shall govern. (ii) The Indemnified Party may, at the indemnifying party's expense, select counsel in connection with conducting the defense or handling of such Third Party Claim and defend or handle such Third Party Claim in such manner as it may deem appropriate, provided, however, that the indemnified party shall keep the indemnifying party timely apprised of the status of such Third Party Claim and shall not settle such Third Party Claim without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld. If the Indemnified Party defends or handles such Third Party Claim, the indemnifying party shall cooperate with the Indemnified Party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (d) If the Indemnified Party intends to seek indemnification hereunder, other than for a Third Party Claim, then it shall notify the indemnifying party in writing within six months after its discovery of facts upon which it intends to base its Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve the indemnifying party of any obligation or liability that the indemnifying party may have to the Indemnified Party except to the extent that the indemnifying party demonstrates that the indemnifying party's ability to defend or resolve such Claim is adversely affected thereby. (e) The Indemnified Party may notify the indemnifying party of a Claim even though the amount thereof plus the amount of other Claims previously notified by the Indemnified Party aggregate less than the Threshold. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 37 44 ARTICLE IX - GENERAL 9.1 EXPENSES Whether or not the transactions contemplated by this Agreement are consummated, the Shareholders shall pay the fees and expenses of the Corporations, the Partnerships and the Shareholders, and Sierra shall pay the fees and expenses of Sierra and the Purchaser, incident to the negotiation, preparation and carrying out of this Agreement and the other Operative Documents (including legal and accounting fees and expenses); provided, however, that at the Closing Sierra shall pay the fees and expenses of Cooley Godward Castro Huddleson & Tatum, not to exceed $69,125; provided further, that should any action be brought hereunder, the attorneys' fees and expenses of the prevailing party shall be paid by the other party to such action. The Shareholders shall pay any transfer or similar taxes which may be payable in connection with the transactions contemplated by this Agreement. 9.2 NOTICES Any notice or demand desired or required to be given hereunder shall be in writing given by personal delivery or certified or registered mail, telegram or confirmed facsimile transmission, addressed as respectively set forth below or to such other address as any party shall have previously designated by such a notice. The effective date of any notice or request shall be three days from the date it is sent by the addressor with charges prepaid so long as it is in fact received within five days, or when successful transmission is confirmed if sent by facsimile, or when personally delivered. TO THE PURCHASER AND TO SIERRA: Sierra On-Line, Inc. 3380 146th Place S.E., Suite 300 Bellevue, WA 98007 Fax: (206) 649-0214 Attention: General Counsel with a copy to: Perkins Coie 1201 Third Avenue, 40th Floor Seattle, Washington 98101-3099 Fax: (206) 583-8500 Attention: Stephen A. McKeon TO THE SHAREHOLDERS: At their respective addresses set forth on Schedule 2.1 to the Disclosure Memorandum - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 38 45 TO THE CORPORATIONS AND THE PARTNERSHIPS: c/o Pixellite Group P.O. Box 151 21800 Moscow Road Villa Grande, CA 95486-0151 Fax: (707) 865-9042 Attention: Martin Kahn with a copy to: Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306-2155 Fax: (415) 857-0663 Attention: Gregory C. Smith 9.3 SEVERABILITY If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. 9.4 ENTIRE AGREEMENT This Agreement and the other Operative Documents constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede, except as set forth in Section 6.1 hereof, all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof. 9.5 ASSIGNMENT This Agreement shall not be assigned by operation of law or otherwise, except that Sierra may assign all or any of its rights and obligations hereunder to any of its affiliates, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 39 46 9.6 PARTIES IN INTEREST This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 9.7 SPECIFIC PERFORMANCE The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. 9.8 GOVERNING LAW This Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington applicable to contracts executed in and to be performed in that State. All actions and proceedings arising out of or relating to this Agreement shall be heard and determined in any Washington state or federal court situated therein. 9.9 HEADINGS The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 9.10 WAIVER OF JURY TRIAL Each of the Shareholders, the Corporations, the Partnerships, Sierra and the Purchaser hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the actions of such parties in the negotiation, administration, performance and enforcement thereof. 9.11 COUNTERPARTS This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 40 47 IN WITNESS WHEREOF, the parties hereto have entered into and signed this Agreement as of the date and year first above written. SIERRA ON-LINE, INC. By: /s/ Kenneth A. Williams --------------------------------------------- Title: President & Chief Executive Officer ------------------------------------------ PIXEL ACQUISITION CORP. By: /s/ Michael A. Brochu --------------------------------------------- Title: President ------------------------------------------------- PIXELLITE GROUP By: /s/ Pixellite Software --------------------------------------------- By: /s/ Martin Kahn, Inc. --------------------------------------------- By: /s/ Martin Kahn --------------------------------------------- President --------------------------------------------- PIXELLITE SOFTWARE By: /s/ Martin Kahn, Inc. --------------------------------------------- By: /s/ Martin Kahn --------------------------------------------- President --------------------------------------------- KEN GRANT, INC. By: /s/ Ken Grant --------------------------------------------- Title: President ------------------------------------------ MARTIN KAHN, INC. By: /s/ Martin Kahn --------------------------------------------- Title: President ------------------------------------------ DAVID BALSAM, INC. By: /s/ Dick B. Balsam --------------------------------------------- Title: President ------------------------------------------ - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER 48 STOCKHOLDERS: /s/ Ken Grant --------------------------------------------- KEN GRANT /s/ Martin Kahn --------------------------------------------- MARTIN KAHN /s/ David B Balsam --------------------------------------------- DAVID BALSAM /s/ Sherrill Grant --------------------------------------------- SHERRILL GRANT - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER EX-2.02 3 SHARE EXCHANGE AGREEMENT DATED JUNE, 20 1995 1 SHARE EXCHANGE AGREEMENT AMONG SIERRA ON-LINE, INC., SOFTWARE INSPIRATION LTD., AND THE SHAREHOLDERS OF SOFTWARE INSPIRATION LTD. DATED AS OF JUNE 20, 1995 2 CONTENTS ARTICLE I - SHARE EXCHANGE .............................................................. 1 1.1 Exchange of Shares .............................................................. 1 1.2 Consideration for Company Shares ................................................ 1 1.2.1 Closing Consideration ................................................ 1 1.2.2 Escrow ............................................................... 2 1.2.3 Special Definitions .................................................. 2 1.3 The Closing ..................................................................... 2 1.4 No Fractional Shares ............................................................ 3 1.5 Pooling Restrictions on Transfer of Sierra Shares ............................... 3 1.6 U.S. Tax Treatment .............................................................. 3 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS ........................ 3 2.1 Good Title, etc. ................................................................ 3 2.2 No Approvals or Notices Required; No Conflicts With Instruments ................. 4 2.3 Pooling Matters ................................................................. 4 2.4 Insider Interests ............................................................... 4 2.5 Securities Act Matters .......................................................... 5 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE MAJOR SHAREHOLDER .................. 7 3.1 Organization .................................................................... 7 3.2 Enforceability .................................................................. 8 3.3 Capitalization .................................................................. 8 3.4 Subsidiaries and Affiliates ..................................................... 9 3.5 No Approvals or Notices Required; No Conflicts With Instruments ................. 9 3.6 Financial Statements ............................................................ 10 3.7 Absence of Certain Changes or Events ............................................ 10 3.8 Taxes ........................................................................... 13 3.9 Property ........................................................................ 14
- ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page i 3 3.10 Contracts ....................................................................... 16 3.11 Customers and Suppliers ......................................................... 18 3.12 Orders, Commitments and Returns ................................................. 18 3.13 Claims and Legal Proceedings .................................................... 18 3.14 Labor Matters ................................................................... 18 3.15 Employee Benefit Plans .......................................................... 19 3.16 Intellectual Property ........................................................... 20 3.17 Accounts Receivable ............................................................. 22 3.18 Inventory ....................................................................... 23 3.19 Corporate Books and Records ..................................................... 23 3.20 Licenses, Permits, Authorizations, etc. ......................................... 23 3.21 Compliance With Laws ............................................................ 23 3.22 Insurance ....................................................................... 24 3.23 Brokers or Finders .............................................................. 24 3.24 Government Contracts ............................................................ 25 3.25 Absence of Questionable Payments ................................................ 25 3.26 Personnel ....................................................................... 25 3.27 Insider Interests ............................................................... 26 3.28 Pooling Matters ................................................................. 26 3.29 Full Disclosure ................................................................. 27 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SIERRA ................................... 27 4.1 Organization .................................................................... 27 4.2 Enforceability .................................................................. 27 4.3 No Approvals or Notices Required; No Conflicts With Instruments ................. 28 4.4 Litigation ...................................................................... 28 4.5 SEC Filings ..................................................................... 28 4.6 Good Title ...................................................................... 28 ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF SIERRA ............................... 29 5.1 Accuracy of Representations and Warranties ...................................... 29
- ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page ii 4 5.2 Performance of Agreements ....................................................... 29 5.3 Opinions of Counsel for the Company ............................................. 29 5.4 Resignations .................................................................... 29 5.5 Consents to Share Exchange ...................................................... 29 5.6 Major Shareholder's Certificate ................................................. 30 5.7 Material Adverse Change ......................................................... 30 5.8 Due Diligence ................................................................... 30 5.9 Approvals and Consents .......................................................... 30 5.10 Proceedings and Documents; Secretary's Certificate .............................. 30 5.11 Nonforeign Affidavit ............................................................ 30 5.12 Compliance With Laws ............................................................ 31 5.13 Pooling of Interests ............................................................ 31 5.14 Other Agreements ................................................................ 31 5.15 Legal Proceedings ............................................................... 31 5.16 Operative Documents ............................................................. 31 ARTICLE VI - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY ......................................................................... 31 6.1 Accuracy of Representations and Warranties ...................................... 31 6.2 Performance of Agreements ....................................................... 32 6.3 Opinion of Counsel .............................................................. 32 6.4 Officers' Certificate ........................................................... 32 6.5 Legal Proceedings ............................................................... 32 6.6 Operative Documents ............................................................. 32 ARTICLE VII - COVENANTS ................................................................. 32 7.1 Conduct of Business by the Company Pending the Closing .......................... 32 7.2 Access to Information; Confidentiality .......................................... 34 7.3 No Solicitation of Transactions ................................................. 35 7.4 Notification of Certain Matters ................................................. 35 7.5 Further Action; Reasonable Best Efforts ......................................... 35 7.6 Publicity ....................................................................... 36
- ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page iii 5 ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER ........................................ 36 8.1 Termination ..................................................................... 36 8.2 Effect of Termination ........................................................... 37 8.3 Amendment ....................................................................... 37 8.4 Waiver .......................................................................... 37 ARTICLE IX - SURVIVAL AND INDEMNIFICATION ............................................... 37 9.1 Survival ........................................................................ 37 9.2 Indemnification by the Shareholders ............................................. 38 9.3 Indemnification by Sierra ....................................................... 38 9.4 Threshold and Limitations ....................................................... 38 9.5 Procedure for Indemnification ................................................... 39 9.6 Offset .......................................................................... 40 ARTICLE X - GENERAL ..................................................................... 40 10.1 Expenses ........................................................................ 40 10.2 Notices ......................................................................... 40 10.3 Severability .................................................................... 41 10.4 Entire Agreement ................................................................ 42 10.5 Assignment ...................................................................... 42 10.6 Parties in Interest ............................................................. 42 10.7 Specific Performance ............................................................ 42 10.8 Governing Law ................................................................... 42 10.9 Headings ........................................................................ 43 10.10 Counterparts .................................................................... 43 10.11 Waiver of Jury Trial ............................................................ 43 10.12 Waiver of Preemptive and Other Rights ........................................... 43
EXHIBITS Exhibit A - Form of Escrow Agreement Exhibit B - Shareholder Disclosure Memorandum Exhibit C - Form of Registration Rights Agreement Exhibit D - Form of Noncompetition Agreement Exhibit E - Company Disclosure Memorandum - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page iv 6 Exhibit F - List of Agreements to be Amended or Terminated - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page v 7 SHARE EXCHANGE AGREEMENT This Share Exchange Agreement (this "Agreement") is made and entered into as of June 20, 1995 by and among Sierra On-Line, Inc., a Delaware corporation ("Sierra"), Software Inspiration Ltd., a corporation organized under the laws of England (the "Company"), David Lester (the "Majority Shareholder") and all the shareholders of the Company other than the Major Shareholder (together with the Major Shareholder, the "Shareholders"). RECITALS A. The parties hereto believe it advisable and in their respective best interests to effect the exchange of all issued and outstanding shares of capital stock of the Company (the "Company Shares"), all of which are owned as of the date hereof by the Shareholders, for shares of common stock, $.01 par value per share, of Sierra ("Sierra Common Stock") as contemplated herein (the "Share Exchange"). B. The parties hereto also contemplate entering into certain other agreements ancillary to this Agreement at the Closing (as defined below). AGREEMENT In consideration of the terms hereof, the parties hereto agree as follows: ARTICLE I - SHARE EXCHANGE 1.1 EXCHANGE OF SHARES On the terms and subject to the conditions of this Agreement, Sierra agrees to purchase the Company Shares from the Shareholders, and the Shareholders agree to sell the Company Shares to Sierra. The names of the Shareholders and the number of Company Shares held by each are set forth on Schedule 2.1 to the Company Disclosure Memorandum (as hereinafter defined). 1.2 CONSIDERATION FOR COMPANY SHARES The aggregate purchase price for the Company Shares shall be (a) a number of shares of Sierra Common Stock which, when multiplied by the Closing Average (as defined below), and excluding any fractional shares, equals US$13,870,000 less the amount of the Adjustment (as defined below), plus (b) US$90.00 in cash all as set forth below in this Section 1.2. 1.2.1 CLOSING CONSIDERATION Each Shareholder shall be entitled to receive at or as soon as practicable after the Closing, upon surrender to Sierra at the Closing of a certificate or certificates, duly endorsed - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 1 8 for transfer, representing the total number of Company Shares owned by such Shareholder (or affidavits concerning the loss of such certificates), (a) a number of shares of Sierra Common Stock (excluding any fractional shares) equal to the total number of Closing Shares (as defined below) multiplied by a fraction, the numerator of which is the total number of such Company Shares so surrendered by such Shareholder and the denominator of which is the total number of Company Shares outstanding, and (b) US$10.00 payable to each Shareholder in cash. 1.2.2 ESCROW As soon as practicable after the Closing, Sierra shall deposit into escrow, in accordance with the terms of an Escrow Agreement in substantially the form attached hereto as Exhibit A (the "Escrow Agreement") to be entered into at the Closing among the Shareholders and Sierra, a number of shares of Sierra Common Stock (excluding any fractional shares) equal to the total number of Escrow Shares (as defined below). The Escrow Shares, or the proceeds from any disposition thereof in accordance with the Escrow Agreement, shall be distributed from escrow in accordance with the Escrow Agreement. 1.2.3 SPECIAL DEFINITIONS (a) The term "Closing Average" shall mean the average of the last reported sale prices of Sierra Common Stock on the Nasdaq National Market over the 20 consecutive trading days ending with the third trading day prior to the date on which the Closing occurs. (b) The term "Closing Shares" shall mean a number of shares of Sierra Common Stock (rounded to the nearest whole share) which, when multiplied by the Closing Average, equals U.S.$12,483,000. (c) The term "Escrow Shares" shall mean a number of shares of Sierra Common Stock (rounded to the nearest whole share) which, when multiplied by the Closing Average, equals U.S.$1,387,000. 1.3 THE CLOSING The closing of the Share Exchange pursuant to this Agreement (the "Closing") shall take place on the earliest practicable business day after the conditions to the Closing of the Share Exchange set forth in Articles V and VI hereof are satisfied or waived (the "Closing Date") at 2:00 p.m. local time at the offices of Perkins Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington, U.S.A., or at such other time or location as Sierra and the Company shall agree. At the Closing, each of the parties hereto shall deliver all such documents, instruments, certificates and other items as may be required under this Agreement or the other Operative Documents (as defined in Section 2.1) or otherwise. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 2 9 1.4 NO FRACTIONAL SHARES No certificates or scrip representing fractional shares of Sierra Common Stock shall be issued upon the surrender for exchange of certificates representing Company Shares pursuant to the Share Exchange, and no dividend, stock split or other distribution with respect to Sierra Common Stock shall relate to any such fractional interest, and any such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder. In lieu of any such fractional shares, each holder of Company Shares who otherwise would have been entitled to a fraction of a share of Sierra Common Stock pursuant to the Share Exchange will be paid cash upon such surrender in an amount equal to such fraction multiplied by the Closing Average. 1.5 POOLING RESTRICTIONS ON TRANSFER OF SIERRA SHARES No Shareholder shall transfer any Closing Shares or Escrow Shares until at least three (3) business days after the issuance by Sierra of a press release announcing financial results for the first fiscal quarter of Sierra ending after the Closing which contains a period of at least 30 days of combined financial results of Sierra and the Company. 1.6 U.S. TAX TREATMENT The parties agree that the purchase and sale of the Company Shares in the Share Exchange shall be treated as a taxable transaction for U.S. federal income tax purposes. ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS To induce Sierra to enter into and perform this Agreement and the other Operative Documents (as defined in Section 2.1 hereof), and except as is otherwise set forth in the Shareholder Disclosure Memorandum attached hereto as Exhibit B (the "Shareholder Disclosure Memorandum"), which exceptions shall specifically identify the paragraph or paragraphs of this Article II to which such exceptions relate, and which shall constitute in its entirety a representation and warranty under this Article II, the Shareholders jointly and severally represent and warrant to Sierra as of the date of this Agreement and as of the Closing as follows in this Article II. 2.1 GOOD TITLE, ETC. Each Shareholder represents with respect to itself only that (a) such Shareholder owns the Company Shares listed opposite such Shareholder's name on Schedule 2.1 to the Shareholder Disclosure Memorandum; (b) such Company Shares are free and clear of any lien, encumbrance, adverse claim, restriction on sale or transfer (other than restrictions imposed by applicable securities laws), preemptive right or option; (c) such Shareholder has all necessary power, right and authority to enter into this Agreement and each of the agreements, certificates, instruments and documents executed or delivered pursuant to the terms of this Agreement by such Shareholder, including, without limitation and as applicable, - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 3 10 the Registration Rights Agreement in substantially the form attached hereto as Exhibit C to be entered into as of the Closing among Sierra and the Shareholders, the Noncompetition Agreements in substantially the form attached hereto as Exhibit D, to be entered into as of the Closing among Sierra and the Major Shareholder and the Escrow Agreement (collectively, and including this Agreement, the "Operative Documents"), to consummate the transactions contemplated hereby and thereby, and to sell and transfer the Company Shares held by such Shareholder hereunder without the consent or approval of any other Person (as defined in Section 3.5 hereof), other than as set forth on Schedule 2.1 to the Shareholder Disclosure Memorandum; and (d) this Agreement and the other Operative Documents to which such Shareholder is a party have each been duly authorized, executed and delivered by such Shareholder and each is a legal, valid and binding obligation of such Shareholder, enforceable in accordance with its terms. 2.2 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS Except as set forth on Schedule 2.2 to the Shareholder Disclosure Memorandum, the execution, delivery and performance of this Agreement by each Shareholder and the consummation of the transactions contemplated hereby will not (a) constitute a violation by such Shareholder (with or without the giving of notice or lapse of time, or both) of any provisions of law or any judgment, decree, order, regulation or rule of any court, agency or other governmental authority applicable to such Shareholder, (b) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, except for compliance with applicable securities laws and the filing of all documents necessary to consummate the Share Exchange with applicable government authorities (the consent of all such Persons to be duly obtained by the Company or the Shareholder at or prior to the Closing), (c) result in the creation of any lien or encumbrance upon the Company Shares owned by such Shareholder, or (d) conflict with or result in a breach of or constitute a default under any provision of the Certificate of Incorporation or By-Laws (or comparable charter documents) of the Company. 2.3 POOLING MATTERS No Shareholder has taken any action, or become aware of any action taken by the Company, any Subsidiary (as defined in Section 3.1 hereof) or any officer or director of the Company or any Subsidiary which, alone or together with other facts or circumstances, could affect the ability of Sierra to account for the Share Exchange as a "pooling of interests" transaction consistent with GAAP (as defined in Section 3.6 hereof). 2.4 INSIDER INTERESTS Except as set forth on Schedule 2.4 to the Shareholder Disclosure Memorandum, no Shareholder has any interest (other than as a shareholder of the Company) (a) in any property, real or personal, tangible or intangible, used in or directly pertaining to the business of the Company, including, without limitation, inventions, patents, copyrights, trademarks or trade names, or (b) in any agreement, contract, arrangement or obligation relating to the Company, - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 3 11 its present or prospective business or its operations. Except as set forth on Schedule 2.4 to the Shareholder Disclosure Memorandum, there are no agreements, understandings or proposed transactions between the Company and any of its Shareholders or any affiliate thereof. Except as set forth on Schedule 2.4 to the Shareholder Disclosure Memorandum, no Shareholder has any interest, either directly or indirectly, in any entity, including, without limitation, any corporation, partnership, joint venture, proprietorship, firm, licensee, business or association (whether as an employee, officer, director, shareholder, agent, independent contractor, security holder, creditor, consultant or otherwise) that presently (x) provides any services, produces and/or sells any products or product lines, or engages in any activity which is the same, similar to or competitive with any activity or business in which the Company is now engaged or proposes to engage; (y) is a supplier, customer, creditor, or has an existing contractual relationship with any of the Company's employees (or persons performing similar functions); or (z) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of the Company or any property, real or personal, tangible or intangible, that is necessary or desirable for the present or anticipated future conduct of the Company's business. 2.5 SECURITIES ACT MATTERS Each of the Shareholders hereby acknowledges, represents and warrants to Sierra as follows: (a) Ability to Bear Risk. Such Shareholder is in a financial position to hold the shares of Sierra Common Stock to be issued to such Shareholder hereunder for an indefinite period of time and is able to bear the economic risk and withstand a complete loss of its investment in such shares. (b) SEC Documents. Such Shareholder acknowledges that it has had the opportunity to review to its satisfaction all publicly available filings and reports of Sierra with the Securities and Exchange Commission. Such Shareholder acknowledges that an investment in the shares of Sierra Common Stock to be issued to such Shareholder hereunder involves a high degree of risk. (c) Professional Advice. Such Shareholder has obtained, to the extent that it deems necessary, its own professional advice with respect to the risks inherent in acquiring the shares of Sierra Common Stock to be issued to such Shareholder hereunder, the condition of Sierra and the suitability of its investment in such shares in light of its financial condition and investment needs. (d) Sophistication. Such Shareholder, either alone or with the assistance of its professional advisors, is a sophisticated investor, is able to fend for itself in the transactions contemplated by this Agreement relating to the shares of Sierra Common Stock to be issued to such Shareholder hereunder and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment in such shares. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 5 12 (e) Access to Information. Such Shareholder has been given access to full and complete information regarding Sierra and the Company, including, in particular, the current respective financial conditions of Sierra and the Company and the risks associated therewith, and has utilized such access to its satisfaction for the purpose of obtaining information about Sierra. (f) Acquisition Entirely for Own Account. The shares of Sierra Common Stock to be issued to such Shareholder hereunder are being acquired by such Shareholder for investment for its respective account, not as a nominee or agent, and not with a view to the distribution of any part thereof; such Shareholder has no present intention of selling, granting any participation in or otherwise distributing any of such shares in a manner contrary to the Securities Act of 1933, as amended (the "1933 Act"), or to any applicable state or foreign securities or Blue Sky law, nor does such Shareholder have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant a participation to such Person or to any third person with respect to any of such shares. (g) Due Diligence. Such Shareholder has conducted its own due diligence investigation of Sierra and its business and analysis of the merits and risks of an investment in the shares of Sierra Common Stock to be issued to such Shareholder hereunder and is not relying on anyone else's investigation or analysis of Sierra or its business or the merits and risks of an investment in such shares, other than professionals, if any, employed specifically by it to assist it. (h) Restricted Securities. Such Shareholder acknowledges that the shares of Sierra Common Stock to be issued to such Shareholder hereunder have not been and will not prior to issuance be registered under the 1933 Act and that such shares are characterized under the 1933 Act as "restricted securities" and, therefore, cannot be sold or transferred unless such sale or transfer is registered under the 1933 Act or an exemption from such registration is available. The financial condition of such Shareholder is such that it is not likely that it will be necessary to dispose of any of such shares in the foreseeable future. In this connection, such Shareholder represents that it is familiar with Rule 144 under the 1933 Act as presently in effect, and understands the resale limitations imposed thereby and by the 1933 Act. (i) Exemption Reliance. Such Shareholder has been advised that the shares of Sierra Common Stock to be issued to such Shareholder hereunder have not been registered under the 1933 Act or any applicable state or foreign securities laws, but are being issued under this Agreement pursuant to exemptions from such laws, and that Sierra's reliance upon such exemptions is predicated in part upon the Shareholder's representations contained herein. (j) Further Limitations on Disposition. Without in any way limiting the representations set forth herein, each Shareholder further agrees not to make any disposition of all or any portion of the shares of Sierra Common Stock to be issued to such Shareholder hereunder unless and until: - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 6 13 (i) There is in effect a registration statement under the 1933 Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) Such Shareholder shall have notified Sierra of the proposed disposition and shall have furnished Sierra with a detailed statement of the circumstances surrounding the proposed disposition, and (B) if reasonably requested by Sierra, such Shareholder shall have furnished Sierra with an opinion of counsel, reasonably satisfactory to Sierra, that such disposition will not require registration under the 1933 Act; or (iii) Sierra shall be satisfied that such proposed disposition complies in all respects with Rule 144 under the 1933 Act or any successor rule providing a safe harbor for such disposition without registration. (k) Residency. For purposes of the application of state securities laws, each Shareholder is a resident of the jurisdiction specified on Schedule 2.5 to the Shareholder Disclosure Memorandum. (l) Legend. It is understood that the certificates evidencing the shares of Sierra Common Stock to be issued to such Shareholder hereunder will bear a legend as set forth in the Registration Rights Agreement: ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE MAJOR SHAREHOLDER To induce Sierra to enter into and perform this Agreement and the other Operative Documents, and except as is otherwise set forth in the Company Disclosure Memorandum attached hereto as Exhibit E (the "Company Disclosure Memorandum"), which exceptions shall specifically identify the paragraph or paragraphs of this Article III to which such exceptions relate, and which shall constitute in its entirety a representation and warranty under this Article III, the Major Shareholder represents and warrants to Sierra as of the date of this Agreement and as of the Closing as follows in this Article III. Except as to Sections 3.1, 3.3, 3.4, 3.5(e) and 3.19(a) hereof, all references to the "Company" in this Article III shall include the Company's Subsidiaries (as defined in Section 3.1 below). 3.1 ORGANIZATION The Company is a corporation duly organized, validly existing and in good standing under the laws of England. Each subsidiary of the Company listed on Schedule 3.4 to the Company Disclosure Memorandum (individually a "Subsidiary" and together the "Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, which jurisdictions are set forth in Schedule 3.4 to the Company Disclosure Memorandum. The Company and each Subsidiary have all requisite corporate power and authority to own, operate and lease their properties and assets, to carry - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 7 14 on their respective businesses as now conducted and as proposed to be conducted, and in the case of the Company to enter into and perform its obligations under this Agreement and the Operative Documents, and to consummate the transactions contemplated hereby and thereby. The Company and each Subsidiary are duly qualified and licensed as foreign corporations to do business and are in good standing in each jurisdiction listed on Schedule 3.1, in the case of the Company, and Schedule 3.4, in the case of the Subsidiaries, to the Company Disclosure Memorandum, which jurisdictions constitute all jurisdictions where the character of the Company's or such Subsidiary's properties occupied, owned or held under lease or the nature of the business conducted by the Company or such Subsidiary makes such qualification necessary, except as set forth on Schedule 3.1 or Schedule 3.4, as the case may be, to the Company Disclosure Memorandum and except where the failure to be so qualified or in good standing would not have a material adverse effect on the business, business prospects, assets, operations or condition (financial or other) of the Company or such Subsidiary. 3.2 ENFORCEABILITY All corporate action on the part of the Company and its officers, directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement and the Operative Documents, the consummation of the Share Exchange, and the performance of all of the Company's obligations under this Agreement and the Operative Documents has been taken or will be taken prior to the Closing. This Agreement has been, and each of the Operative Documents at the Closing will have been, duly executed and delivered by the Company, and this Agreement is, and each of the Operative Documents to which the Company is a party will be at the Closing, a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 3.3 CAPITALIZATION (a) The authorized capital stock of the Company consists of 37,500 Ordinary Class A Shares and 12,500 Ordinary Class B Shares. (b) The issued and outstanding capital stock of the Company consists solely of 11,340 Ordinary Class A Shares and 2,250 Ordinary Class B Shares, together constituting the Company Shares, which are and as of the Closing will be held of record and beneficially by the Shareholders as set forth on Schedule 2.1 to the Shareholder Disclosure Memorandum. The Company Shares are, and immediately prior to the Closing will be, duly authorized and validly issued, fully paid and nonassessable, and issued in compliance with all applicable federal, state and foreign securities laws. No party other than the Shareholders holds any interest in any of the Company Shares. (c) There are no outstanding rights of first refusal, preemptive rights, options, warrants, conversion rights or other agreements, either directly or indirectly, for the purchase or acquisition from the Company or any Shareholder of any shares of the Company's capital stock or the capital stock of any Subsidiary. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 8 15 (d) Except as set forth on Schedule 3.3(d) to the Company Disclosure Memorandum, the Company is not a party or subject to any agreement or understanding, and there is no agreement or understanding between any Persons (as defined in Section 3.5 hereof), that affects or relates to the voting or giving of written consents with respect to any securities of the Company or the voting by any director of the Company. Except as set forth on Schedule 3.3(d) to the Company Disclosure Memorandum, no Shareholder or any affiliate thereof is indebted to the Company, and the Company is not indebted to any Shareholder or any affiliate thereof. The Company is not under any contractual or other obligation to register any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.4 SUBSIDIARIES AND AFFILIATES The name, jurisdiction of incorporation and jurisdictions of foreign qualification of each of the Company's Subsidiaries are as set forth on Schedule 3.4 to the Company Disclosure Memorandum. Except as set forth on Schedule 3.4 to the Company Disclosure Memorandum, the Company does not own, directly or indirectly, any ownership, equity, profits or voting interest in, or otherwise control, any corporation, partnership, joint venture or other entity, and has no agreement or commitment to purchase any such interest. The Company owns 100% of the issued and outstanding shares of capital stock, or other ownership interests, of each of the Subsidiaries, free and clear of any lien, encumbrance, preemptive right, right of first offer or refusal, or other prior claim, and all the issued and outstanding shares of capital stock, or other ownership interests, of the Subsidiaries are duly authorized and validly issued, fully paid and nonassessable, and were issued and acquired in compliance with all applicable federal, state and foreign securities and other laws. 3.5 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS Except as set forth on Schedule 3.5(a) to the Company Disclosure Memorandum, the execution, delivery and performance of this Agreement and the other Operative Documents by the Company and the consummation of the transactions contemplated hereby and thereby will not (a) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to the Company, (b) require any consent, approval or authorization of, or declaration, filing or registration with, any person, corporation, partnership, joint venture, association, organization, other entity or governmental or regulatory authority (a "Person"), except compliance with applicable securities laws and the filing of all documents necessary to consummate the Share Exchange with applicable government authorities (the consent of all such Persons to be duly obtained by the Company at or prior to the Closing), (c) result in a default (with or without the giving of notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which the Company is a party or by which it is bound or to which any assets of the Company are subject, (d) result in the creation of any lien or encumbrance upon the assets of the Company or upon any Company Shares or other - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 9 16 securities of the Company, (e) conflict with or result in a breach of or constitute a default under any provision of the Certificate of Incorporation or By-laws of each Subsidiary or the Memorandum and Articles of Association of the Company, or (f) invalidate or adversely affect any permit, license, authorization or status used in the conduct of the business of the Company. 3.6 FINANCIAL STATEMENTS The Company has delivered to Sierra (a) consolidated balance sheets and consolidated statements of operations, stockholders' equity and cash flows of the Company as of or for the fiscal years ended June 30, 1994 and 1993, and accompanying notes, certified without qualification by Alliotts, chartered accountants and registered auditors (the consolidated balance sheet of the Company as of June 30, 1994 being herein referred to as the "Company Balance Sheet"), and (b) an unaudited consolidated balance sheet and unaudited consolidated statements of operations, shareholders' equity and cash flows of the Company as of and for the ten-month period ended April 30, 1995. All of the foregoing financial statements are herein referred to as the "Financial Statements." The Financial Statements have been prepared in conformity with generally accepted accounting practices in England consistently applied throughout the periods covered therein ("GAAP") and present fairly in all respects the financial position, results of operations and changes in financial position of the Company as of the dates and for the periods indicated, subject, in the case of the unaudited financial statements as of and for the ten-month period ended April 30, 1995, to normal recurring period-end audit adjustments which will not exceed $10,000 in the aggregate. The Company has no liabilities or obligations of any nature (absolute, contingent or otherwise) which are not fully reflected or reserved against in the Company Balance Sheet, except (a) liabilities or obligations incurred since the date of the Company Balance Sheet in the ordinary course of business and consistent with past practice which are disclosed to Sierra or (b) as specifically set forth on Schedule 3.6 to the Company Disclosure Memorandum. The Company maintains and will continue to maintain standard systems of accounting established and administered in accordance with GAAP. Except as set forth on Schedule 3.6 to the Company Disclosure Memorandum, the Company is not a guarantor, indemnitor, surety or other obligor of any indebtedness of any other Person. The Company's practices with respect to capitalizing software development costs, as reflected in the Financial Statements, are reasonable, in accordance with GAAP and industry standards, and consistent with the advice of the Company's independent auditors. 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS Except as specifically set forth on Schedule 3.7 to the Company Disclosure Memorandum, since the date of the Company Balance Sheet, neither the Company nor any of its officers or directors in their representative capacities on behalf of the Company has: (a) taken any action or entered into or agreed to enter into any transaction, agreement or commitment other than in the ordinary course of business; - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 10 17 (b) forgiven or canceled any indebtedness or waived any claims or rights of material value (including, without limitation, any indebtedness owing by any Shareholder or any officer, director, employee or affiliate of the Company); (c) granted, other than in the ordinary course of business and consistent with past practice, any increase in the compensation of directors, officers, employees or consultants (including any such increase pursuant to any employment agreement or bonus, pension, profit-sharing, lease payment or other plan or commitment) or any increase in the compensation payable or to become payable to any director, officer, employee or consultant; (d) suffered any material adverse change in its working capital, assets, liabilities (absolute, accrued, contingent or otherwise), earnings, reserves, financial condition, business, prospects or operations; (e) borrowed or agreed to borrow any funds, assumed or become subject to, whether directly or by way of guarantee or otherwise, any obligations or liabilities (absolute, accrued, contingent or otherwise), or incurred any liabilities or obligations (absolute, accrued, contingent or otherwise), except liabilities and obligations incurred in the ordinary course of business and consistent with past practice, or increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (f) paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of claims, liabilities and obligations reflected or reserved against in the Company Balance Sheet or incurred in the ordinary course of business and consistent with past practice since the date of the Company Balance Sheet, or prepaid any obligation having a fixed maturity of more than 90 days from the date such obligation was issued or incurred; (g) permitted or allowed any of its property or assets (real, personal or mixed, tangible or intangible) to be subjected to any mortgage, pledge, lien, security interest, encumbrance, restriction or charge, except (i) assessments for current taxes not yet due and payable, (ii) landlord's liens for rental payments not yet due and payable, and (iii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that is in the aggregate less than $5,000, was incurred in the ordinary course of business and is not yet due and payable; (h) between April 30, 1995 and the Closing, written down the value of any inventory (including write-downs by reason of shrinkage or markdown) or written off as uncollectible any notes or accounts receivable in excess of reserves reflected in the balance sheet of the Company as of April 30, 1995, except for write-downs and write-offs that are in the aggregate less than $10,000, incurred in the ordinary course of business and consistent with past practice; - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 11 18 (i) sold, transferred or otherwise disposed of any of its properties or assets (real, personal or mixed, tangible or intangible), except the sale of inventory in the ordinary course of business and consistent with past practice; (j) disposed of or permitted to lapse any rights to the use of any trademark, trade name, patent or copyright, or disposed of or disclosed to any Person other than representatives of Sierra any trade secret, formula, process or know-how not theretofore a matter of public knowledge; (k) made aggregate capital expenditures in excess of $100,000 for additions to property, plant, equipment or intangible capital assets; (l) made any change in any method of accounting or accounting practice or internal control procedure; (m) issued any capital stock or other securities, or declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock, or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of capital stock or other securities of the Company, or otherwise permitted the withdrawal by any of the holders of capital stock of the Company of any cash or other assets (real, personal or mixed, tangible or intangible), in compensation, indebtedness or otherwise, other than payments of compensation in the ordinary course of business and consistent with past practice; (n) paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any Shareholder or any of the Company's officers, directors or employees or any affiliate of any Shareholder or any of the Company's officers, directors or employees, except directors' fees and compensation paid to officers and employees at rates not exceeding the rates of compensation paid during the fiscal year ended June 30, 1994; (o) entered into or agreed to enter into, or otherwise suffered to be outstanding, any power of attorney of the Company or any obligations or liabilities (absolute, accrued, contingent or otherwise) of the Company, as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any other Person; (p) received notice of, or otherwise obtained knowledge of: (i) any claim, action, suit, arbitration, proceeding or investigation involving, pending against or threatened against the Company or any employee of the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person; (ii) any valid basis for any claim, action, suit, arbitration, proceeding, investigation or the application of any fine or penalty adverse to the Company or any employee of the Company before or by any Person; or (iii) any outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company or any employee of the Company is a party which relate directly to the transactions contemplated herein or which - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 12 19 would have any adverse effect upon the business, business prospects, assets, liabilities or financial condition of the Company; (q) entered into or agreed to any sale, assignment, transfer or license of any patents, trademarks, copyrights, trade secrets or other intangible assets of the Company or any amendment or change to any existing license or other agreement relating to intellectual property; (r) received notice that there has been a loss of, or contract cancellation by, any current or prospective customer, licensor or distributor of the Company; (s) taken any action, or become aware of any action taken by any Shareholder, which alone or together with other facts or circumstances could affect the ability of Sierra to account for the Share Exchange as a "pooling of interests" transaction consistent with GAAP; or (t) agreed, whether in writing or otherwise, to take any action described in this Section 3.7. 3.8 TAXES Except as described on Schedule 3.8 to the Company Disclosure Memorandum, the Company has (a) duly and timely filed, including valid extensions, with the appropriate governmental agencies (domestic (U.S.) and foreign) all tax returns, information returns and reports ("Returns") for all Taxes (as defined below) required to have been filed with respect to the Company and its business, (b) all such Returns are true, correct and complete in all respects, and (c) except as set forth on Schedule 3.8 to the Company Disclosure Memorandum, paid in full or provided for all Taxes that are due or claimed to be due by any governmental agency. "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, but not limited to, income, excise, gross receipts, property, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, severance, stamp, occupation, windfall profits, social security, unemployment, capital gains, corporation, VAT, inheritance or other taxes imposed by the United States or any agency or instrumentality thereof, any state, county, local or foreign government (including without limitation the United Kingdom or any agency or instrumentality thereof), or any agency or instrumentality thereof, and any interest or fines, and any and all penalties or additions relating to such taxes, charges, fees, levies or other assessments. Except as described on Schedule 3.8 to the Company Disclosure Memorandum, (i) the reserves and provisions for Taxes reflected in the Financial Statements are adequate for the payment of Taxes not yet due and payable, as determined in accordance with GAAP consistently applied; (ii) no unresolved claim for assessment or collection of Taxes has been asserted or threatened against the Company, and no audit or investigation by any governmental authority is under way with respect to Taxes, interest or other governmental charges; (iii) no circumstances exist or have existed which would constitute grounds for assessment against the Company of any tax liability with respect to any period for which Returns have been filed, including, but not limited to, any - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 13 20 circumstances relating to the existence of a valid subchapter S corporation election for the Company for any such period; (iv) the Company has not filed or entered into any election, consent or extension agreement or any waiver that extends any applicable statute of limitations; (v) any Taxes incurred by the Company or accrued by it since the date of the Company Balance Sheet have arisen in the ordinary course of business; and (vi) the Company has not filed any consent to the application of Section 341(f)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), to any assets held, acquired or to be acquired by it. The Company has furnished Sierra with complete and correct copies of all Returns, except for Returns for periods as to which all applicable statutes of limitations have expired. There are no tax liens on any property or assets of the Company other than liens for current property taxes not yet payable. No claim has been made by an authority in any jurisdiction where the Company does not file Returns that the Company is or may be subject to taxation by that jurisdiction. The Company has not made any payments, is not obligated to make any payments, and is not a party to any agreement that could obligate it to make any payments that will not be deductible under Section 280G of the Code; the Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(2)(i) of the Code; the Company is not a party to any Tax allocation or sharing agreement, and, except as set forth on Schedule 3.8 to the Company Disclosure Memorandum, the Company (A) has not been a member of an affiliated group filing a consolidated income Tax Return and (B) does not have any liability for Taxes of any person under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law) as a transferor or successor by contract or otherwise. Software Inspiration Ltd. is a "resident of the United Kingdom" as that phrase is defined in the income tax treaty between the United Kingdom and the United States currently in force (the "Tax Treaty"), and has never carried on business in the United States through a permanent establishment in the United States such that it would be subject to U.S. federal income taxes pursuant to Article 7 of the Tax Treaty. Notwithstanding any other provision of this Agreement, the Company and the Shareholders make no representations or warranties with respect to transfer pricing between the Company and any Subsidiary of the Company. 3.9 PROPERTY (a) The Company owns no real property other than the leasehold interests described herein. Schedule 3.9(a) to the Company Disclosure Memorandum contains a complete and accurate list of all real property of the Company which is leased, rented or used by the Company (the "Real Property"). The Company has delivered to Sierra true and complete copies of all leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to the Real Property. (b) The Schedule 3.9(b) to the Company Disclosure Memorandum contains a complete and accurate list of each item of personal property having a value in excess of $2,000 which is owned, leased, rented or used by the Company (the "Personal Property"); provided that such list need not describe the Listed Intellectual Property or the Intellectual Property Licenses (as defined in Section 3.16 hereof). The Company has delivered to Sierra true and complete copies of all leases, subleases, rental agreements, - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 14 21 contracts of sale, tenancies or licenses relating to the Personal Property. The Real Property and the Personal Property include all properties and assets (whether real, personal or mixed, tangible or intangible) (other than, in the case of the Personal Property, property rights with an individual value of less than $2,000, the Listed Intellectual Property and the Intellectual Property Licenses) reflected in the Company Balance Sheet and all the properties and assets purchased by the Company since the date of the Company Balance Sheet (except for such properties or assets sold since the date of the Company Balance Sheet in the ordinary course of business and consistent with past practice). The Real Property and the Personal Property include all property used in the business of the Company. (c) The Company's leasehold interest in each parcel of the Real Property is free and clear of all liens, mortgages, pledges, deeds of trust, security interests, charges, encumbrances and other adverse claims or interests of any kind, except as set forth on Schedule 3.9(c) to the Company Disclosure Memorandum. Each lease of any portion of the Real Property is valid, binding and enforceable in accordance with its terms against the parties thereto and any other Person with an interest in such Real Property, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor any other party thereto is in default thereunder nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder. Except as set forth on Schedule 3.5 to the Company Disclosure Memorandum, no consent is required from any Person under any lease or other agreement or instrument relating to the Real Property in connection with the consummation of the transactions contemplated by this Agreement and the other Operative Documents, and the Company has not received notice that any party to any such lease or other agreement or instrument intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. The Company has not granted any lease, sublease, tenancy or license of, or entered into any rental agreement or contract of sale with respect to, any portion of the Real Property. (d) Except as described on Schedule 3.9(d) to the Company Disclosure Memorandum, the Company's offices, warehouse and other structures and its Personal Property are of quality consistent with industry standards, are in good operating condition and repair, normal wear and tear excepted, are adequate for the uses to which they are being put, and comply in all material respects with applicable safety and other laws and regulations. (e) Except as set forth on Schedule 3.9(e) to the Company Disclosure Memorandum, and except for (i) assessments for current taxes not yet due and payable, (ii) landlord's liens for rental payments in respect of the Real Property incurred in the ordinary course of business and not yet due and payable, and (iii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that is in the aggregate less than $5,000, was incurred in the ordinary course of business and is not yet due and payable, the Personal Property is free and clear of all liens, and, other than leased Personal Property which is so noted on the list supplied pursuant to paragraph (b) of this Section 3.9, the Company owns such Personal Property. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 15 22 (f) Except as set forth on Schedule 3.9(f) to the Company Disclosure Memorandum, each lease, license, rental agreement, contract of sale or other agreement to which the Personal Property is subject is valid, binding and enforceable in accordance with its terms against the parties thereto, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder. Except as set forth on Schedule 3.9(f) to the Company Disclosure Memorandum, no consent is required from any Person under any lease or other agreement or instrument relating to the Personal Property in connection with the consummation of the transactions contemplated by in this Agreement and the other Operative Documents, and the Company has not received notice that any party to any such lease or other agreement or instrument intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. The Company has not granted any lease, sublease, tenancy or license of any portion of the Personal Property. (g) Neither the whole nor any portion of the leaseholds or any other assets or property of the Company is subject to any currently outstanding governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor has any such condemnation, expropriation or taking been proposed. 3.10 CONTRACTS Schedule 3.10 to the Company Disclosure Memorandum contains a complete and accurate list of all contracts, agreements and understandings, oral or written, to which the Company is a party or by which the Company is bound, including, without limitation, security agreements, license agreements, software development agreements, credit agreements, conditional sales agreements, instruments relating to the borrowing of money, and distributorship agreements. Except as set forth on Schedule 3.10 to the Company Disclosure Memorandum, all contracts set forth in such Schedule are valid, binding and enforceable in accordance with their terms against each party thereto, are in full force and effect, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder. True and complete copies of each such contract have been heretofore delivered to Sierra. Except as specifically set forth on Schedule 3.10 to the Company Disclosure Memorandum, the Company has no: (a) agreements, contracts, commitments or restrictions requiring the Company to make any charitable contribution; (b) purchase contracts or commitments of the Company that continue for a period of more than 12 months or are in excess of the normal, ordinary and usual requirements of its business or that are at an excessive price to the extent that such excess would be material to the Company's business as a whole; - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 16 23 (c) outstanding sales or service contracts, commitments or proposals of the Company which are expected by the Company to result in any loss or the realization of less than the Company's usual and customary margins upon completion or performance thereof, in excess of the inventory reserve provided in the Company Balance Sheet, or any outstanding contracts, bids, or sales or service proposals quoting prices which the Company, based upon the Company's current operations, expects not to result in a profit; (d) contracts with directors, officers, stockholders, employees, agents, consultants, advisors, salesmen, sales representatives, distributors or dealers that are not, except as provided by law to the contrary without regard to the express terms of such contract, cancellable by it within 30 days' notice without liability, penalty or premium, any agreement or arrangement providing for the payment of any bonus or commission based on sales or earnings, or any compensation agreement or arrangement affecting or relating to former employees of the Company; (e) employment agreement, whether express or implied, or any other agreement for services that contains any severance or termination pay liabilities or obligations; (f) collective bargaining or union contracts or agreements; (g) employee to whom it paid in fiscal 1994, or expects to pay in fiscal 1995, total compensation at the annual rate of more than $65,000; (h) restriction by agreement from carrying on its business anywhere in the world; (i) liability or obligation with respect to the return of inventory or merchandise other than on account of a defective condition, incorrect quantities or missed delivery dates; (j) debt obligation for borrowed money, including guarantees of or agreements to acquire any such debt obligation of others; (k) loans outstanding to any Person; (l) power of attorney outstanding or any obligations or liabilities (whether absolute, accrued, contingent or otherwise) as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any Person; (m) notice that any party to a contract intends to cancel, terminate or refuse to renew such contract or to exercise or decline to exercise any option or right thereunder; (n) material disagreement with any of its suppliers or customers; or (o) equipment leases. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 17 24 3.11 CUSTOMERS AND SUPPLIERS Schedule 3.11 to the Company Disclosure Memorandum sets forth: (a) a complete and accurate list of the customers of the Company accounting for 2% or more of the Company's sales during the fiscal year last ended showing the approximate total sales by the Company to each such customer during the fiscal year last ended and (b) a complete and accurate list of the five largest suppliers of the Company. The Company has no basis to expect any material modification to its relationship with any customer or supplier named on Schedule 3.11 to the Company Disclosure Memorandum. 3.12 ORDERS, COMMITMENTS AND RETURNS Schedule 3.12 to the Company Disclosure Memorandum contains an accurate summary of the Company's total backlog of orders (including all accepted and unfulfilled sales orders) and the aggregate of all outstanding purchase orders issued by the Company (which include all contracts or commitments for the purchase by the Company of materials or other supplies). All such sale and purchase commitments were made in the ordinary course of business. There are no known outstanding claims against the Company to return merchandise, in excess of amounts provided for on the balance sheet of the Company dated April 30, 1995, with an aggregate retail value in excess of $7,500 by reason of alleged overshipments, defective merchandise, missed delivery dates, incorrect quantities or otherwise, or of merchandise in the hands of customers under an understanding that such merchandise would be returnable. 3.13 CLAIMS AND LEGAL PROCEEDINGS Except as set forth on Schedules 3.13 and 3.16 to the Company Disclosure Memorandum, there are no claims, actions, suits, arbitrations, investigations or proceedings pending or involving or, to the Company's best knowledge, threatened against the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person. There is no valid basis for any claim, action, suit, arbitration, proceeding or investigation (other than as noted on Schedule 3.13 or 3.16 to the Company Disclosure Memorandum) which could reasonably be expected to be materially adverse to the business, business prospects, assets, operations or condition (financial or other) of the Company before or by any Person. There are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company is a party which involve the transactions contemplated herein or which would have a material adverse effect upon the business, business prospects, assets, operations or condition (financial or other) of the Company. 3.14 LABOR MATTERS There are no material labor disputes, employee grievances or disciplinary actions pending or, to the Company's best knowledge, threatened against or involving the Company or any of its present or former employees. The Company has complied with all provisions of - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 18 25 law relating to employment and employment practices, terms and conditions of employment, wages and hours, the failure to comply with which could have a material adverse effect upon the business, business prospects, assets, operations or conditions (financial or other) of the Company. The Company is not engaged in any unfair labor practice and has no liability for any arrears of wages or Taxes or penalties for failure to comply with any such provisions of law. There is no labor strike, dispute, slowdown or stoppage pending or, to the Company's best knowledge, threatened against or affecting the Company, and the Company has not experienced any work stoppage or other labor difficulty since its incorporation. No collective bargaining agreement is binding on the Company. The Company has no knowledge of any organizational efforts presently being made or threatened by or on behalf of any labor union with respect to employees of the Company, and the Company has not been requested by any group of employees or others to enter into any collective bargaining agreement or other agreement with any labor union or other employee organization. Each employee, officer and consultant of the Company has executed a Proprietary Information and Inventions Agreement in the form provided to Sierra. No employee (or person performing similar functions) of the Company is in violation of any such agreement or any employment agreement, noncompetition agreement, patent disclosure agreement, invention assignment agreement, proprietary information agreement or other contract or agreement relating to the relationship of such employee with the Company or any other party, and the Company will use its best efforts to prevent any such violation. 3.15 EMPLOYEE BENEFIT PLANS Except as set forth on Schedule 3.15 to the Company Disclosure Memorandum, the Company has no bonus, deferred compensation, incentive, severance pay, pension, profit-sharing, retirement, stock purchase, stock option or any other employee benefit plan, employee fringe benefit plan, arrangement or practice with regard to present or former employees as to which the Company has any liability ("Employee Benefit Plan"), whether formal or informal. Schedule 3.15 to the Company Disclosure Memorandum contains an accurate and complete description of, and sets forth the annual amount expected to be payable for the fiscal year last ended pursuant to, each Employee Benefit Plan, whether formal or informal. The Company Balance Sheet reflects in the aggregate all amounts accrued but unpaid under the aforesaid plans and arrangements as of the date thereof. The Company has no agreement, arrangement or commitment, whether formal or informal and whether legally binding or not, to create any additional plan or arrangement or to modify or amend any existing Employee Benefit Plan. The Company has delivered to Sierra true, correct and complete copies of all written Employee Benefit Plans of the Company, all contracts related thereto and the most recently available annual reports, summary plan descriptions, IRS Form 5500s (or 5500-C or 5500-R) (or comparable English government materials) and favorable determination letters for such plans. The Company is in compliance in all respects with the terms of its Employee Benefit Plans and with all applicable laws and regulations relating thereto, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. The Company has extinguished any liabilities to participants, beneficiaries and the Pension Benefit Guaranty Corporation (or comparable English authority) which may have arisen under any such plans previously maintained by them - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 19 26 and expects to incur no future liabilities with regard to such plans. Neither the Company nor any "affiliate" of the Company is a party to or has ever made any contributions to, or is subject to any liability with respect to, any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA or any defined benefit plan within the meaning of Section 3(35) of ERISA. The term "affiliate" means any company, trade or business which is a member of the same control group, as defined in Code Section 414(b) or 414(c), with the Company, or any company, trade or business which is a member of an affiliated service group, as defined in Code Section 414(m) or 414(o) with the Company. No prohibited transaction (within the meaning of ERISA Section 406 or Code Section 4975) or failure to meet the requirements of Code Section 4980B(f) has occurred with respect to any Employee Benefit Plan which could subject the Company to any liability. There are no actions, suits or claims pending (other than routine claims for benefits) or which could reasonably be expected to be asserted against any Employee Benefit Plan or the assets of any such plan. 3.16 INTELLECTUAL PROPERTY Set forth on Schedule 3.16 to the Company Disclosure Memorandum is a true and complete list of all inventions, patents, trademarks, trade names, brand names, copyrights, Software Products (as defined below), trade secrets and formulae (collectively, the "Listed Intellectual Property") of any kind now used or anticipated to be used in the business of the Company. Schedule 3.16 contains a complete and accurate list of all licenses or agreements, oral or written, which in any way affect the rights of the Company to any of the Listed Intellectual Property (the "Intellectual Property Licenses"); such list indicates the specific Listed Intellectual Property affected by each such license or agreement and includes a description of all material terms of any oral Intellectual Property Licenses, including without limitation payment obligations, termination provisions and ownership rights. Except as set forth on Schedule 3.16 to the Company Disclosure Memorandum, neither the Company's operations nor any Listed Intellectual Property or Intellectual Property License infringes or provides any basis to believe that its operations or any Listed Intellectual Property or Intellectual Property License would infringe upon any validly issued or pending trademark, trade name, service mark, copyright or, to the knowledge of the Company, any validly issued or pending patent or other right of any other Person, nor, to the knowledge of the Company, is there any infringement by any other Person of any of the Listed Intellectual Property or of the intellectual property to which the Intellectual Property Licenses relate. The consummation of the transactions contemplated hereby and by the other Operative Documents will not alter or impair the Company's rights to any of the Listed Intellectual Property or under any Intellectual Property License. The manner in which the Company has manufactured, packaged, shipped, advertised, labeled and sold its products complies with all applicable laws and regulations pertaining thereto. Except as set forth on Schedule 3.16 of the Company Disclosure Memorandum, the Company is the sole and exclusive owner or licensee of: (a) the Listed Intellectual Property, the Intellectual Property Licenses and the technology, know-how and processes now used by it, or used in connection with any - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 20 27 product now being manufactured and sold by it, in the manner that such product is now being manufactured and sold; and (b) all rights, title and interest of whatever kind or nature throughout the world in and to the fully or partially developed computer software products listed on Schedule 3.16 to the Company Disclosure Memorandum (the "Software"), with all modifications, enhancements and additions thereto, including, without limitation, all rights in and to all versions thereof and all source code, object code, manuals and other documentation and related materials thereof (collectively, the "Software Products"). Without limiting the generality of the above, the Software Products shall also include all of the Company's related programs, trade secrets, algorithms and processes relating to the Software Products or such programs, the Company's copyright in and to each of the Software Products and all works derivative therefrom (including the registrations of copyright listed on Schedule 3.16 to the Company Disclosure Memorandum), all current, previous, enhanced and developmental versions of the source and object code and any variations thereof, all user and programmer documentation, all design specifications, all maintenance and installation job control language, all system documentation (including all flow charts, systems procedures and program component descriptions), all procedures for modification and preparation for the release of enhanced versions and all test data available (excluding all proprietary information of third parties) with respect to the Software Products. Except as set forth on Schedule 3.16 to the Company Disclosure Memorandum, each of the Intellectual Property Licenses is valid, binding and enforceable in accordance with its terms against the parties thereto, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder. Except as set forth on Schedule 3.16 to the Company Disclosure Memorandum, the Company has not received notice that any party to any of the Intellectual Property Licenses intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. No licenses, sublicenses, covenants or agreements have been granted or entered into by the Company in respect of any of the Listed Intellectual Property except the Intellectual Property Licenses. No director, officer, shareholder or employee of the Company owns, directly or indirectly, in whole or in part, any of the Listed Intellectual Property. The Company does not know and does not have any reasonable basis to believe that there exist any new developments in the manufacture or marketing of the products of the Company or any new or improved products or processes useful in connection with the business of the Company as now conducted or as presently anticipated to be conducted that would have a material adverse effect upon the business, business prospects, assets, operations or condition (financial or other) of the Company. None of the officers of the Company and none of the Company's employees, consultants, distributors, agents, representatives or advisers has entered into any agreement regarding know-how, trade secrets, assignment of rights in inventions, or prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than the Company. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 21 28 Except as set forth in the Company Disclosure Memorandum, to the Company's knowledge, no Person has asserted any claim of infringement or other interference with third-party rights with respect to the Listed Intellectual Property. Except as set forth on Schedule 3.16 to the Company Disclosure Memorandum, (i) the Company has not disclosed any source code regarding the Software Products to any person other than an employee of the Company or to Sierra, except for any disclosure that would not have a material adverse effect on the business, business prospects, assets, operations or conditions (financial or other) of the Company; (ii) the Company has at all times maintained reasonable procedures to protect and has enforced all trade secrets of the Company; (iii) neither the Company nor any escrow agent is under any contractual or other obligation to disclose the source code or any other proprietary information included in or relating to the Software Products nor, to the knowledge of the Company, is any other party to the Intellectual Property Licenses or any escrow agent under any such obligation to disclose any source code or other proprietary information included in or relating to Software Products, if any, that are licensed to the Company, to any person or entity and no event has taken place, including the execution of this Agreement or any related change in the Company's business activities, which would give rise to such obligation; and (iv) the Company has not deposited any source code regarding the Software Products into any source code escrows or similar arrangements. If, as disclosed on Schedule 3.16 to the Company Disclosure Memorandum, the Company has deposited any source code to Software Products into source code escrows or similar arrangements, no event has occurred that has or could reasonably form the basis for a release of such source code from such escrows or arrangements. Except as set forth on Schedule 3.16 to the Company Disclosure Memorandum, the Software Products are free from known significant defects and substantially conform to the specifications, documentation and sample demonstration furnished to the Company's customers, Sierra or the Purchaser. The Software Distribution Agreement between the Company and Davidson & Associates, Inc. dated April 29, 1994 and the Fulfillment Agreement between the Company and Davidson & Associates, Inc. dated June 24, 1994 are both terminable by the Company on no more than 90 day's notice without liability, penalty, premium or continuing obligation on the part of the Company. 3.17 ACCOUNTS RECEIVABLE All accounts receivable of the Company reflected in the Company Balance Sheet, or existing at the Closing, represent sales actually made in the ordinary course of business and properly represent the amounts of such sales, net of all appropriate credits. Except as described on Schedule 3.17 to the Company Disclosure Memorandum, the bad debt reserves and sales return allowances reflected in the Company Balance Sheet are adequate, and such accounts will be collectible in full by Sierra prior to March 31, 1996. Set forth on Schedule 3.17 to the Company Disclosure Memorandum is a full and complete list of all consolidated accounts receivable of the Company existing as of May 31, 1995. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 22 29 3.18 INVENTORY Subject to such reserves and write-downs as may be reflected in the Financial Statements, all items in the inventory reflected in the Company Balance Sheet or as currently owned by the Company are of a quality and quantity usable and saleable in the ordinary course of business. Such inventory consists of materials and supplies used or sold in the business of the Company. 3.19 CORPORATE BOOKS AND RECORDS The Company has furnished to Sierra or its representatives true and complete copies of (a) the Certificate of Incorporation and By-laws of each Subsidiary and the Memorandum and Articles of Association of the Company as currently in effect, including all amendments thereto, (b) the minute books of the Company and (c) the statutory registers (including register of members) of the Company. Such minutes reflect all meetings of the Company's shareholders, Board of Directors and any committees thereof since the Company's inception, and such minutes accurately reflect in all material respects the events of and actions taken at such meetings. Such share transfer registers accurately reflect all issuances and transfers of shares of the authorized capital stock of the Company since its inception. 3.20 LICENSES, PERMITS, AUTHORIZATIONS, ETC. Except as identified in Schedules 3.1 and 3.5 to the Company Disclosure Memorandum, the Company has received all currently required governmental approvals, authorizations, consents, licenses, orders, registrations and permits of all agencies, whether federal, state, local or foreign, the failure to obtain which would have a material adverse effect on its business, business prospects, assets, operations or condition (financial or other). The Company has not received any notifications of any asserted present failure by it to have obtained any such governmental approval, authorization, consent, license, order, registration or permit, or past and unremedied failure to obtain such items. 3.21 COMPLIANCE WITH LAWS (a) Except as described on Schedule 3.21 to the Company Disclosure Memorandum, the Company has complied, and is in compliance, with all federal, state, local and foreign laws, rules, regulations, ordinances, decrees and orders applicable to the operation of its business, to its employees, or to the Real Property and the Personal Property, the failure to comply with which would, individually or in the aggregate, have a material adverse effect on the business, assets or operations of the Company, including, without limitation, all such laws, rules, ordinances, decrees and orders relating to antitrust, consumer protection, currency exchange, environmental protection, equal opportunity, health, occupational safety, pension, securities and trading-with-the-enemy matters. The Company has not received any notification of any asserted present or past unremedied failure by the Company to comply with any of such laws, rules, ordinances, decrees or orders. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 23 30 (b) The Company is not currently in violation of any applicable building, zoning, environmental or other law, ordinance or regulation in respect of the Real Property or its plant, structures or operations. No such law, ordinance or regulation would reasonably be expected to prevent the use of substantially all of the Real Property for the conduct thereon of the business of the Company. (c) The Company is not in violation of, and has not violated, in connection with the ownership, use, maintenance or operation of the Real Property or the Personal Property or the conduct of their businesses, any applicable federal, state, county or local statutes, laws, regulations, guidances, rules, ordinances, codes, licenses, permits, judgments, writs, decrees, injunctions or orders of any governmental entity relating to environmental (air, water, groundwater, soil, noise and odor) matters, including, by way of illustration and not by way of limitation, the Clean Air Act, the Federal Water Pollution Control Act, the Resources Conservation and Recovery Act and the regulations issued thereunder, the Comprehensive Environmental, Response, Compensation, and Liability Act, the Clean Water Act, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the Hazardous Waste Control Act, comparable English laws, and the regulations issued thereunder, and all other applicable federal, state, county, local and foreign environmental requirements where such violation might have a material adverse impact on the Company's business, business prospects, assets, operations or condition (financial or other). 3.22 INSURANCE The Company maintains (a) insurance on all of its property (including leased premises) that insures against loss or damage by fire or other casualty (including extended coverage) and (b) insurance against liabilities, claims and risks of a nature and in such amounts as are normal and customary in the software publication industry. All insurance policies of the Company are in full force and effect, all premiums with respect thereto covering all periods up to and including the date this representation is made have been paid, and no notice of cancellation or termination has been received with respect to any such policy or binder. Such policies or binders are sufficient for compliance with all requirements of law currently applicable to the Company and of all agreements to which the Company is a party, will remain in full force and effect through the respective expiration dates of such policies or binders without the payment of additional premiums, and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. The Company has not been refused any insurance with respect to its assets or operations, nor has its coverage been limited, by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance. 3.23 BROKERS OR FINDERS The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by or on behalf of the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 24 31 3.24 GOVERNMENT CONTRACTS The Company has never been, nor as a result of the consummation of the transactions contemplated by this Agreement (without giving any consideration to the identity or conduct of Sierra) will it be, suspended or debarred from bidding on contracts or subcontracts for any agency of the United States government, nor has such suspension or debarment been threatened or action for suspension or debarment been commenced. The Company has not been nor is it now being audited or, to the knowledge of the Company, investigated by the United States Government Accounting Office, the United States Department of Justice, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency or the inspector general of any agency of the United States government, nor, to the knowledge of the Company, has such audit or investigation been threatened. There is no valid basis for the Company's suspension or debarment from bidding on contracts or subcontracts for any agency of the United States government and there is no valid basis for a claim pursuant to an audit or investigation by the United States Government Accounting Office, the United States Department of Justice, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency or the inspector general of any agency of the United States government, or any prime contractor. The Company has never had a contract or subcontract terminated for default or has ever been determined to be nonresponsible by any agency of the United States government. Except as set forth on Schedule 3.24 to the Company Disclosure Memorandum, the Company has no outstanding agreements, contracts or commitments which require it to obtain or maintain a government security clearance. 3.25 ABSENCE OF QUESTIONABLE PAYMENTS Neither the Company nor any director, officer, agent, employee or other Person acting on behalf of the Company has used any Company funds for improper or unlawful contributions, payments, gifts or entertainment, or made any improper or unlawful expenditures relating to political activity to domestic or foreign government officials or others. The Company has adequate financial controls to present such improper or unlawful contributions, payments, gifts, entertainment or expenditures. Neither the Company, nor any current director, officer, agent, employee or other Person acting on behalf of the Company, has accepted or received any improper or unlawful contributions, payments, gifts or expenditures. The Company has at all times complied, and is currently in compliance, in all respects with the Foreign Corrupt Practices Act and all foreign laws and regulations relating to corrupt practices and similar matters. 3.26 PERSONNEL Schedule 3.26 to the Company Disclosure Memorandum sets forth a true and complete list of: (a) the names and current compensation amounts of all directors and elected and appointed officers of the Company (which for purposes of this Section 3.26 shall include its Subsidiaries) and the family relationships, if any, among such persons; - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 25 32 (b) the wage rates for nonsalaried and nonexecutive salaried employees of the Company by classification, and all labor union contracts (if any); (c) all group insurance programs in effect for employees of the Company; and (d) the names and current compensation packages of all independent contractors and consultants of the Company. The Company is not in default with respect to any of its obligations referred to in clause (b) above. 3.27 INSIDER INTERESTS Except as set forth on Schedule 3.27 to the Company Disclosure Memorandum, no officer, director, key employee or other representative of the Company has any interest (other than as a shareholder of the Company) (a) in any property, real or personal, tangible or intangible, used in or directly pertaining to the business of the Company, including, without limitation, inventions, patents, copyrights, trademarks or tradenames, or (b) in any agreement, contract, arrangement or obligation relating to the Company, its present or prospective business or its operations. Except as set forth on Schedule 3.27 to the Company Disclosure Memorandum, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, key employees or affiliates. The Company and its officers, directors, key employees and affiliates have no interest, either directly or indirectly, in any entity, including, without limitation, any corporation, partnership, joint venture, proprietorship, firm, licensee, business or association (whether as an employee, officer, director, shareholder, agent, independent contractor, security holder, creditor, consultant or otherwise) that presently (x) provides any services, produces and/or sells any products or product lines, or engages in any activity which is the same, similar to or competitive with any activity or business in which the Company is now engaged or proposes to engage; (y) is a supplier, customer, creditor, or has an existing contractual relationship with any of the Company's employees (or persons performing similar functions); or (z) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of the Company or any property, real or personal, tangible or intangible, that is necessary or desirable for the present or anticipated future conduct of the Company's business. 3.28 POOLING MATTERS The Company has not taken and will not take, and the Shareholders have not taken and will not take, directly or indirectly, and the Company and the Shareholders will use their respective best efforts to prevent any other Person from taking, any actions, including without limitation any recapitalization or repurchase or redemption of any securities of the Company, or any grant or acceleration of any options to acquire securities of the Company, or any purchase or sale of Sierra Common Stock, and there have occurred no other events with respect to or involving the Company or its Shareholders, which taken individually or together - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 26 33 would affect the ability of Sierra to account for the transactions contemplated by this Agreement as a "pooling of interests" transaction in accordance with generally accepted accounting principles, and neither the Company nor any of the Shareholders is aware of any facts which otherwise could prevent such accounting treatment. 3.29 FULL DISCLOSURE No information furnished by the Company or the Shareholders to Sierra in connection with this Agreement (including, but not limited to, the Financial Statements and all information in the Company Disclosure Memorandum and the other Exhibits hereto) or the other Operative Documents, or by the Company to the Shareholders in connection with their execution and delivery of this Agreement, is false or misleading in any material respect. Neither the Company nor any Shareholder has made any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made or information delivered in or pursuant to this Agreement, including, but not limited to, all Schedules to the Company Disclosure Memorandum and Exhibits hereto, or in or pursuant to the other Operative Documents, or in or pursuant to closing certificates executed or delivered by the Shareholders or the Company, not misleading. The Company has provided to Sierra an accurate and complete copy of the disclosure materials (the "Shareholder Disclosure Statement") delivered to the Shareholders in connection with their consideration and approval of the transactions contemplated hereby. The Shareholder Disclosure Statement contains all information required to be set forth therein under all applicable laws (including without limitation applicable federal, state and foreign securities laws). The Shareholder Disclosure Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein not misleading. ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SIERRA To induce the Company and the Shareholders to enter into and perform this Agreement and the Operative Documents, Sierra represents and warrants to the Company and the Shareholders as follows in this Article IV: 4.1 ORGANIZATION Sierra is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Sierra has full corporate power and authority to own, operate and lease its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform this Agreement and the Operative Documents to which it is a party, and to carry out the transactions contemplated hereby and thereby. 4.2 ENFORCEABILITY All corporate action on the part of Sierra and its officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 27 34 the Operative Documents, the consummation of the Share Exchange, and the performance of all of Sierra's obligations under this Agreement and the Operative Documents has been taken or will be taken prior to the Closing. This Agreement has been, and each of the Operative Documents to which Sierra is a party will have been at the Closing, duly executed and delivered by Sierra, and this Agreement is, and each of the Operative Documents to which Sierra is a party will be at the Closing, a legal, valid and binding obligation of Sierra, enforceable against Sierra in accordance with its terms. 4.3 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS The execution, delivery and performance of this Agreement and the other Operative Documents by Sierra, the issuance of the Issuable Sierra Shares to the Shareholders, and the consummation of the transactions contemplated hereby and by the other Operative Documents will not (a) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court, agency or other governmental authority applicable to Sierra, (b) require Sierra to obtain any consent, approval or authorization of, or make any declaration, filing, or registration with, any Person, except for compliance with applicable securities laws and the filing of all documents necessary to consummate the Share Exchange with Applicable government authorities, (c) result in a default (with or without the giving of notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which Sierra is a party or by which it is bound or to which any of their assets are subject, (d) result in the creation of any lien or encumbrance upon the assets of Sierra, (e) conflict with or result in a breach of or constitute a default under any provision of the charter documents or bylaws of Sierra, or (f) invalidate or adversely affect any permit, license, authorization or status used in the conduct of the business of Sierra. 4.4 LITIGATION There is no litigation or governmental or administrative proceeding or investigation pending or, to Sierra's knowledge, threatened against Sierra which would prevent or hinder the consummation of the transactions contemplated by this Agreement. 4.5 SEC FILINGS In its fiscal year last ended and since the beginning of its current fiscal year, Sierra has filed with the SEC all reports required to be filed by Sierra with the SEC. 4.6 GOOD TITLE Upon issuance at the Closing in accordance with this Agreement and payment to Sierra therefor as provided herein, the Shareholders shall receive good and valid title to the shares of Sierra Common Stock issuable hereunder, free and clear of any and all security interests, liens, claims, charges, encumbrances, preemptive rights or opinions of any nature - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 28 35 whatsoever, except for (a) any restrictions contained herein or in the Operative Documents or the By-laws or the Certificate of Incorporation of Sierra, (b) the security interest of Sierra in the shares held in escrow pursuant to the Escrow Agreement and (c) any security interests, liens, claims, charges, encumbrances, preemptive rights or opinions of any nature which existed as to the Company Shares prior to the Closing. ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF SIERRA The obligations of Sierra to perform and observe the covenants, agreements and conditions hereof to be performed and observed by it at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by Sierra: 5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of the Company and each Shareholder contained herein (including applicable Exhibits or Schedules to the Company Disclosure Memorandum) and in the other Operative Documents shall have been true and correct when made and shall be true and correct as of the Closing Date as though made on that date. 5.2 PERFORMANCE OF AGREEMENTS The Company and the Shareholders shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement or any other Operative Document to be performed and complied with by them at or prior to the Closing. 5.3 OPINIONS OF COUNSEL FOR THE COMPANY Sierra shall have received opinion letters of Glovsky, Tarlow & Milberg, Shipman & Goodwin, and Glenisters Solicitors, counsel for the Company and the Shareholders in the United States and the United Kingdom, dated the Closing Date, in form and substance satisfactory to Sierra's counsel. 5.4 RESIGNATIONS Sierra shall have received copies of resignations effective as of the Closing Date of all the officers and directors of the Company and the Subsidiaries. 5.5 CONSENTS TO SHARE EXCHANGE The Company shall have received and shall have delivered to Sierra written consents to the Share Exchange from each of the parties (other than the Company) to those agreements, leases, notes or other documents identified on Schedules 3.5 and 3.16 to the Company Disclosure Memorandum, which consents shall be satisfactory in all respects to Sierra in its sole and absolute discretion. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 29 36 5.6 MAJOR SHAREHOLDER'S CERTIFICATE Sierra shall have received a certificate from the Major Shareholder, dated the Closing Date, in a form acceptable to Sierra, certifying as to the fulfillment of the conditions to the obligations of Sierra set forth herein. 5.7 MATERIAL ADVERSE CHANGE Since the date of the Company Balance Sheet and through the Closing, there shall not have occurred any material adverse change in the business, operations, assets, liabilities, earnings, condition (financial or other), or prospects of the Company and its Subsidiaries, and no material adverse change shall have occurred in any domestic or foreign laws or regulations affecting the Company and its Subsidiaries or in any third party contractual or other business relationships of the Company and its Subsidiaries. 5.8 DUE DILIGENCE The results of Sierra's due diligence investigation of the Company and its Subsidiaries shall be satisfactory in all respects to Sierra in its sole and absolute discretion. 5.9 APPROVALS AND CONSENTS All transfers of permits or licenses, all approvals, applications or notices to public agencies, federal, state, local or foreign, the granting or delivery of which is necessary for the consummation of the transactions contemplated hereby or for the continued operation of the Company and its Subsidiaries, shall have been obtained, and all waiting periods specified by law shall have passed. All other consents, approvals and notices referred to in this Agreement shall have been obtained or delivered. 5.10 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE All corporate and other proceedings in connection with the transactions contemplated hereby and by the Operative Documents and all documents and instruments incident to such transactions shall have been approved by Sierra's counsel, and Sierra shall have received a certificate of the Secretary of the Company, in a form acceptable to Sierra, as to the authenticity and effectiveness of the actions of the Board of Directors and Shareholders of the Company relating to the transactions contemplated by this Agreement and the Operative Documents and such other documents as are specified by Sierra's counsel. 5.11 NONFOREIGN AFFIDAVIT Sierra shall have received from the Company and each Subsidiary, pursuant to Section 1445 of the Code, a Foreign Investment in Real Property Tax Act Affidavit in a form acceptable to Sierra. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 30 37 5.12 COMPLIANCE WITH LAWS The consummation of the transactions contemplated by this Agreement and the Operative Documents shall be legally permitted by all laws and regulations to which Sierra or the Company and its Subsidiaries is subject. 5.13 POOLING OF INTERESTS As of the Closing no facts shall exist and no events shall have occurred that would, in the opinion of Sierra's independent accountants, prevent Sierra from accounting for the transactions contemplated herein as a "pooling of interests" transaction. 5.14 OTHER AGREEMENTS The agreements listed in Exhibit F to this Agreement shall have been amended or terminated in a manner satisfactory to Sierra. 5.15 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect which enjoins, restrains, conditions or prohibits consummation of this Agreement or any Operative Document, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Operative Document. 5.16 OPERATIVE DOCUMENTS The Operative Documents shall have been executed and delivered by all parties thereto other than Sierra. ARTICLE VI - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY The obligations of the Shareholders and the Company to perform and observe the covenants, agreements and conditions hereof to be performed and observed by them at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by the Shareholders and the Company. 6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of Sierra contained herein and in the other Operative Documents shall have been true and correct when made and shall be true and correct as of the Closing Date as though made on that date. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 31 38 6.2 PERFORMANCE OF AGREEMENTS Sierra shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement or any other Operative Document to be performed and complied with by it at or prior to the Closing. 6.3 OPINION OF COUNSEL The Shareholders shall have received the opinion letter of Perkins Coie, counsel for Sierra, dated the Closing Date, in form and substance satisfactory to the Company's counsel. 6.4 OFFICERS' CERTIFICATE The Company shall have received a certificate of the Chief Financial Officer and another officer of Sierra, dated the Closing Date, in a form acceptable to the Company, certifying as to the fulfillment of the conditions to the obligations of the Shareholders and the Company set forth herein. 6.5 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect which enjoins, restrains, conditions or prohibits consummation of this Agreement or any Operative Document, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Operative Document. 6.6 OPERATIVE DOCUMENTS Sierra shall have executed and delivered to the Company all the Operative Documents to which it is a party. ARTICLE VII - COVENANTS Between the date of this Agreement and the Closing, the parties covenant and agree as set forth in this Article VII. Except as to Section 7.1(a), all references to the Company in this Article VII shall also include its Subsidiaries. 7.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE CLOSING Unless Sierra shall otherwise agree in writing, the business of the Company shall be conducted in and only in, and the Company shall not take any action except in, the ordinary course of business and in a manner consistent with past practice and in accordance with applicable law; and the Company shall use its best efforts to preserve substantially intact the business organization of the Company, to keep available the services of the current officers, employees and consultants of the Company and to preserve the current relationships of the Company with customers, suppliers and other persons with which the Company has significant - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 32 39 business relations. By way of amplification and not limitation, except as otherwise set forth in the Company Disclosure Memorandum, neither the Company nor any Shareholder shall, between the date of this Agreement and the Closing, directly or indirectly do, or propose to do, any of the following without the prior written consent of Sierra: (a) amend or otherwise change, with respect to the Company, its Memorandum and Articles of Association, and with respect to each Subsidiary, its Certificate of Incorporation or By-laws; (b) issue, sell, pledge, dispose of, grant, encumber or authorize the issuance, sale, pledge, disposition, grant or encumbrance of (i) any shares of capital stock of any class of the Company, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of the Company or (ii) any assets of the Company, except for sales in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) reclassify, combine, split, subdivide, redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets) any corporation, partnership, other business organization or division thereof or any material amount of assets; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans or advances, except in the ordinary course of business and consistent with past practice; (iii) enter into any contract or agreement other than in the ordinary course of business, consistent with past practice; (iv) authorize any single capital expenditure which is in excess of $10,000 or capital expenditures which are, in the aggregate, in excess of $25,000 for the Company taken as a whole; or (v) enter into or amend any contract, agreement, commitment or arrangement with respect to any matter set forth in this subsection (e); (f) enter into any employment, consulting or agency agreement, or increase the compensation payable or to become payable to its officers, employees or consultants, except for increases in accordance with existing agreements or past practices for employees of the Company who are not officers of the Company, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee; - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 33 40 (g) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures (including, without limitation, procedures with respect to the payment of accounts payable and collection of accounts receivable); (h) make any tax election or settle or compromise any material federal, state, local or foreign income tax liability; (i) pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business and consistent with past practice, of liabilities reflected or reserved against in the Company Balance Sheet or subsequently incurred in the ordinary course of business and consistent with past practice; (j) take any action that would or is reasonably likely to result in any of the representations and warranties of the Company set forth in this Agreement being untrue, or in any covenant of the Company set forth in this Agreement being breached, or in any of the conditions to the Share Exchange specified in Article V hereof not being satisfied; (k) take or agree to take any action specified in Section 3.7 hereof, or enter into any other material transaction other than those specified above, or agree to do any of the foregoing. 7.2 ACCESS TO INFORMATION; CONFIDENTIALITY From the date hereof to the Closing, the Company shall, and shall cause the officers, directors, employees, auditors and agents of the Company to, afford the officers, employees and agents of Sierra complete access at all reasonable times to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company and shall furnish Sierra with all financial, operating and other data and information as Sierra, through its officers, employees or agents, may reasonably request. From the date hereof until the Closing, the Company shall provide Sierra with monthly and other financial statements of the Company as they become available internally at the Company, all of which financial statements shall be prepared in conformity with GAAP and shall fairly present the financial position and results of operations of the Company as of the dates and for the periods therein specified. All information obtained by either party or its officers, directors, employees, auditors or agents pursuant to this Section 7.2 shall be kept confidential in accordance with the confidentiality agreement, dated May 19, 1995 (the "Confidentiality Agreement"), between Sierra and the Company. No investigation pursuant to this Section 7.2 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. As of the Closing, the Confidentiality Agreement shall be deemed to have terminated without further action by the parties thereto. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 34 41 7.3 NO SOLICITATION OF TRANSACTIONS The Company shall not, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, the Company or any business combination with the Company or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. The Company immediately shall cease and cause to be terminated all existing discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company shall notify Sierra promptly if any such proposal or offer, or any inquiry or contact with any Person with respect thereto, is made and shall, in any such notice to Sierra, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact and the terms and conditions of such proposal, offer, inquiry or contact. The Company agrees not to release any third party from, or waive any provision of, any confidentiality or standstill agreement to which the Company is a party. 7.4 NOTIFICATION OF CERTAIN MATTERS The Company shall give prompt notice to Sierra of (a) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate and (b) any failure of the Company or any Shareholder to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 7.4 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.5 FURTHER ACTION; REASONABLE BEST EFFORTS Upon the terms and subject to the conditions hereof, each of the parties hereto shall (a) make promptly its respective filings, and thereafter make any other required submissions, under the 1933 Act, the Securities and Exchange Act of 1934 Act, as amended, or any foreign securities or other laws with respect to the transactions contemplated hereby and shall cooperate with the other party with respect to such filings and submissions and (b) use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby, including, without limitation, using its reasonable best efforts to obtain all waivers, licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company as are necessary for the consummation of the transactions contemplated hereby and to fulfill the conditions to the Closing. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each party to this Agreement shall use its reasonable best efforts to take all such action. No Shareholder will undertake any course of action inconsistent with - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 35 42 this Agreement or which would make any representations, warranties or agreements made by such party in this Agreement or any other Operative Documents untrue or any conditions precedent to this Agreement unable to be satisfied at or prior to the Closing. After the Closing Date, each party hereto, at the request of and without any further cost or expense to the other parties, will take any further actions necessary or desirable to carry out the purposes of this Agreement or any other Operative Document, to vest in Sierra full title to all properties, assets and rights of the Company and to effect the issuance of the Issuable Sierra Shares to the Shareholders pursuant to the terms and conditions hereof. 7.6 PUBLICITY Neither the Company nor any Shareholder shall issue any press release or make any statement regarding the transactions contemplated hereby to any third party without the prior written consent of Sierra. ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER 8.1 TERMINATION This Agreement may be terminated and the Share Exchange may be abandoned at any time prior to the Closing: (a) by mutual written consent duly authorized by the Company and Sierra; (b) by either the Company or Sierra, if the Share Exchange has not been consummated by June 30, 1995; provided, however, that the right to terminate this Agreement under this subsection (b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date; (c) by either the Company or Sierra, if there shall be any law or regulation that makes consummation of the Share Exchange illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Sierra or the Company from consummating the Share Exchange is entered and such judgment, injunction, order or decree shall become final and nonappealable; provided, however, that the party seeking to terminate this Agreement pursuant to this subsection (c) shall have used all reasonable efforts to remove such judgment, injunction, order or decree; (d) at any time prior to the Closing by Sierra if, at any time in the course of its legal, accounting, financial or operational due diligence investigation as to the Company, it shall have become aware of any material facts or circumstances that it was not aware of on the date hereof, or any additional facts and circumstances as to matters of which it was aware on the date hereof, in either case that would, in the reasonable judgment of Sierra, make it inadvisable to consummate the Share Exchange or the other transactions contemplated hereby; - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 36 43 (e) by the Company, in the event of a material breach by Sierra of any representation, warranty or agreement contained herein which has not been cured or is not curable by June 30, 1995; or (f) by Sierra, in the event of a material breach by the Company of any representation, warranty or agreement contained herein which has not been cured or is not curable by June 30, 1995. 8.2 EFFECT OF TERMINATION In the event of the termination of this Agreement pursuant to Section 81 hereof, there shall be no further obligation on the part of any party hereto except pursuant to the Confidentiality Agreement, except that nothing herein shall relieve any party from liability for any breach hereof. 8.3 AMENDMENT This Agreement may be amended by Sierra and the Company at any time prior to the Closing. Any such amendment must be in writing and signed by the Company and Sierra, but not by the Shareholders; provided, however, that no amendment may be made which would reduce the amount or change the type of consideration into which each Company Share shall be exchanged upon consummation of the Share Exchange without the prior written consent of Shareholders owning a majority of the Company Shares. 8.4 WAIVER At any time prior to the Closing, any party hereto may (a) extend the time for the performance of any obligation or other act of any other party hereto, (b) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any agreement or condition contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE IX - SURVIVAL AND INDEMNIFICATION 9.1 SURVIVAL All representations and warranties contained in this Agreement or in the other Operative Documents or in any certificate delivered pursuant hereto or thereto shall survive the Closing for a period of one year, and shall not be deemed waived or otherwise affected by any investigation made or any knowledge acquired with respect thereto. The covenants and agreements contained in this Agreement or in the other Operative Documents shall survive the Closing and shall continue until all obligations with respect thereto shall have been performed or satisfied or shall have been terminated in accordance with their terms. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 37 44 9.2 INDEMNIFICATION BY THE SHAREHOLDERS From and after the Closing Date, the Shareholders shall jointly and severally indemnify and hold Sierra and its affiliates (the "Sierra Indemnified Parties") harmless from and against, and shall reimburse the Sierra Indemnified Parties for, any and all losses, damages, debts, liabilities, obligations, judgments, orders, awards, writs, injunctions, decrees, fines, penalties, taxes, costs or expenses (including but not limited to any reasonable legal or accounting fees of expenses) ("Losses") arising out of or in connection with: (a) any inaccuracy in any representation or warranty made by the Company or the Shareholders in this Agreement or in any other Operative Document or in any certificate delivered pursuant hereto or thereto; (b) any failure by the Company or any Shareholder to perform or comply, in whole or in part, with any covenant or agreement in this Agreement or in any other Operative Document; (c) any accounts receivable reflected on the balance sheet of the Company dated April 30, 1995 which are not collected prior to March 31, 1996; or (d) any inventory reflected on the balance sheet of the Company dated April 30, 1995 which is written down due to obsolescence or shrink (which occurs prior to Closing), on or prior to March 31, 1996. 9.3 INDEMNIFICATION BY SIERRA From and after the Closing Date Sierra shall indemnify and hold harmless each Shareholder and his successors, assigns, heirs and legatees (the "Company Indemnified Parties"; together with the Sierra Indemnified Parties, the "Indemnified Parties") from and against, and shall reimburse the Company Indemnified Parties for, any and all Losses arising out of or in connection with: (a) any inaccuracy in any representation or warranty made by the Purchaser or Sierra in this Agreement or in any other Operative Document or in any certificate delivered pursuant hereto or thereto; or (b) any failure by Sierra to perform or comply, in whole or in part, with any covenant or agreement in this Agreement or in any other Operative Document. 9.4 THRESHOLD AND LIMITATIONS (a) No Indemnified Party shall be entitled to receive any indemnification payment with respect to any Claims until the aggregate Losses which the Sierra Indemnified Parties or the Company Indemnified Parties, as the case may be, would be otherwise entitled to receive as indemnification with respect to any Claims exceed $15,000 (the "Threshold"); provided, however, that once such aggregate Losses exceed the Threshold, such Indemnified - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 38 45 Parties shall be entitled to indemnification for all Losses which they otherwise would be entitled to receive without regard to the Threshold. (b) In no event shall the liability of the Shareholders hereunder for Losses incurred by Sierra Indemnified Parties exceed $12,000,000. 9.5 PROCEDURE FOR INDEMNIFICATION (a) Any Indemnified Party shall notify the indemnifying party in writing reasonably promptly after the assertion against the indemnified party of any claim by a third party (a "Third Party Claim") in respect of which the indemnified party intends to base a Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve it of any obligation or liability that it may have to the indemnified party except to the extent that the indemnifying party demonstrates that its ability to defend or resolve such Third Party Claim is adversely affected thereby. (b) (i) The indemnifying party shall have the right, upon written notice given to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, to assume the defense or handling of such Third Party Claim, at the indemnifying party's sole expense, in which case the provisions of Section 9.5(b)(ii) below shall govern. (ii) The indemnifying party shall select counsel reasonably acceptable to the Indemnified Party in connection with conducting the defense or handling of such Third Party Claim, and the indemnifying party shall defend or handle the same in consultation with the Indemnified Party and shall keep the Indemnified Party timely apprised of the status of such Third Party Claim. The indemnifying party shall not, without the prior written consent of the Indemnified Party, agree to a settlement of any Third Party Claim. The Indemnified Party shall cooperate with the indemnifying party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (c) (i) If the indemnifying party does not give written notice to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, of the indemnifying party's election to assume the defense or handling of such Third Party Claim, the provisions of Section 9.5(c)(ii) below shall govern. (ii) The Indemnified Party may, at the indemnifying party's expense, select counsel in connection with conducting the defense or handling of such Third Party Claim and defend or handle such Third Party Claim in such manner as it may deem appropriate, provided, however, that the indemnified party shall keep the indemnifying party timely apprised of the status of such Third Party Claim and shall not settle such Third Party Claim without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld. If the Indemnified Party defends or handles such Third Party Claim, the indemnifying party shall cooperate with the Indemnified Party and shall be entitled to - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 39 46 participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (d) If the Indemnified Party intends to seek indemnification hereunder, other than for a Third Party Claim, then it shall notify the indemnifying party in writing within six months after its discovery of facts upon which it intends to base its Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve the indemnifying party of any obligation or liability that the indemnifying party may have to the Indemnified Party except to the extent that the indemnifying party demonstrates that the indemnifying party's ability to defend or resolve such Claim is adversely affected thereby. (e) The Indemnified Party may notify the indemnifying party of a Claim even though the amount thereof plus the amount of other Claims previously notified by the Indemnified Party aggregate less than the Threshold. 9.6 OFFSET If and to the extent that any Sierra Indemnified Party is entitled to indemnification hereunder, Sierra may offset such indemnification amount against any property held in escrow pursuant to the Escrow Agreement. ARTICLE X - GENERAL 10.1 EXPENSES If the transactions contemplated by this Agreement are consummated, Sierra shall pay the fees and expenses of the Company and the Shareholders, up to a maximum of $35,000, incident to the negotiation, preparation and execution of this Agreement and the other Operative Documents (including legal and accounting fees and expenses); provided, however, that, should any action be brought hereunder, the attorneys' fees and expenses of the prevailing party shall be paid by the other party to such action. The Shareholders shall pay any transfer or similar taxes which may be payable in connection with the transactions contemplated by this Agreement. In addition, the Shareholders shall be responsible for the fees and expenses incurred by the Company in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby to the extent such fees and expenses exceed the maximum amount referred to above. 10.2 NOTICES Any notice or demand desired or required to be given hereunder shall be in writing given by personal delivery or certified or registered mail, telegram or confirmed facsimile transmission, addressed as respectively set forth below or to such other address as any party shall have previously designated by such a notice. The effective date of any notice or request shall be three days from the date it is sent by the addressor with charges prepaid so long as it - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 40 47 is in fact received within five days, or when successful transmission is confirmed if sent by facsimile, or when personally delivered. TO SIERRA: Sierra On-Line, Inc. 3380 146th Place S.E., Suite 300 Bellevue, WA 98007 Fax: (206) 649-0340 Attention: Corporate Counsel with a copy to: Perkins Coie 1201 Third Avenue, 40th Floor Seattle, Washington 98101-3099 Fax: (206) 583-8500 Attention: Stephen A. McKeon TO THE SHAREHOLDERS: At their respective addresses set forth on Schedule 2.1 to the Company Disclosure Memorandum. TO THE COMPANY: Impressions Software, Inc. 222 Third Street Suite 0254 Cambridge, MA 02142 Fax: (617) 225-0993 Attention: President with a copy to: Glovsky, Tarlow & Milberg 31 Milk Street Suite 810 Boston, MA 02109 Attn: Richard D. Glovsky Fax: (617) 482-8034 10.3 SEVERABILITY If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 41 48 Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. 10.4 ENTIRE AGREEMENT This Agreement and the other Operative Documents constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede, except as set forth in Section 7.2 hereof, all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof. 10.5 ASSIGNMENT This Agreement shall not be assigned by operation of law or otherwise, except that Sierra may assign all or any of its rights and obligations hereunder to any of its affiliates, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. 10.6 PARTIES IN INTEREST This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 10.7 SPECIFIC PERFORMANCE The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. 10.8 GOVERNING LAW This Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington applicable to contracts executed in and to be performed in that State. All actions and proceedings arising out of or relating to this Agreement shall be heard and determined in any Washington state or federal court thereof. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 42 49 10.9 HEADINGS The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 10.10 COUNTERPARTS This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 10.11 WAIVER OF JURY TRIAL Each of the Shareholders, Sierra and the Company hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the actions of such parties in the negotiation, administration, performance and enforcement thereof. 10.12 WAIVER OF PREEMPTIVE AND OTHER RIGHTS Each of the Shareholders hereby irrevocably waives any pre-emptive rights, rights of first offer, or other rights to purchase or receive any shares of capital stock of the Company, including, without limitation, the rights described in Sections 7 and 12 of the Company's Articles of Association. - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 43 50 IN WITNESS WHEREOF, the parties hereto have entered into and signed this Agreement as of the date and year first above written. SIERRA ON-LINE, INC. By /s/ Kenneth A. Williams ----------------------------------------------- Its President and Chief Executive Officer ------------------------------------------- SOFTWARE INSPIRATION LTD. By /s/ David Lester ----------------------------------------------- Its Managing Director ------------------------------------------- SHAREHOLDERS: /s/ David Lester -------------------------------------------------- David Roger Lester /s/ E. Grabowski -------------------------------------------------- Edward Grabowski EASTCOTE MOTOR SERVICES LIMITED By /s/ ----------------------------------------------- Its Director ------------------------------------------- /s/ Simon Lester -------------------------------------------------- Simon Edmund George Lester /s/ Pauline Lester -------------------------------------------------- Pauline Lester /s/ David Glover -------------------------------------------------- David C. Glover /s/ Emma Glover -------------------------------------------------- Emma C. Glover - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 44 51 /s/ Wolf Percival -------------------------------------------------- Wolf Percival /s/ Richard Colthurst -------------------------------------------------- Richard Colthurst - ------------------------------------------------------------------------------- SHARE EXCHANGE AGREEMENT Page 45 EX-2.03 4 AGREEMENT AND PLAN OF MERGER DATED JULY 17, 1995 1 AGREEMENT AND PLAN OF MERGER AMONG SIERRA ON-LINE, INC., GREEN THUMB ACQUISITION CORP., GREEN THUMB SOFTWARE, INC. AND THE SHAREHOLDERS OF GREEN THUMB SOFTWARE, INC. DATED AS OF JULY 17, 1995 2 CONTENTS ARTICLE I - THE MERGER.................................................................. 1 1.1 The Merger ............................................................... 1 1.2 The Closing .............................................................. 1 1.3 Effective Date and Time .................................................. 2 1.4 Certificate of Incorporation of the Surviving Corporation ................ 2 1.5 Bylaws of the Surviving Corporation ...................................... 2 1.6 Conversion of Shares ..................................................... 2 1.6.1 Exchange Ratio .................................................. 2 1.6.2 Escrow .......................................................... 3 1.6.3 Special Definitions ............................................. 3 1.6.4 Company Payments ................................................ 4 1.6.5 Exchange of Certificates ........................................ 4 1.6.6 No Fractional Shares ............................................ 5 1.6.7 Dissenting Shareholders ......................................... 5 1.6.8 No Further Transfers ............................................ 5 1.7 Pooling Restrictions on Transfer of the Securities ....................... 5 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS ................................................... 6 2.1 Good Title, etc. ......................................................... 6 2.2 Organization ............................................................. 6 2.3 Enforceability ........................................................... 7 2.4 Capitalization ........................................................... 7 2.5 Subsidiaries and Affiliates .............................................. 8 2.6 No Approvals or Notices Required; No Conflicts With Instruments .......... 8 2.7 Financial Statements ..................................................... 9 2.8 Absence of Certain Changes or Events ..................................... 10 2.9 Taxes .................................................................... 12 2.10 Property ................................................................. 14 2.11 Contracts ................................................................ 15 2.12 Customers and Suppliers .................................................. 17
- -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page i 3 2.13 Orders, Commitments and Returns ...................................................... 17 2.14 Claims and Legal Proceedings ......................................................... 17 2.15 Labor Matters ........................................................................ 17 2.16 Employee Benefit Plans ............................................................... 18 2.17 Patents, Trademarks, etc. ............................................................ 19 2.18 Accounts Receivable .................................................................. 21 2.19 Inventory ............................................................................ 21 2.20 Corporate Books and Records .......................................................... 22 2.21 Licenses, Permits, Authorizations, etc. .............................................. 22 2.22 Compliance With Laws ................................................................. 22 2.23 Insurance ............................................................................ 24 2.24 Brokers or Finders ................................................................... 24 2.25 Government Contracts ................................................................. 25 2.26 Absence of Questionable Payments ..................................................... 25 2.27 Personnel ............................................................................ 25 2.28 Bank Accounts ........................................................................ 26 2.29 Insider Interests .................................................................... 26 2.30 Securities Act Matters ............................................................... 27 2.31 Pooling Matters ...................................................................... 29 2.32 Full Disclosure ...................................................................... 29 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND SIERRA .......................... 30 3.1 Organization ......................................................................... 30 3.2 Enforceability ....................................................................... 30 3.3 Legal Proceedings .................................................................... 30 3.4 Securities ........................................................................... 31 3.5 No Brokers ........................................................................... 31 3.6 Full Disclosure ...................................................................... 31 3.7 Tax Consequences ..................................................................... 31
- -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page ii 4 ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER AND SIERRA ...................... 31 4.1 Accuracy of Representations and Warranties ........................................... 32 4.2 Performance of Agreements ............................................................ 32 4.3 Opinion of Counsel for the Company ................................................... 32 4.4 Shareholder Approval ................................................................. 32 4.5 Resignations ......................................................................... 32 4.6 Consents to Merger ................................................................... 32 4.7 Officers' Certificate ................................................................ 32 4.8 Principals' Certificates ............................................................. 33 4.9 Material Adverse Change .............................................................. 33 4.10 Due Diligence ........................................................................ 33 4.11 Opinion of Accountants ............................................................... 33 4.12 Approvals and Consents ............................................................... 33 4.13 Proceedings and Documents; Secretary's Certificate ................................... 33 4.14 Nonforeign Affidavit ................................................................. 34 4.15 Compliance With Laws ................................................................. 34 4.16 Pooling of Interests ................................................................. 34 4.17 Other Agreements ..................................................................... 34 4.18 Legal Proceedings .................................................................... 34 4.19 Operative Documents .................................................................. 34 ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY ............... 34 5.1 Accuracy of Representations and Warranties ........................................... 35 5.2 Performance of Agreements ............................................................ 35 5.3 Opinion of Counsel ................................................................... 35 5.4 Officers' Certificate ................................................................ 35 5.5 Legal Proceedings .................................................................... 35 5.6 Operative Documents .................................................................. 35 ARTICLE VI - COVENANTS.............................................................................. 35 6.1 Conduct of Business by the Company Pending the Merger ................................ 36 6.2 Access to Information; Confidentiality ............................................... 37
- -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page iii 5 6.3 No Solicitation of Transactions ...................................................... 38 6.4 Notification of Certain Matters ...................................................... 38 6.5 Further Action; Reasonable Best Efforts .............................................. 38 6.6 Publicity ............................................................................ 39 ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER ..................................................... 39 7.1 Termination .......................................................................... 39 7.2 Effect of Termination ................................................................ 40 7.3 Amendment ............................................................................ 40 7.4 Waiver ............................................................................... 40 ARTICLE VIII - SURVIVAL AND INDEMNIFICATION ........................................................ 40 8.1 Survival ............................................................................. 40 8.2 Indemnification by the Shareholders .................................................. 41 8.3 Indemnification by Sierra ............................................................ 41 8.4 Threshold and Limitations ............................................................ 41 8.5 Procedure for Indemnification ........................................................ 42 8.6 Offset ............................................................................... 43 ARTICLE IX - GENERAL................................................................................ 43 9.1 Expenses ............................................................................. 43 9.2 Bank Loans ........................................................................... 43 9.3 Employee Agreements .................................................................. 44 9.4 Notices .............................................................................. 44 9.5 Severability ......................................................................... 45 9.6 Entire Agreement ..................................................................... 45 9.7 Assignment ........................................................................... 45 9.8 Parties in Interest .................................................................. 45 9.9 Specific Performance ................................................................. 46 9.10 Governing Law ........................................................................ 46 9.11 Headings ............................................................................. 46 9.12 Counterparts ......................................................................... 46
- -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page iv 6 EXHIBITS 1.3 - Certificates of Merger 1.4 - Articles of Incorporation of the Surviving Corporation 1.5 - Bylaws of the Surviving Corporation 1.6 - Form of Escrow Agreement 2.1 - Disclosure Memorandum 2.2 - Form of Registration Rights Agreement 2.3 - Form of Noncompetition Agreement 4.3 - Form of Opinion of Counsel for the Company 4.14 - Foreign Investment in Real Property Tax Act Affidavit 5.3 - Form of Opinion of Counsel for Sierra 5.4 - Sierra Officer's Certificate 9.2 - Payoff Quotation - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page v 7 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "Agreement") is made and entered into as of July 17, 1995 by and among Sierra On-Line, Inc., a Delaware corporation ("Sierra"), Green Thumb Acquisition Corp., a Washington corporation (the "Purchaser"), Green Thumb Software, Inc., a Colorado corporation (the "Company"), and the shareholders of the Company listed on the signature pages hereto (the "Shareholders"). RECITALS A. The Company and the Purchaser believe it advisable and in the best interests of such corporations to effect the merger of the Company and the Purchaser (the "Merger") pursuant to this Agreement. B. The Board of Directors and the Shareholders of the Company have approved the Merger. C. The Board of Directors and the sole shareholder of the Purchaser have approved the Merger. Sierra is the sole shareholder of the Purchaser. D. For federal income tax purposes, the parties hereto intend to treat the Merger as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). AGREEMENT In consideration of the terms hereof, the parties hereto agree as follows: ARTICLE I - THE MERGER 1.1 THE MERGER Upon the terms and subject to the conditions hereof, (a) at the Effective Time (as defined in Section 1.3 hereof) the separate existence of the Company shall cease and the Company shall be merged with and into the Purchaser (the Purchaser is sometimes referred to herein as the "Surviving Corporation"), and (b) from and after the Effective Time, the Merger shall have all the effects of a merger under the laws of the State of Washington, the State of Colorado and other applicable law. 1.2 THE CLOSING The closing of the Merger pursuant to this Agreement (the "Closing") shall take place on the earliest practicable business day after the conditions to the Closing of the Merger set forth in Articles IV and V hereof are satisfied or waived (the "Closing Date") at 2:00 p.m. local time at the offices of Perkins Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington, - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 1 8 or such other time or location as Sierra and the Company shall agree. At the Closing, each of the parties hereto shall deliver all such documents, instruments, certificates and other items as may be required under this Agreement or the other Operative Documents (as defined in Section 2.1) or otherwise. 1.3 EFFECTIVE DATE AND TIME On the Closing Date and subject to the terms and conditions hereof, articles of merger (collectively, the "Articles of Merger") complying with the applicable provisions of the Washington Business Corporation Act ("Washington Law") and the Colorado Corporation Code ("Colorado Law), substantially in the form or forms attached hereto as Exhibit 1.3, and in such form as required by, and executed in duplicate in accordance with, Washington Law and Colorado Law, shall be delivered for filing to the Secretary of State of the State of Washington (the "Washington Secretary of State") and the Secretary of State of the State of Colorado (the "Colorado Secretary of State"), respectively. The Merger shall become effective on the date (the "Effective Date") and at the time (the "Effective Time") specified in the Articles of Merger as so filed. If the Washington Secretary of State or the Colorado Secretary of State requires any changes in the Articles of Merger as a condition to filing the Articles of Merger or issuing its certificate to the effect that the Merger is effective, Sierra, the Purchaser, the Company and the Shareholders will execute any necessary revisions incorporating such changes, provided such changes are not inconsistent with and do not result in any substantial change in the terms of this Agreement. 1.4 CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION At the Effective Time, the Certificate of Incorporation of the Purchaser shall be in the form attached hereto as Exhibit 1.4 and shall be the Certificate of Incorporation of the Surviving Corporation. Thereafter, the Certificate of Incorporation of the Surviving Corporation may be amended in accordance with its terms and as provided by law. 1.5 BYLAWS OF THE SURVIVING CORPORATION At the Effective Time, the Bylaws of the Purchaser shall be in the form attached hereto as Exhibit 1.5 and shall be the Bylaws of the Surviving Corporation. Thereafter, the Bylaws may be amended or repealed in accordance with their terms, the Certificate of Incorporation of the Surviving Corporation and as provided by law. 1.6 CONVERSION OF SHARES 1.6.1 EXCHANGE RATIO As of the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof: (a) All shares of any class of capital stock of the Company held by the Company as treasury shares shall be cancelled. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 2 9 (b) Each issued and outstanding share of Common Stock of the Company, no par value ("Company Common Stock"), shall be converted into the right to receive from Sierra a number of shares of common stock of Sierra, $.01 par value per share ("Sierra Common Stock"), determined as follows (such shares being referred to herein as the "Merger Consideration" or the "Securities"): (i) at or as soon as practicable after the Closing, a number of shares of Sierra Common Stock determined by dividing the Net Closing Shares (as defined below) by the total number of shares of Company Common Stock outstanding immediately prior to the Effective Time (the "Closing Consideration"); plus (ii) on or before the earlier of one year after the Closing Date and the date on which Sierra's independent auditors issue their report with respect to the financial statements of Sierra for the first fiscal year of Sierra ending after the Closing, and subject to adjustment in accordance with the terms of an Escrow Agreement in substantially the form attached hereto as Exhibit 1.6 (the "Escrow Agreement") to be entered into at the Closing among the Shareholders and Sierra, a number of shares of Sierra Common Stock determined by dividing the Escrow Shares (as defined below) by the total number of shares of Company Common Stock outstanding immediately prior to the Effective Time. (c) Each issued and outstanding share of capital stock of the Purchaser shall be converted into one share of common stock of the Surviving Corporation. 1.6.2 ESCROW As soon as practicable after the Closing, Sierra shall deposit into escrow, in accordance with the terms of the Escrow Agreement, a number of shares of Sierra Common Stock (excluding any fractional shares) equal to the total number of Escrow Shares. The Escrow Shares, or the proceeds from any disposition thereof in accordance with the Escrow Agreement, shall be distributed from escrow in accordance with the Escrow Agreement. 1.6.3 SPECIAL DEFINITIONS (a) The term "Aggregate Closing Shares" shall mean a number of shares (excluding any fractional share) of Sierra Common Stock determined by dividing $2,450,000 by the Closing Average (as defined below). (b) The term "Net Closing Shares" shall mean a number of shares of Sierra Common Stock equal to the Aggregate Closing Shares, less (i) the Deduction Shares (as defined below) and (ii) a number of shares of Sierra Common Stock (excluding any fractional shares) equal to 10% of the number of shares of Sierra Common Stock remaining after the application of the preceding clause (i). (c) The term "Deduction Shares" shall mean a number of shares of Sierra Common Stock (excluding any fractional shares) equal to (i) the aggregate dollar value of (A) all attorneys' fees, accounting fees and brokerage or finders' fees and/or commissions - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 3 10 incurred by or on behalf of the Company or the Shareholders in connection with the transactions contemplated by this Agreement and (B) all obligations or liabilities of the Company for back pay owed to the Shareholders and to fund the Company's profit sharing plan, if the Company determines such funding is appropriate, through the Closing (the Company shall deliver to Sierra no later than one business day before the Closing a Certificate stating the actual dollar amounts of the items referred to in clauses (A) and (B) of this paragraph (c) as of such date and a reasonable estimate of the total dollar amounts of such items expected to be incurred), divided by (ii) the Closing Average. (d) The term "Escrow Shares" shall mean a number of shares of Sierra Common Stock equal to the number of shares of Sierra Common Stock referred to in paragraph (b)(ii) of this Section 1.6.3. (e) The term "Closing Average" shall mean the average of the last reported sale prices of Sierra Common Stock over the ten consecutive trading days ending three trading days prior to the Closing Date. 1.6.4 COMPANY PAYMENTS At the Closing, the Company shall pay in full the fees and obligations set forth in Section 1.6.3(c), which payments shall be reflected as expenses on the books of the Company as of the Closing Date. Sierra shall provide to the Company the funds necessary to make such payments as reflected in Section 9.1 hereof. 1.6.5 EXCHANGE OF CERTIFICATES As soon as practicable after the Effective Date, Sierra shall make available, and each Shareholder will be entitled to receive, upon surrender to Sierra of one or more certificates representing Company Common Stock for cancellation, certificates representing the number of shares of Sierra Common Stock that such Shareholder is entitled to receive at Closing pursuant to Section 1.6.1 hereof. The shares of Sierra Common Stock that each Shareholder shall be entitled to receive at the Closing pursuant to the Merger shall be deemed to have been issued at the Effective Time. No interest shall accrue on the Merger Consideration. If the Merger Consideration (or any portion thereof) is to be delivered to any person other than the person in whose name the certificate or certificates representing shares of Company Common Stock surrendered in exchange therefor is registered, it shall be a condition to such exchange that the person requesting such exchange shall pay to Sierra any transfer or other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the certificate or certificates so surrendered, or shall establish to the satisfaction of Sierra that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither Sierra nor any other party hereto shall be liable to a holder of shares of Company Common Stock for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat and similar laws. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 4 11 1.6.6 NO FRACTIONAL SHARES No certificates or scrip representing fractional shares of Sierra Common Stock shall be issued upon the surrender for exchange of certificates representing Company Common Stock pursuant to the Merger, and no dividend, stock split or other distribution with respect to Sierra Common Stock shall relate to any such fractional interest, and any such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder. In lieu of any such fractional shares, each holder of Company Common Stock who otherwise would have been entitled to a fraction of a share of Sierra Common Stock upon surrender of certificates representing Company Common Stock for exchange pursuant to the Merger will be paid cash upon such surrender in an amount equal to such fraction multiplied by the Closing Average. 1.6.7 DISSENTING SHAREHOLDERS Any issued and outstanding shares of Company Common Stock held by any Shareholder who, in accordance with Colorado law, dissents from the Merger (a "Dissenting Shareholder") and requires appraisal of such Dissenting Shareholder's shares ("Dissenting Shares") shall not be converted or cancelled as described in Section 1.6.1 hereof but shall become the right to receive such consideration as may be determined to be due to such Dissenting Shareholder pursuant to Colorado Law; provided, however, that Dissenting Shares outstanding at the Effective Time and held by a Dissenting Shareholder who shall after the Effective Time withdraw such Dissenting Shareholder's demand for appraisal or lose such Dissenting Shareholder's right of appraisal as provided by Colorado Law shall be deemed to be converted as of the Effective Time into the right to receive the Merger Consideration. 1.6.8 NO FURTHER TRANSFERS After the Effective Time, there shall be no transfers of any shares of Company Common Stock on the stock transfer books of the Surviving Corporation. If, after the Effective Time, certificates formerly representing shares of Company Common Stock are presented to the Surviving Corporation, they shall be forwarded to Sierra and be cancelled and exchanged in accordance with this Section 1.6, subject to applicable law in the case of Dissenting Shares. 1.7 POOLING RESTRICTIONS ON TRANSFER OF THE SECURITIES The Shareholders shall not transfer the Securities received pursuant to the Merger until at least 30 days after the publication by Sierra of financial results for the first fiscal quarter of Sierra ending after the Closing which contains a period of at least 30 days of combined financial results of Sierra and the Surviving Corporation. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 5 12 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS To induce the Purchaser and Sierra to enter into and perform this Agreement and the other Operative Documents (as defined in Section 2.1 hereof), and except as is otherwise set forth in the Disclosure Memorandum attached hereto as Exhibit 2.1 (the "Disclosure Memorandum"), which exceptions shall specifically identify the paragraph or paragraphs of this Article II to which such exceptions relate, and which shall constitute in its entirety a representation and warranty under this Article II, the Company and the Shareholders jointly and severally represent and warrant to the Purchaser and Sierra as of the date of this Agreement and as of the Closing as follows in this Article II. Except as to Sections 2.2, 2.4 and 2.5 hereof, all references to the Company in this Article II shall include the Company's Subsidiaries (as defined in Section 2.2). 2.1 GOOD TITLE, ETC. Each Shareholder represents with respect to itself only that (a) such Shareholder owns the shares of Company Common Stock listed opposite such Shareholder's name on Schedule 2.1 to the Disclosure Memorandum; (b) such shares of Company Common Stock are free and clear of any lien, encumbrance, adverse claim, restriction on sale or transfer (other than the restriction on transfer set forth in Article 5, Section 2, of the Company's Articles of Incorporation (which restriction has been validly waived) and restrictions imposed by applicable securities laws), preemptive right or option; (c) such Shareholder has all necessary power, right and authority to enter into this Agreement and each of the agreements, certificates, instruments and documents executed or delivered pursuant to the terms of this Agreement by such Shareholder, including, without limitation and as applicable, the Escrow Agreement, the Registration Rights Agreement in substantially the form attached hereto as Exhibit 2.2 to be entered into as of the Closing among Sierra and the Shareholders, and the Noncompetition Agreements in substantially the form attached hereto as Exhibit 2.3 to be entered into as of the Closing among Sierra, the Surviving Corporation and each of Judy McNary and Beth Tatem (together, the "Principals") (collectively, and including this Agreement, the "Operative Documents"), to consummate the transactions contemplated hereby and thereby, and to sell and transfer the shares of Company Common Stock held by such Shareholder hereunder without the consent or approval of any other Person (as defined in Section 2.6 hereof), other than as set forth on Schedule 2.6 to the Disclosure Memorandum; and (d) this Agreement and the other Operative Documents to which such Shareholder is a party have each been duly authorized, executed and delivered by such Shareholder and each is a legal, valid and binding obligation of such Shareholder, enforceable in accordance with its terms. 2.2 ORGANIZATION The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado. Each subsidiary of the Company listed on Schedule 2.5 to the Disclosure Memorandum (individually a "Subsidiary" and together the - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 6 13 "Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, which jurisdictions are set forth in Schedule 2.5 to the Disclosure Memorandum. The Company and each Subsidiary have all requisite corporate power and authority to own, operate and lease their properties and assets, to carry on their respective businesses as now conducted and as proposed to be conducted, and in the case of the Company to enter into and perform its obligations under this Agreement and the Operative Documents, and to consummate the transactions contemplated hereby and thereby. The Company and each Subsidiary are duly qualified and licensed as foreign corporations to do business and are in good standing in each jurisdiction listed on Schedule 2.2, in the case of the Company, and Schedule 2.5, in the case of the Subsidiaries, to the Disclosure Memorandum, which jurisdictions constitute all jurisdictions where the character of the Company's or such Subsidiary's properties occupied, owned or held under lease or the nature of the business conducted by the Company or such Subsidiary makes such qualification necessary, except as set forth on Schedule 2.2 or Schedule 2.5, as the case may be, to the Disclosure Memorandum and except where the failure to be so qualified or in good standing would not have a material adverse effect on the business, business prospects, assets, operations or condition (financial or other) of the Company or such Subsidiary. 2.3 ENFORCEABILITY All corporate action on the part of the Company and its officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Operative Documents, the consummation of the Merger, and the performance of all of the Company's obligations under this Agreement and the Operative Documents has been taken or will be taken prior to the Closing. This Agreement has been, and each of the Operative Documents at the Closing will have been, duly executed and delivered by the Company, and this Agreement is, and each of the Operative Documents to which the Company is a party will be at the Closing, a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 2.4 CAPITALIZATION (a) The authorized capital stock of the Company consists of 48,000 shares of Company Common Stock. (b) The issued and outstanding capital stock of the Company consists solely of 9,421 shares of Company Common Stock (the "Outstanding Shares"), which are and as of the Closing will be held of record and beneficially by the Shareholders as set forth on Schedule 2.4(b) to the Disclosure Memorandum. The Outstanding Shares are, and immediately prior to the Closing will be, duly authorized and validly issued, fully paid and nonassessable, and issued in compliance with all applicable federal, state and foreign securities laws. No Person other than the Shareholders holds any interest in any of the Outstanding Shares. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 7 14 (c) There are no outstanding rights of first refusal, preemptive rights, options, warrants, conversion rights or other agreements, either directly or indirectly, for the purchase or acquisition from the Company or any Shareholder of any shares of the Company's capital stock or the capital stock of any Subsidiary, except for the restriction on the transfer of shares set forth in Article 5, Section 2, of the Company's Articles of Incorporation (which restriction has been validly waived). (d) The Company is not a party or subject to any agreement or understanding, and there is no agreement or understanding between any Persons (as defined in Section 2.6 hereof), that affects or relates to the voting or giving of written consents with respect to any securities of the Company or the voting by any director of the Company. Except as set forth on Schedule 2.4(d) to the Disclosure Memorandum, no Shareholder or any affiliate thereof is indebted to the Company, and the Company is not indebted to any Shareholder or any affiliate thereof. The Company is not under any contractual or other obligation to register any of its presently outstanding securities or any of its securities which may hereafter be issued. 2.5 SUBSIDIARIES AND AFFILIATES The name, jurisdiction of incorporation and jurisdictions of foreign qualification of each of the Company's Subsidiaries are as set forth on Schedule 2.5 to the Disclosure Memorandum. Except as set forth on Schedule 2.5 to the Disclosure Memorandum, the Company does not own, directly or indirectly, any ownership, equity, profits or voting interest in, or otherwise control, any corporation, partnership, joint venture or other entity, and has no agreement or commitment to purchase any such interest. The Company owns 100% of the issued and outstanding shares of capital stock, or other ownership interests, of each of the Subsidiaries, free and clear of any lien, encumbrance, preemptive right, right of first offer or refusal, or other prior claim, and all the issued and outstanding shares of capital stock, or other ownership interests, of the Subsidiaries are duly authorized and validly issued, fully paid and nonassessable, and were issued and acquired in compliance with all applicable federal, state and foreign securities and other laws. 2.6 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS (a) Except as set forth on Schedule 2.6(a) to the Disclosure Memorandum, the execution, delivery and performance of this Agreement and the other Operative Documents by the Company and the consummation of the transactions contemplated hereby and thereby will not (i) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to the Company, (ii) require any consent, approval or authorization of, or declaration, filing or registration with, any person, corporation, partnership, joint venture, association, organization, other entity or governmental or regulatory authority (a "Person"), except compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Washington Secretary of State and the Colorado Secretary of State (the consent of all such Persons to be duly obtained - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 8 15 by the Company at or prior to the Closing), (iii) result in a default (with or without the giving of notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which the Company is a party or by which it is bound or to which any assets of the Company are subject, (iv) result in the creation of any lien or encumbrance upon the assets of the Company or upon any Outstanding Shares or other securities of the Company, (v) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or Bylaws of the Company, or (vi) invalidate or adversely affect any permit, license, authorization or status used in the conduct of the business of the Company. (b) Except as set forth on Schedule 2.6(b) to the Disclosure Memorandum, the execution, delivery and performance of this Agreement by each Shareholder and the consummation of the transactions contemplated hereby will not (i) constitute a violation by such Shareholder (with or without the giving of notice or lapse of time, or both) of any provisions of law or any judgment, decree, order, regulation or rule of any court, agency or other governmental authority applicable to such Shareholder, (ii) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, except for compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Washington Secretary of State and the Colorado Secretary of State (the consent of all such Persons to be duly obtained by the Company or the Shareholder at or prior to the Closing), (iii) result in the creation of any lien or encumbrance upon the shares of Company Common Stock owned by such Shareholder, or (iv) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or Bylaws of the Company. 2.7 FINANCIAL STATEMENTS The Company has delivered to Sierra (a) unaudited consolidated balance sheets and consolidated statements of operations, and retained earnings of the Company as of or for the fiscal years ended December 31, 1993 and 1994 compiled by Clifton, Gunderson & Co., independent certified public accountants, and (b) an unaudited consolidated balance sheet and unaudited consolidated statement of operations and retained earnings of the Company as of and for the six-month period ended June 30, 1995, compiled by Clifton, Gunderson & Co., independent certified public accountants. All of the foregoing financial statements are herein referred to as the "Financial Statements." The consolidated balance sheet of the Company as of June 30, 1995 is herein referred to as the "Company Balance Sheet." The Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States consistently applied throughout the periods covered therein ("GAAP") and present fairly the financial position, results of operations and changes in financial position of the Company as of the dates and for the periods indicated, subject, in the case of the unaudited financial statements as of and for the six-month period ended June 30, 1995 to normal recurring period-end audit adjustments which will not exceed $5,000 in the aggregate. The Company has no liabilities or obligations of any nature (absolute, contingent or otherwise) which are not fully reflected or reserved against in the Company Balance Sheet, - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 9 16 except (a) liabilities or obligations incurred since the date of the Company Balance Sheet in the ordinary course of business and consistent with past practice which are not in excess of $10,000 in the aggregate or $2,000 individually or (b) as specifically set forth on Schedule 2.7 to the Disclosure Memorandum. The Company maintains and will continue to maintain standard systems of accounting established and administered in accordance with GAAP. Except as set forth on Schedule 2.7 to the Disclosure Memorandum, the Company is not a guarantor, indemnitor, surety or other obligor of any indebtedness of any other Person. The Company's practices with respect to capitalizing software development costs, as reflected in the Financial Statements, are reasonable, in accordance with GAAP and industry standards, and consistent with the advice of the Company's independent accountants. 2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS Except as specifically set forth on Schedule 2.8 to the Disclosure Memorandum, since the date of the Company Balance Sheet, neither the Company nor any of its officers or directors in their representative capacities on behalf of the Company has: (a) taken any action or entered into or agreed to enter into any transaction, agreement or commitment other than in the ordinary course of business; (b) forgiven or canceled any indebtedness or waived any claims or rights of material value (including, without limitation, any indebtedness owing by any Shareholder or any officer, director, employee or affiliate of the Company); (c) granted, other than in the ordinary course of business and consistent with past practice, any increase in the compensation of directors, officers, employees or consultants (including any such increase pursuant to any employment agreement or bonus, pension, profit-sharing, lease payment or other plan or commitment) or any increase in the compensation payable or to become payable to any director, officer, employee or consultant; (d) suffered any material adverse change in its working capital, assets, liabilities (absolute, accrued, contingent or otherwise), earnings, reserves, financial condition, business, prospects or operations; (e) borrowed or agreed to borrow any funds, assumed or become subject to, whether directly or by way of guarantee or otherwise, any obligations or liabilities (absolute, accrued, contingent or otherwise), or incurred any liabilities or obligations (absolute, accrued, contingent or otherwise), which individually or in the aggregate exceed $10,000, except liabilities and obligations incurred in the ordinary course of business and consistent with past practice not to exceed $25,000 in the aggregate, or increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (f) paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 10 17 in the ordinary course of business and consistent with past practice of claims, liabilities and obligations reflected or reserved against in the Company Balance Sheet or incurred in the ordinary course of business and consistent with past practice since the date of the Company Balance Sheet, or prepaid any obligation having a fixed maturity of more than 90 days from the date such obligation was issued or incurred; (g) permitted or allowed any of its property or assets (real, personal or mixed, tangible or intangible) to be subjected to any mortgage, pledge, lien, security interest, encumbrance, restriction or charge, except (i) assessments for current taxes not yet due and payable, (ii) landlord's liens for rental payments not yet due and payable, and (iii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that is in the aggregate less than $5,000, was incurred in the ordinary course of business and is not yet due and payable; (h) written down the value of any inventory (including write-downs by reason of shrinkage or markdown) or written off as uncollectible any notes or accounts receivable, except for write-downs and write-offs that are in the aggregate less than $5,000, incurred in the ordinary course of business and consistent with past practice; (i) sold, transferred or otherwise disposed of any of its properties or assets (real, personal or mixed, tangible or intangible), except the sale of inventory in the ordinary course of business and consistent with past practice; (j) disposed of or permitted to lapse any rights to the use of any trademark, trade name, patent or copyright, or disposed of or disclosed to any Person other than representatives of Sierra any trade secret, formula, process or know-how not theretofore a matter of public knowledge; (k) made any single capital expenditure or commitment in excess of $5,000 for additions to property, plant, equipment or intangible capital assets or made aggregate capital expenditures in excess of $20,000 for additions to property, plant, equipment or intangible capital assets; (l) made any change in any method of accounting or accounting practice or internal control procedure; (m) issued any capital stock or other securities, or declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock, or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of capital stock or other securities of the Company, or otherwise permitted the withdrawal by any of the holders of capital stock of the Company of any cash or other assets (real, personal or mixed, tangible or intangible), in compensation, indebtedness or otherwise, other than payments of compensation in the ordinary course of business and consistent with past practice; - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 11 18 (n) paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any Shareholder or any of the Company's officers, directors or employees or any affiliate of any Shareholder or any of the Company's officers, directors or employees, except directors' fees and compensation paid to officers and employees at rates not exceeding the rates of compensation paid during the fiscal year ended December 31, 1994; except for those increased in the ordinary course of business and consistent with past practice. (o) entered into or agreed to enter into, or otherwise suffered to be outstanding, any power of attorney of the Company or any obligations or liabilities (absolute, accrued, contingent or otherwise) of the Company, as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any other Person; (p) received notice of, or otherwise obtained knowledge of: (i) any claim, action, suit, arbitration, proceeding or investigation involving, pending against or threatened against the Company or any employee of the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person; (ii) any valid basis for any claim, action, suit, arbitration, proceeding, investigation or the application of any fine or penalty adverse to the Company or any employee of the Company before or by any Person; or (iii) any outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company or any employee of the Company is a party and where such items in subparagraphs (i), (ii) and (iii) above relate directly to the transactions contemplated herein or which would have any adverse effect upon the business, business prospects, assets, liabilities or financial condition of the Company; (q) entered into or agreed to any sale, assignment, transfer or license of any patents, trademarks, copyrights, trade secrets or other intangible assets of the Company or any amendment or change to any existing license or other agreement relating to intellectual property; (r) received notice that there has been a loss of, or contract cancellation by, any current or prospective customer, licensor or distributor of the Company; (s) taken any action, or become aware of any action taken by any Shareholder, which alone or together with other facts or circumstances could affect the ability of Sierra to account for the Merger as a "pooling of interests" transaction consistent with GAAP; or (t) agreed, whether in writing or otherwise, to take any action described in this Section 2.8. 2.9 TAXES Except as described on Schedule 2.9 to the Disclosure Memorandum, the Company has (a) duly and timely filed, including valid extensions, with the appropriate governmental - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 12 19 agencies (domestic and foreign) all tax returns, information returns and reports ("Returns") for all Taxes (as defined below) required to have been filed with respect to the Company and its business, (b) all such Returns are true, correct and complete, and (c) except as set forth on Schedule 2.9 to the Disclosure Memorandum, paid in full or provided for all Taxes that are due or claimed to be due by any governmental agency. "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, but not limited to, income, excise, gross receipts, property, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, severance, stamp, occupation, windfall profits, social security and unemployment or other taxes imposed by the United States or any agency or instrumentality thereof, any state, county, local or foreign government, or any agency or instrumentality thereof, and any interest or fines, and any and all penalties or additions relating to such taxes, charges, fees, levies or other assessments. Except as described on Schedule 2.9 to the Disclosure Memorandum, (i) the reserves and provisions for Taxes reflected in the Financial Statements are adequate for the payment of Taxes not yet due and payable, as determined in accordance with GAAP consistently applied; (ii) no unresolved claim for assessment or collection of Taxes has been asserted or threatened against the Company, and no audit or investigation by any governmental authority is under way with respect to Taxes, interest or other governmental charges; (iii) to the best of its knowledge, no circumstances exist or have existed which would constitute grounds for assessment against the Company of any tax liability with respect to any period for which Returns have been filed, including, but not limited to, any circumstances relating to the existence of a valid S corporation election for the Company for any such period; (iv) the Company has not filed or entered into any election, consent or extension agreement or any waiver that extends any applicable statute of limitations; (v) any Taxes incurred by the Company or accrued by it since the date of the Company Balance Sheet have arisen in the ordinary course of business; and (vi) the Company has not filed any consent to the application of Section 341(f)(2) of the Code, to any assets held, acquired or to be acquired by it. The Company has furnished Sierra with complete and correct copies of all Returns. There are no tax liens on any property or assets of the Company other than liens for current taxes not yet payable. No claim has been made by an authority in any jurisdiction where the Company does not file Returns that the Company is or may be subject to taxation by that jurisdiction. The Company has not made any payments, is not obligated to make any payments, and is not a party to any agreement that could obligate it to make any payments that will not be deductible under Section 280G of the Code; the Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(2)(i) of the Code; the Company is not a party to any Tax allocation or sharing agreement, and, except as set forth on Schedule 2.9 to the Disclosure Memorandum, the Company (A) has not been a member of an affiliated group filing a consolidated income Tax Return and (B) does not have any liability for Taxes of any person under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law) as a transferor or successor by contract or otherwise. 2.10 PROPERTY (a) The Company owns no real property other than the leasehold interests described in Schedule 2.10(a) to the Disclosure Memorandum, which contains a complete and - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 13 20 accurate list of all real property of the Company which is leased, rented or used by the Company (the "Real Property"). The Company has delivered to Sierra true and complete copies of all written leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to the Real Property and written summaries of the terms of any oral leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to the Real Property. (b) Schedule 2.10(b) to the Disclosure Memorandum contains a complete and accurate list of each item of personal property having a value in excess of $1,000 which is owned, leased, rented or used by the Company (the "Personal Property"); provided that such list need not describe the Listed Intellectual Property or the Intellectual Property Licenses (as defined in Section 2.17 hereof). The Company has delivered to Sierra true and complete copies of all leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to the Personal Property. The Real Property and the Personal Property include all properties and assets (whether real, personal or mixed, tangible or intangible) (other than, in the case of the Personal Property, property rights with an individual value of less than $1,000, the Listed Intellectual Property and the Intellectual Property Licenses) reflected in the Company Balance Sheet and all the properties and assets purchased by the Company since the date of the Company Balance Sheet (except for such properties or assets sold since the date of the Company Balance Sheet in the ordinary course of business and consistent with past practice). The Real Property and the Personal Property include all material property used in the business of the Company. (c) The Company's leasehold interest in each parcel of the Real Property is free and clear of all liens, mortgages, pledges, deeds of trust, security interests, charges, encumbrances and other adverse claims or interests of any kind, except as set forth on Schedule 2.10(c) to the Disclosure Memorandum. Each lease of any portion of the Real Property is valid, binding and enforceable in accordance with its terms against the parties thereto and any other Person with an interest in such Real Property, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor any other party thereto is in default thereunder nor is there any event which with notice or lapse of time, or both, would constitute a default thereunder. Except as set forth on Schedule 2.6 to the Disclosure Memorandum, no consent is required from any Person under any lease or other agreement or instrument relating to the Real Property in connection with the consummation of the transactions contemplated by this Agreement and the other Operative Documents, and the Company has not received notice that any party to any such lease or other agreement or instrument intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. The Company has not granted any lease, sublease, tenancy or license of, or entered into any rental agreement or contract of sale with respect to, any portion of the Real Property. (d) Except as described on Schedule 2.10(d) to the Disclosure Memorandum, the Company's offices, warehouse and other structures and its Personal Property are of quality consistent with industry standards, are in good operating condition and - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 14 21 repair, normal wear and tear excepted, are adequate for the uses to which they are being put, and comply in all material respects with applicable safety and other laws and regulations. (e) Except as set forth on Schedule 2.10(e) to the Disclosure Memorandum, and except for (i) assessments for current taxes not yet due and payable, (ii) landlord's liens for rental payments in respect of the Real Property incurred in the ordinary course of business and not yet due and payable, and (iii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that is in the aggregate less than $2,000, was incurred in the ordinary course of business and is not yet due and payable, the Personal Property is free and clear of all liens, and, other than leased Personal Property which is so noted on the list supplied pursuant to paragraph (b) of this Section 2.10, the Company owns such Personal Property. (f) Except as set forth on Schedule 2.10(f) to the Disclosure Memorandum, each lease, license, rental agreement, contract of sale or other agreement to which the Personal Property is subject is valid, binding and enforceable in accordance with its terms against the parties thereto, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor, to the best of the Company's knowledge, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default by the Company or, to the best of the Company's knowledge, any other party thereunder. Except as set forth on Schedule 2.10(f) to the Disclosure Memorandum, no consent is required from any Person under any lease or other agreement or instrument relating to the Personal Property in connection with the consummation of the transactions contemplated by in this Agreement and the other Operative Documents, and the Company has not received notice that any party to any such lease or other agreement or instrument intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. The Company has not granted any lease, sublease, tenancy or license of any portion of the Personal Property. (g) Neither the whole nor any portion of the leaseholds or any other assets or property of the Company is subject to any currently outstanding governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to the best of the Company's knowledge, has any such condemnation, expropriation or taking been proposed. 2.11 CONTRACTS Schedule 2.11 to the Disclosure Memorandum contains a complete and accurate list of all contracts, agreements and understandings, oral or written, to which the Company is a party or by which the Company is bound, including, without limitation, security agreements, license agreements, software development agreements, credit agreements, conditional sales agreements, instruments relating to the borrowing of money, and distributorship agreements. Except as set forth on Schedule 2.11 to the Disclosure Memorandum, all contracts set forth in such Schedule are valid, binding and enforceable in accordance with their terms against each party thereto, are in full force and effect, the Company has performed all obligations imposed - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 15 22 upon it thereunder, and neither the Company nor, to the best of the Company's knowledge, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default by the Company or, to the best of the Company's knowledge, any other party thereunder. True and complete copies of each such written contract (or written summaries of the terms of any such oral contract) have been heretofore delivered to Sierra. Except as specifically set forth on Schedule 2.11 to the Disclosure Memorandum, the Company has no: (a) agreements, contracts, commitments or restrictions requiring the Company to make any charitable contribution; (b) purchase contracts or commitments of the Company that continue for a period of more than 12 months or are in excess of the normal, ordinary and usual requirements of its business or that are at an excessive price to the extent that such excess would be material to the Company's business; (c) outstanding sales or service contracts, commitments or proposals of the Company which are expected by the Company to result in any material loss or the realization of substantially less than the Company's usual and customary margins upon completion or performance thereof, in excess of the inventory reserve provided in the Company Balance Sheet, or any outstanding contracts, bids, or sales or service proposals quoting prices which the Company, based upon the Company's current operations, expects not to result in a profit; (d) agreements, understandings, arrangements or contracts that are not, except as provided by law to the contrary without regard to the express terms of such contract, cancellable by it within 30 days' notice without liability, penalty or premium, any agreement or arrangement providing for the payment of any bonus or commission based on sales or earnings, or any compensation agreement or arrangement affecting or relating to former employees of the Company; (e) employment agreement, whether express or implied, or any other agreement for services that contains any severance or termination pay liabilities or obligations; (f) restriction by agreement from carrying on its business anywhere in the world; (g) notice that any party to a contract intends to cancel, terminate or refuse to renew such contract or to exercise or decline to exercise any option or right thereunder; or (h) material disagreement with any of its suppliers or customers. 2.12 CUSTOMERS AND SUPPLIERS Schedule 2.12 to the Disclosure Memorandum sets forth: (a) a complete and accurate list of the customers of the Company accounting for 2% or more of the Company's sales during the fiscal year last ended showing the approximate total sales by the Company to each - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 16 23 such customer during the fiscal year last ended and (b) a complete and accurate list of the suppliers of the Company from whom the Company has purchased 5% or more of the goods or services purchased by the Company in the fiscal year last ended. The Company has no reasonable basis to expect any material modification to its relationship with any customer or supplier named on Schedule 2.12 to the Disclosure Memorandum. 2.13 ORDERS, COMMITMENTS AND RETURNS Schedule 2.13 to the Disclosure Memorandum contains an accurate summary of the Company's total backlog of orders (including all accepted and unfulfilled sales orders) and the aggregate of all outstanding purchase orders issued by the Company (which include all contracts or commitments for the purchase by the Company of materials or other supplies). All such sale and purchase commitments were made in the ordinary course of business. Except as set forth in Schedule 2.13 to the Disclosure Memorandum there are no outstanding claims against the Company to return merchandise with an aggregate retail value in excess of $5,000 by reason of alleged overshipments, defective merchandise, missed delivery dates, incorrect quantities or otherwise, or of merchandise in the hands of customers under an understanding that such merchandise would be returnable. 2.14 CLAIMS AND LEGAL PROCEEDINGS Except as set forth on Schedules 2.14 and 2.17 to the Disclosure Memorandum, there are no claims, actions, suits, arbitrations, investigations or proceedings pending or involving or, to the Company's best knowledge, threatened against the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person. To the Company's best knowledge, there is no valid basis for any claim, action, suit, arbitration, proceeding or investigation (other than as noted on Schedule 2.14 or 2.17 to the Disclosure Memorandum) which could reasonably be expected to be materially adverse to the business, business prospects, assets, operations or condition (financial or other) of the Company before or by any Person. There are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company is a party which involve the transactions contemplated herein or which would have a material adverse effect upon the business, business prospects, assets, operations or condition (financial or other) of the Company. 2.15 LABOR MATTERS There are no material labor disputes, employee grievances or disciplinary actions pending or, to the Company's best knowledge, threatened against or involving the Company or any of its present or former employees. The Company has complied with all provisions of law relating to employment and employment practices, terms and conditions of employment, wages and hours, the failure to comply with which could have a material adverse effect upon the business, business prospects, assets, operations or conditions (financial or other) of the Company. The Company is not engaged in any unfair labor practice and has no liability for any arrears of wages or Taxes or penalties for failure to comply with any such provisions of - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 17 24 law, except for back pay to the Shareholders as referenced in Section 1.6.3(c) hereof. There is no labor strike, dispute, slowdown or stoppage pending or, to the Company's best knowledge, threatened against or affecting the Company, and the Company has not experienced any work stoppage or other labor difficulty since its incorporation. No collective bargaining agreement is binding on the Company. The Company has no knowledge of any organizational efforts presently being made or threatened by or on behalf of any labor union with respect to employees of the Company, and the Company has not been requested by any group of employees or others to enter into any collective bargaining agreement or other agreement with any labor union or other employee organization. Each employee, officer and consultant of the Company has executed an Employee Non-Disclosure Agreement in the form provided to Sierra. To the best of the Company's knowledge, no employee (or person performing similar functions) of the Company is in violation of any such agreement or any employment agreement, noncompetition agreement, patent disclosure agreement, invention assignment agreement, proprietary information agreement or other contract or agreement relating to the relationship of such employee with the Company or any other party, and the Company will use its best efforts to prevent any such violation. 2.16 EMPLOYEE BENEFIT PLANS Except as set forth on Schedule 2.16 to the Disclosure Memorandum, the Company has no bonus, deferred compensation, incentive, severance pay, pension, profit-sharing, retirement, stock purchase, stock option or any other employee benefit plan, employee fringe benefit plan, arrangement or practice with regard to present or former employees as to which the Company has any liability ("Employee Benefit Plan"), whether formal or informal. Schedule 2.16 to the Disclosure Memorandum contains an accurate and complete description of, and sets forth the annual amount expected to be payable for the fiscal year last ended pursuant to, each Employee Benefit Plan, whether formal or informal. The Company Balance Sheet reflects in the aggregate all amounts accrued but unpaid under the aforesaid plans and arrangements as of the date thereof. The Company has no agreement, arrangement or commitment, whether formal or informal and whether legally binding or not, to create any additional plan or arrangement or to modify or amend any existing Employee Benefit Plan. The Company has delivered to Sierra true, correct and complete copies of all written Employee Benefit Plans of the Company, all contracts related thereto and the most recently available annual reports, summary plan descriptions, IRS Form 5500s (or 5500-C or 5500-R) and favorable determination letters for such plans. The Company is in compliance in all material respects with the terms of its Employee Benefit Plans and with all applicable laws and regulations, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. The Company has extinguished any liabilities to participants, beneficiaries and the Pension Benefit Guaranty Corporation which may have arisen under any such plans previously, but not currently, maintained by them and expects to incur no future liabilities with regard to such plans. Neither the Company nor any "affiliate" of the Company is a party to or has ever made any contributions to, or is subject to any liability with respect to, any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA or any defined benefit plan within the meaning of Section 3(35) of ERISA. The term "affiliate" means any company, trade or business which is a member of the same control - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 18 25 group, as defined in Code Section 414(b) or 414(c), with the Company, or any company, trade or business which is a member of an affiliated service group, as defined in Code Section 414(m) or 414(o) with the Company. No prohibited transaction (within the meaning of ERISA Section 406 or Code Section 4975) or failure to meet the requirements of Code Section 4980B(f) has occurred with respect to any Employee Benefit Plan which could subject the Company to any liability. There are no actions, suits or claims pending (other than routine claims for benefits) or which could reasonably be expected to be asserted against any Employee Benefit Plan or the assets of any such plan. 2.17 PATENTS, TRADEMARKS, ETC. Set forth on Schedule 2.17 to the Disclosure Memorandum is a true and complete list of all inventions, patents, trademarks, trade names, brand names, copyrights, Software Products (as defined below), trade secrets and formulae (collectively, the "Listed Intellectual Property") of any kind now used or anticipated to be used in the business of the Company. Schedule 2.17 contains a complete and accurate list of all licenses or agreements which in any way affect the rights of the Company to any of the Listed Intellectual Property (the "Intellectual Property Licenses"); such list indicates the specific Listed Intellectual Property affected by each such license or agreement. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, neither the Company's operations nor any Listed Intellectual Property or Intellectual Property License infringes or provides any basis to believe that its operations or any Listed Intellectual Property or Intellectual Property License would infringe upon any validly issued or pending trademark, trade name, service mark, copyright or, to the knowledge of the Company, any validly issued or pending patent or other right of any other Person, nor, to the knowledge of the Company, is there any infringement by any other Person of any of the Listed Intellectual Property or of the intellectual property to which the Intellectual Property Licenses relate. The consummation of the transactions contemplated hereby and by the other Operative Documents will not alter or impair the Company's rights to any of the Listed Intellectual Property or under any Intellectual Property License. The manner in which the Company has manufactured, packaged, shipped, advertised, labeled and sold its products complies with all applicable laws and regulations pertaining thereto. Except as set forth on Schedule 2.17 of the Disclosure Memorandum, the Company is the sole and exclusive owner or licensee of: (a) the Listed Intellectual Property, the Intellectual Property Licenses and the technology, know-how and processes now used by it, or used in connection with any product now being manufactured and sold by it, in the manner that such product is now being manufactured and sold; and (b) all rights, title and interest of whatever kind or nature throughout the world in and to the fully or partially developed computer software products listed on Schedule 2.17 to the Disclosure Memorandum (the "Software"), with all modifications, enhancements and additions thereto, including, without limitation, all rights in and to all versions thereof and all source code, object code, manuals and other documentation and - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 19 26 related materials thereof (collectively, the "Software Products"). Without limiting the generality of the above, the Software Products shall also include all of the Company's related programs, trade secrets, algorithms and processes relating to the Software Products or such programs, the Company's copyright in and to each of the Software Products and all works derivative therefrom (including the registrations of copyright listed on Schedule 2.17 to the Disclosure Memorandum), all current, previous, enhanced and developmental versions of the source and object code and any variations thereof, all user and programmer documentation, all design specifications, all maintenance and installation job control language, all system documentation (including all flow charts, systems procedures and program component descriptions), all procedures for modification and preparation for the release of enhanced versions and all test data available (excluding all proprietary information of third parties) with respect to the Software Products. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, each of the Intellectual Property Licenses is valid, binding and enforceable in accordance with its terms against the parties thereto, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor, to the best of the Company's knowledge, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default by the Company or, to the best of the Company's knowledge, any other party thereunder. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, the Company has not received notice that any party to any of the Intellectual Property Licenses intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. No licenses, sublicenses, covenants or agreements have been granted or entered into by the Company in respect of any of the Listed Intellectual Property except the Intellectual Property Licenses. No director, officer, shareholder or employee of the Company owns, directly or indirectly, in whole or in part, any of the Listed Intellectual Property. The Company does not know and does not have any reasonable basis to believe that there exist any new developments in the manufacture or marketing of the products of the Company or any new or improved products or processes useful in connection with the business of the Company as now conducted or as presently anticipated to be conducted that would have a material adverse effect upon the business, business prospects, assets, operations or condition (financial or other) of the Company. None of the officers of the Company and none of the Company's employees, consultants, agents, representatives or advisers has entered into any agreement regarding know-how, trade secrets, assignment of rights in inventions, or prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than the Company which would have an adverse effect upon the Company's business or products. Except as set forth in the Disclosure Memorandum, to the Company's knowledge, no Person has asserted any claim of infringement or other interference with third-party rights with respect to the Listed Intellectual Property. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, (i) the Company has not disclosed any source code regarding the Software Products to any person other than an employee of the Company or to Sierra or the Purchaser, except for any disclosure that would not have a material adverse effect on the - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 20 27 business, business prospects, assets, operations or conditions (financial or other) of the Company; (ii) the Company has at all times maintained reasonable procedures to protect and has enforced all trade secrets of the Company; (iii) neither the Company nor any escrow agent is under any contractual or other obligation to disclose the source code or any other proprietary information included in or relating to the Software Products nor, to the knowledge of the Company, is any other party to the Intellectual Property Licenses or any escrow agent under any such obligation to disclose any source code or other proprietary information included in or relating to Software Products, if any, that are licensed to the Company, to any person or entity and no event has taken place, including the execution of this Agreement or any related change in the Company's business activities, which would give rise to such obligation; and (iv) the Company has not deposited any source code regarding the Software Products into any source code escrows or similar arrangements. If, as disclosed on Schedule 2.17 to the Disclosure Memorandum, the Company has deposited any source code to Software Products into source code escrows or similar arrangements, no event has occurred that has or could reasonably form the basis for a release of such source code from such escrows or arrangements. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, the Software Products are free from known significant defects and substantially conform to the specifications, documentation and sample demonstration furnished to the Company's customers, Sierra or the Purchaser. 2.18 ACCOUNTS RECEIVABLE All accounts receivable of the Company reflected in the Company Balance Sheet, or existing at the Effective Time, represent sales actually made in the ordinary course of business. Except as described on Schedule 2.18 to the Disclosure Memorandum, the bad debt reserves and sales return allowances reflected in the Company Balance Sheet are adequate. Set forth on Schedule 2.18 to the Disclosure Memorandum is a full and complete list of all consolidated accounts receivable of the Company existing as of June 30, 1995. 2.19 INVENTORY Subject to such reserves and write-downs as may be reflected in the Financial Statements, all items in the inventory reflected in the Company Balance Sheet or as currently owned by the Company are of a quality and quantity usable and saleable in the ordinary course of business. Such inventory consists of materials and supplies used or sold in the business of the Company. 2.20 CORPORATE BOOKS AND RECORDS The Company has furnished to Sierra or its representatives for their examination true and complete copies of (a) the Articles of Incorporation and Bylaws of the Company as currently in effect, including all amendments thereto, (b) the minute books of the Company and (c) the stock transfer books of the Company. Such minutes reflect all meetings of the - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 21 28 Company's shareholders, Board of Directors and any committees thereof since the Company's inception, and such minutes accurately reflect in all material respects the events of and actions taken at such meetings. Such stock transfer books accurately reflect all issuances and transfers of shares of capital stock of the Company since its inception. 2.21 LICENSES, PERMITS, AUTHORIZATIONS, ETC. Except as identified in Schedules 2.2 and 2.6 to the Disclosure Memorandum, the Company has received all currently required governmental approvals, authorizations, consents, licenses, orders, registrations and permits of all agencies, whether federal, state, local or foreign, the failure to obtain which would have a material adverse effect on its business, business prospects, assets, operations or condition (financial or other). The Company has not received any notifications of any asserted present failure by it to have obtained any such governmental approval, authorization, consent, license, order, registration or permit, or past and unremedied failure to obtain such items. 2.22 COMPLIANCE WITH LAWS (a) Except as described on Schedule 2.22 to the Disclosure Memorandum, the Company has complied, and is in compliance, with all federal, state, local and foreign laws, rules, regulations, ordinances, decrees and orders applicable to the operation of its business, to its employees, or to the Real Property and the Personal Property, the failure to comply with which would, individually or in the aggregate, have a material adverse effect on the business, assets or operations of the Company, including, without limitation, all such laws, rules, ordinances, decrees and orders relating to antitrust, consumer protection, currency exchange, environmental protection, equal opportunity, health, occupational safety, pension, securities and trading-with-the-enemy matters. Except as described on Schedule 2.22 to the Disclosure Memorandum, the Company has not received any notification of any asserted present or past unremedied failure by the Company to comply with any of such laws, rules, ordinances, decrees or orders. (b) To the Company's best knowledge, the Company is not currently in violation of any applicable building, zoning, environmental or other law, ordinance or regulation in respect of the Real Property or its plant, structures or operations. No such law, ordinance or regulation would reasonably be expected to prevent the use of substantially all of the Real Property for the conduct thereon of the business of the Company. (c) To the Company's best knowledge, the Company is not in violation of, and has not violated, in connection with the ownership, use, maintenance or operation of the Real Property or the Personal Property or the conduct of their businesses, any applicable federal, state, county or local statutes, laws, regulations, guidances, rules, ordinances, codes, licenses, permits, judgments, writs, decrees, injunctions or orders of any governmental entity relating to environmental (air, water, groundwater, soil, noise and odor) matters ("Environmental Laws"), including, by way of illustration and not by way of limitation, the Clean Air Act, the Federal Water Pollution Control Act, the Resources Conservation and - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 22 29 Recovery Act and the regulations issued thereunder, the Comprehensive Environmental, Response, Compensation, and Liability Act, the Clean Water Act, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the Hazardous Waste Control Act, comparable Colorado laws, and the regulations issued thereunder, and all other applicable federal, state, county, local and foreign environmental requirements where such violation might have a material adverse impact on the Company's business, business prospects, assets, operations or condition (financial or other). (d) Except as set forth on Schedule 2.22 to the Disclosure Memorandum, to the Company's best knowledge, the Company has not, in violation of any Environmental Laws, transported, stored, treated, recycled, handled or disposed of, or allowed or arranged for any third party to transport, store, treat, recycle, handle or dispose of (i) any flammable substances, explosives, radioactive materials, hazardous substances, hazardous wastes, toxic substances, pollutants, contaminants or any wastes, materials or substances identified in or regulated by any Environmental Laws; (ii) asbestos, polychlorinated biphenyls, urea formaldehyde, nuclear fuel or material, chemical waste, carcinogens and radon, all to the extent regulated by any Environmental Laws; and (iii) gasoline, oil and other petroleum products (collectively, "Regulated Substances"), to or at any location other than a location lawfully permitted to receive such material for such purposes at such time. Set forth on such Schedule 2.22 is a complete and accurate list of all locations to which the Company has ever transported, or caused to be transported or allowed or arranged for any third party to transport, any type of Regulated Substances for storage, treatment, handling, processing, burning, recycling or disposal, as required by the Environmental Laws. (e) Except as set forth on such Schedule 2.22, no real property ever owned by the Company, including, but not limited to, all surface and subsurface soil, sediments, groundwater and surface water located on, in or under such real property, was during the period of use by the Company being contaminated with any Regulated Substances or constituents thereof, which contamination has given or may give rise to any material obligation under any Environmental Laws, the common law or otherwise. To the present, actual knowledge of the Company without investigation, except as set forth on such Schedule 2.22, no real property adjacent to or adjoining the Real Property has been so contaminated. To the knowledge of the Company without investigation, except as set forth on such Schedule 2.22, no polychlorinated biphenyls, lead-based materials or asbestos are present in or on the Real Property or in any equipment located therein, in violation of any Environmental Laws. (f) Except as set forth on such Schedule 2.22, the Company has recorded or filed and has provided to Sierra true, accurate and complete copies of all reports with respect to any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of drums, barrels, containers or other closed receptacles) (any of the foregoing, a "Release"), caused by the Company and required by any Environmental Laws to be filed by the Company with any government authority. Except as disclosed on such Schedule 2.22, the - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 23 30 Company has maintained all environmental and operating documents and records substantially in the manner and for the time periods required by any Environmental Laws. (g) Except as disclosed on such Schedule 2.22, to the Company's knowledge, the Company has not caused the Release of any Regulated Substances or constituents thereof on, from or off-site of its property, or of any Release from any facility owned or operated by third parties but with respect to which any of them is alleged to have liability. (h) Except as set forth on such Schedule 2.22, to the Company's knowledge, there are no tanks which, when considered with all associated piping, are located either wholly or partially below the surface of the ground, and, without regard to whether they are in contact with soil, within a building or contamination structure or otherwise are located in, on or under the Real Property, and, except as set forth on such Schedule 2.22, to the Company's knowledge, the Real Property, or any portion thereof, is not a "wetland" as defined by any law, environmental or otherwise, and is not subject to regulation. 2.23 INSURANCE The Company maintains (a) insurance on all of its property (including leased premises) that insures against loss or damage by fire or other casualty (including extended coverage) and (b) insurance against liabilities, claims and risks of a nature and in such amounts as are normal and customary in the software publication industry. All insurance policies of the Company are in full force and effect, all premiums with respect thereto covering all periods up to and including the date this representation is made have been paid, and no notice of cancellation or termination has been received with respect to any such policy or binder. Such policies or binders are sufficient for compliance with all requirements of law currently applicable to the Company and of all agreements to which the Company is a party, will remain in full force and effect through the respective expiration dates of such policies or binders without the payment of additional premiums, and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. The Company has not been refused any insurance with respect to its assets or operations, nor has its coverage been limited, by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance. 2.24 BROKERS OR FINDERS The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by or on behalf of the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Merger, this Agreement or any transaction contemplated hereby, except that the Company did engage Christopher Schember of Business Development Advisors as a broker and finder, whose fee will be paid as provided in Section 1.6.4 hereof. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 24 31 2.25 GOVERNMENT CONTRACTS The Company has never been, nor as a result of the consummation of the transactions contemplated by this Agreement (without giving any consideration to the identity or conduct of the Purchaser or Sierra) will it be, suspended or debarred from bidding on contracts or subcontracts for any agency of the United States government, nor has such suspension or debarment been threatened or action for suspension or debarment been commenced. The Company has not been nor is it now being audited or, to the knowledge of the Company, investigated by the United States Government Accounting Office, the United States Department of Justice, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency or the inspector general of any agency of the United States government, nor, to the knowledge of the Company, has such audit or investigation been threatened. To the Company's knowledge, there is no valid basis for the Company's suspension or debarment from bidding on contracts or subcontracts for any agency of the United States government and there is no valid basis for a claim pursuant to an audit or investigation by the United States Government Accounting Office, the United States Department of Justice, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency or the inspector general of any agency of the United States government, or any prime contractor. The Company has never had a contract or subcontract terminated for default or has ever been determined to be nonresponsible by any agency of the United States government. Except as set forth on Schedule 2.25 to the Disclosure Memorandum, the Company has no outstanding agreements, contracts or commitments which require it to obtain or maintain a government security clearance. 2.26 ABSENCE OF QUESTIONABLE PAYMENTS Neither the Company, nor any director or officer, nor, to the Company's knowledge, any agent, employee or other Person acting on behalf of the Company, has used any Company funds for improper or unlawful contributions, payments, gifts or entertainment, or made any improper or unlawful expenditures relating to political activity to government officials or others. The Company has adequate financial controls to present such improper or unlawful contributions, payments, gifts, entertainment or expenditures. Neither the Company, nor any current director or officer, nor, to the Company's knowledge, any agent, employee or other Person acting on behalf of the Company, has accepted or received any improper or unlawful contributions, payments, gifts or expenditures. 2.27 PERSONNEL Schedule 2.27 to the Disclosure Memorandum sets forth a true and complete list of: (a) the names and current compensation amounts of all directors and elected and appointed officers of the Company and the family relationships, if any, among such persons; - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 25 32 (b) the wage rates for nonsalaried and nonexecutive salaried employees of the Company by classification, and all labor union contracts (if any); (c) all group insurance programs in effect for employees of the Company; and (d) the names and current compensation packages of all independent contractors and consultants of the Company. The Company is not in default with respect to any of its obligations referred to in clause (b) above. 2.28 BANK ACCOUNTS Schedule 2.28 to the Disclosure Memorandum sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the Company maintains safe deposit boxes or accounts of any nature and the names of all Persons authorized to draw thereon, make withdrawals therefrom or have access thereto. 2.29 INSIDER INTERESTS Except as set forth on Schedule 2.29 to the Disclosure Memorandum, no Shareholder or officer or director or other representative of the Company has any interest (other than as a Shareholder of the Company) (a) in any property, real or personal, tangible or intangible, used in or directly pertaining to the business of the Company, including, without limitation, inventions, patents, trademarks or trade names, or (b) in any agreement, contract, arrangement or obligation relating to the Company, its present or prospective business or its operations. Except as set forth on Schedule 2.29 to the Disclosure Memorandum, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, holders, affiliates or any affiliate thereof. The Company and its officers and directors have no interest, either directly or indirectly, in any entity, including, without limitation, any corporation, partnership, joint venture, proprietorship, firm, licensee, business or association (whether as an employee, officer, director, shareholder, agent, independent contractor, security holder, creditor, consultant or otherwise) that presently (a) provides any services, produces and/or sells any products or product lines, or engages in any activity which is the same, similar to or competitive with any activity or business in which the Company is now engaged or proposes to engage; (b) is a supplier, customer, creditor, or has an existing contractual relationship with any of the Company's employees (or persons performing similar functions); or (c) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of the Company or any property, real or personal, tangible or intangible, that is necessary or desirable for the present or anticipated future conduct of the Company's business. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 26 33 2.30 SECURITIES ACT MATTERS Each of the Shareholders hereby acknowledges, represents and warrants to the Purchaser and Sierra as follows: (a) Ability to Bear Risk. Such Shareholder is in a financial position to hold the Securities for an indefinite period of time and is able to bear the economic risk and withstand a complete loss of its investment in the Securities. (b) SEC Documents. Such Shareholder acknowledges that she has reviewed to her satisfaction the following publicly available filings and reports of Sierra: the 1994 Annual Report to Shareholders, the Form 10-K for the fiscal year ended March 31, 1994, the Form 10-K for the fiscal year ended March 31, 1995, Forms 10-Q for the fiscal quarters ended June 30, September 30 and December 31, 1994, and the Form 8-K filed with the Securities and Exchange Commission (the "SEC") on December 30, 1994 (collectively, the "Public Filings"). Such Shareholder acknowledges that an investment in the Securities involves a high degree of risk. (c) Professional Advice. Such Shareholder has obtained, to the extent that it deems necessary, its own professional advice with respect to the risks inherent in acquiring the Securities, the condition of Sierra and the suitability of its investment in the Securities in light of its financial condition and investment needs. (d) Sophistication. Such Shareholder, either alone or with the assistance of its professional advisors, is a sophisticated investor, is able to fend for itself in the transactions contemplated by this Agreement relating to the Securities and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment in the Securities. (f) Access to Information. Such Shareholder has been given access to full and complete information regarding Sierra and the Company, including, in particular, the current respective financial conditions of Sierra and the Company and the risks associated therewith, and has utilized such access to its satisfaction for the purpose of obtaining information about Sierra. (g) Acquisition Entirely for Own Account. The Securities are being acquired by such Shareholder for investment for its respective account, not as a nominee or agent, and not with a view to the distribution of any part thereof; such Shareholder has no present intention of selling, granting any participation in or otherwise distributing any of the Securities in a manner contrary to the 1933 Act or to any applicable state securities or Blue Sky law, nor does such Shareholder have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant a participation to such person or to any third person with respect to any of the Securities. (h) Due Diligence. Such Shareholder has conducted its own due diligence investigation of Sierra and its business and analysis of the merits and risks of an investment in - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 27 34 the Securities being acquired pursuant to this Agreement and is not relying on anyone else's investigation or analysis of Sierra or its business or the merits and risks of an investment in the Securities, other than professionals, if any, employed specifically by it to assist it. (i) Restricted Securities. Such Shareholder acknowledges that the Securities have not been and will not prior to issuance be registered under the 1933 Act and that the Securities are characterized under the 1933 Act as "restricted securities" and, therefore, cannot be sold or transferred unless such sale or transfer is registered under the 1933 Act or an exemption from such registration is available. The financial condition of such Shareholder is such that it is not likely that it will be necessary to dispose of any of the Securities in the foreseeable future. In this connection, such Shareholder represents that it is familiar with Rule 144 under the 1933 Act as presently in effect, and understands the resale limitations imposed thereby and by the 1933 Act. (j) Exemption Reliance. Such Shareholder has been advised that the Securities have not been registered under the 1933 Act or any applicable state securities laws, but are being issued under this Agreement pursuant to exemptions from such laws, and that Sierra's reliance upon such exemptions is predicated in part upon the Shareholder's representations contained herein. (k) Further Limitations on Disposition. Without in any way limiting the representations set forth herein, each Shareholder further agrees not to make any disposition of all or any portion of the Securities unless and until: (i) There is in effect a registration statement under the 1933 Act covering such proposed disposition and such disposition is made in accordance with such registration statement; (ii) (A) Such Shareholder shall have notified Sierra of the proposed disposition and shall have furnished Sierra with a detailed statement of the circumstances surrounding the proposed disposition and (B) if reasonably requested by Sierra, such Shareholder shall have furnished Sierra with an opinion of counsel, reasonably satisfactory to Sierra, that such disposition will not require registration under the 1933 Act; or (iii) Sierra shall be satisfied that such proposed disposition complies in all respects with Rule 144 or Rule 145 under the 1933 Act or any successor rule providing a safe harbor for such disposition without registration. (l) Residency. For purposes of the application of state securities laws, each Shareholder is a resident of the jurisdiction specified on Schedule 2.30 to the Disclosure Memorandum. (m) Legend. It is understood that the certificates evidencing the Securities may bear the following legend: - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 28 35 The securities evidenced by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and no interest therein may be sold, distributed, assigned, offered, pledged or otherwise transferred unless (i) there is an effective registration statement under the Act and applicable state securities laws covering any such transaction involving such securities, (ii) this corporation receives an opinion of legal counsel for the holder of the securities reasonably satisfactory to this corporation stating that such transaction is exempt from registration, or (iii) this corporation otherwise satisfies itself that such transaction is exempt from registration. 2.31 POOLING MATTERS The Company has not taken and will not take, and the Shareholders have not taken and will not take, directly or indirectly, and the Company and the Shareholders will use their respective best efforts to prevent any other Person from taking, any actions, including without limitation any recapitalization or repurchase or redemption of any securities of the Company, or any grant or acceleration of any options to acquire securities of the Company, or any purchase or sale of securities of Sierra, and there have occurred no other events with respect to or involving the Company or its Shareholders, which taken individually or together would affect the ability of Sierra to account for the transactions contemplated by this Agreement as a "pooling of interests" transaction in accordance with generally accepted accounting principles, and neither the Company nor the Shareholders is aware of any facts which otherwise could prevent such accounting treatment. 2.32 FULL DISCLOSURE No information furnished by the Company or the Shareholders to Sierra or the Purchaser in connection with this Agreement (including, but not limited to, the Financial Statements and all information in the Disclosure Memorandum and the other Exhibits hereto) or the other Operative Documents, or by the Company to the Shareholders in connection with their approval of the Merger and execution and delivery of this Agreement, is false or misleading in any material respect. Neither the Company nor any Shareholder has made any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made or information delivered in or pursuant to this Agreement, including, but not limited to, all Schedules to the Disclosure Memorandum and Exhibits hereto, or in or pursuant to the other Operative Documents, or in or pursuant to closing certificates executed or delivered by the Shareholders or the Company, not misleading. The Company has provided to Sierra an accurate and complete copy of the disclosure materials (the "Shareholder Disclosure Statement") delivered to the Shareholders in connection with their consideration and approval of the Merger and the other transactions contemplated hereby. The Shareholder Disclosure Statement contains all information required to be set forth therein under the Colorado Corporation Code. The Shareholder Disclosure Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein not misleading. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 29 36 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND SIERRA To induce the Company and the Shareholders to enter into and perform this Agreement and the Operative Documents, the Purchaser and Sierra jointly and severally represent and warrant to the Company and the Shareholders as follows in this Article III: 3.1 ORGANIZATION Sierra is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Purchaser is a corporation duly organized and validly existing under the laws of the State of Washington. Each of the Purchaser and Sierra has full corporate power and authority to own, operate and lease its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform this Agreement and the Operative Documents to which either is a party, and to carry out the transactions contemplated hereby and thereby. 3.2 ENFORCEABILITY All corporate action on the part of the Purchaser and Sierra and their respective officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Operative Documents, the consummation of the Merger, and the performance of all of Sierra's and the Purchaser's respective obligations under this Agreement and the Operative Documents has been taken or will be taken prior to the Closing. This Agreement has been, and each of the Operative Documents to which the Purchaser is a party will have been at the Closing, duly executed and delivered by the Purchaser, and this Agreement is, and each of the Operative Documents to which the Purchaser is a party will be at the Closing, a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. This Agreement has been, and each of the Operative Documents to which Sierra is a party will have been at the Closing, duly executed and delivered by Sierra, and this Agreement is, and each of the Operative Documents to which Sierra is a party will be at the Closing, a legal, valid and binding obligation of Sierra, enforceable against Sierra in accordance with its terms. 3.3 LEGAL PROCEEDINGS There is no claim, action, suit, arbitration, proceeding or investigation pending or, to the best knowledge of the Purchaser or Sierra, threatened against the Purchaser or Sierra before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person, which questions the validity of this Agreement or any action taken or to be taken by the Purchaser or Sierra pursuant to this Agreement or in connection with the transactions contemplated hereby. There are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company is a party which involve the transactions contemplated herein or which would have a material - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 30 37 adverse effect upon the business, business prospects, assets or operations or conditions (financial or other) of the Purchaser or Sierra. 3.4 SECURITIES The Securities to be issued pursuant to this Agreement have been duly authorized for issuance, and such Securities, when issued and delivered to the Shareholders pursuant to this Agreement, shall be validly issued, fully paid and nonassessable. 3.5 NO BROKERS Neither Sierra nor the Purchaser has incurred, and neither will incur, directly or indirectly, as a result of any action taken by or on behalf of Sierra or the Purchaser, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Merger, this Agreement or any transaction contemplated hereby. 3.6 FULL DISCLOSURE Sierra has provided to the Shareholders accurate and complete copies of the Public Filings. As of their respective dates, none of the Public Filings contained any untrue statement of any material fact or omitted any material fact required to be stated therein or necessary to make the statements therein not misleading, except to the extent that any such statement or omission has been modified or superseded in a filing subsequently made with the SEC or in a subsequent public statement by Sierra. 3.7 TAX CONSEQUENCES Neither Sierra nor Purchaser makes any representation or warranty with respect to, and expressly disclaims any responsibility for, any Tax consequences to the Shareholders arising out of the structure or terms of this Agreement, or the negotiation or consummation hereof. Each Shareholder has consulted with his own tax advisor in such matters and shall be solely responsible for any such tax consequences. ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER AND SIERRA The obligations of the Purchaser and Sierra to perform and observe the covenants, agreements and conditions hereof to be performed and observed by them at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by the Purchaser or Sierra: 4.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of the Company and each Shareholder contained herein (including applicable Exhibits or Schedules to the Disclosure Memorandum) and in the - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 31 38 other Operative Documents shall have been true and correct when made and shall be true and correct as of the Closing Date as though made on that date. 4.2 PERFORMANCE OF AGREEMENTS The Company and the Shareholders shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement or any other Operative Document to be performed and complied with by them at or prior to the Closing. 4.3 OPINION OF COUNSEL FOR THE COMPANY The Purchaser and Sierra shall have received the opinion letter of Ireland, Stapleton, Pryer & Pascoe, counsel for the Company and the Shareholders, in their capacities as Shareholders, dated the Closing Date, substantially in the form attached hereto as Exhibit 4.3. 4.4 SHAREHOLDER APPROVAL The Shareholders shall have duly and validly approved the Merger by a vote or written consent in accordance with Colorado Law, and no Shareholders holding, in the aggregate, more than 10% of the shares of Company Common Stock shall have elected to claim dissenters' rights under Colorado Law. 4.5 RESIGNATIONS The Purchaser and Sierra shall have received copies of resignations effective as of the Closing Date of all the officers and directors of the Company. 4.6 CONSENTS TO MERGER The Company shall have received and shall have delivered to Sierra written consents to the Merger from each of the parties (other than the Company) to those agreements, leases, notes or other documents identified on Schedules 2.6 and 2.17 to the Disclosure Memorandum, which consents shall be satisfactory in all respects to Sierra in its sole and absolute discretion. 4.7 OFFICERS' CERTIFICATE The Purchaser and Sierra shall have received a certificate of the President and the Chief Financial Officer of the Company, dated the Closing Date, in form and substance satisfactory to Sierra, certifying that the conditions to the obligations of the Purchaser and Sierra have been fulfilled, as required by Sections 4.1, 4.2, 4.4, 4.9 and 4.12 hereof. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 32 39 4.8 PRINCIPALS' CERTIFICATES The Purchaser and Sierra shall have received certificates from each of the Principals, dated the Closing Date, in form and substance satisfactory to Sierra, certifying that the conditions to the obligations of the Purchaser and Sierra have been fulfilled, as required by Sections 4.1, 4.2, 4.4, 4.9 and 4.12. 4.9 MATERIAL ADVERSE CHANGE Since December 31, 1994 and through the Closing, there shall not have occurred any material adverse change in the business, operations, assets, liabilities, earnings, condition (financial or other), or prospects of the Company, and no material adverse change shall have occurred in any domestic or foreign laws or regulations affecting the Company or in any third party contractual or other business relationships of the Company. 4.10 DUE DILIGENCE The results of Sierra's due diligence investigation of the Company shall be satisfactory in all respects to Sierra in its sole and absolute discretion. 4.11 OPINION OF ACCOUNTANTS The Purchaser and Sierra shall have received an opinion of Clifton, Gunderson & Co., independent certified public accountants, which shall be satisfactory to Sierra in its sole and absolute discretion, to the effect that the Merger contemplated pursuant to this Agreement qualifies for "pooling of interests" accounting treatment. 4.12 APPROVALS AND CONSENTS All transfers of permits or licenses, all approvals, applications or notices to public agencies, federal, state, local or foreign, the granting or delivery of which is necessary for the consummation of the transactions contemplated hereby or for the continued operation of the Company, shall have been obtained, and all waiting periods specified by law shall have passed. All other consents, approvals and notices referred to in this Agreement shall have been obtained or delivered. 4.13 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE All corporate and other proceedings in connection with the transactions contemplated hereby and by the Operative Documents and all documents and instruments incident to such transactions shall have been approved by Sierra's counsel, and Sierra shall have received a certificate of the Secretary of the Company, in form and substance satisfactory to Sierra, as to the authenticity and effectiveness of the actions of the Board of Directors and Shareholders of the Company authorizing the Merger and the transactions contemplated by this Agreement and the Operative Documents and such other documents as are specified by Sierra's counsel. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 33 40 4.14 NONFOREIGN AFFIDAVIT Sierra and the Purchaser shall have received from the Company, pursuant to Section 1445 of the Code, a Foreign Investment in Real Property Tax Act Affidavit in the form attached hereto as Exhibit 4.14. 4.15 COMPLIANCE WITH LAWS The consummation of the transactions contemplated by this Agreement and the Operative Documents shall be legally permitted by all laws and regulations to which Sierra or the Company is subject. 4.16 POOLING OF INTERESTS As of the Closing no facts shall exist and no events shall have occurred that would, in the opinion of Sierra's independent accountants, prevent Sierra from accounting for the Merger contemplated herein as a "pooling of interests" transaction. 4.17 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect which enjoins, restrains, conditions or prohibits consummation of this Agreement or any Operative Document, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Operative Document. 4.18 OPERATIVE DOCUMENTS The Operative Documents shall have been executed and delivered by all parties thereto other than Sierra and the Purchaser. ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY The obligations of the Shareholders and the Company to perform and observe the covenants, agreements and conditions hereof to be performed and observed by them at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by the Company. 5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of the Purchaser and Sierra contained herein and in the other Operative Documents shall have been true and correct when made and shall be true and correct as of the Closing Date as though made on that date. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 34 41 5.2 PERFORMANCE OF AGREEMENTS The Purchaser and Sierra shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement or any other Operative Document to be performed and complied with by them at or prior to the Closing. 5.3 OPINION OF COUNSEL The Shareholders shall have received the opinion letter of Perkins Coie, counsel for Sierra and the Purchaser, dated the Closing Date, substantially in the form attached hereto as Exhibit 5.3. 5.4 OFFICERS' CERTIFICATE The Company shall have received a certificate of the Chief Financial Officer and another officer of Sierra, dated the Closing Date, substantially in the form attached hereto as Exhibit 5.4, certifying that the conditions to the obligations of the Shareholders and the Company have been fulfilled. 5.5 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect which enjoins, restrains, conditions or prohibits consummation of this Agreement or any Operative Document, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Operative Document. 5.6 OPERATIVE DOCUMENTS Sierra and the Purchaser shall have executed and delivered to the Company all the Operative Documents to which they are parties. ARTICLE VI - COVENANTS Between the date of this Agreement and the Effective Time, the parties covenant and agree as set forth in this Article VI. For purposes of this Article VI, all references to the Company shall also include its Subsidiaries. 6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER Unless Sierra shall otherwise agree in writing, the business of the Company shall be conducted in and only in, and the Company shall not take any action except in, the ordinary course of business and in a manner consistent with past practice and in accordance with applicable law; and the Company shall use its best efforts to preserve substantially intact the business organization of the Company, to keep available the services of the current officers, employees and consultants of the Company and to preserve the current relationships of the - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 35 42 Company with customers, suppliers and other persons with which the Company has significant business relations. By way of amplification and not limitation, except as otherwise contemplated by this Agreement, the Company shall not, between the date of this Agreement and the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of Sierra: (a) amend or otherwise change its Articles of Incorporation or Bylaws or equivalent organizational documents; (b) issue, sell, pledge, dispose of, grant, encumber or authorize the issuance, sale, pledge, disposition, grant or encumbrance of (i) any shares of capital stock of any class of the Company, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of the Company or (ii) any assets of the Company, except for sales in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) reclassify, combine, split, subdivide, redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets) any corporation, partnership, other business organization or division thereof or any material amount of assets; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans or advances, except in the ordinary course of business and consistent with past practice; (iii) enter into any contract or agreement other than in the ordinary course of business, consistent with past practice; (iv) authorize any single capital expenditure which is in excess of $5,000 or capital expenditures which are, in the aggregate, in excess of $10,000 for the Company taken as a whole; or (v) enter into or amend any contract, agreement, commitment or arrangement with respect to any matter set forth in this subsection (e); (f) enter into any employment, consulting or agency agreement, or increase the compensation payable or to become payable to its officers, employees or consultants, except for increases in accordance with existing agreements or past practices for employees of the Company who are not officers of the Company, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee; - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 36 43 (g) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures (including, without limitation, procedures with respect to the payment of accounts payable and collection of accounts receivable); (h) make any tax election or settle or compromise any material federal, state, local or foreign income tax liability; (i) pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business and consistent with past practice, of liabilities reflected or reserved against in the Company Balance Sheet or subsequently incurred in the ordinary course of business and consistent with past practice; (j) take any action that would or is reasonably likely to result in any of the representations and warranties of the Company set forth in this Agreement being untrue, or in any covenant of the Company set forth in this Agreement being breached, or in any of the conditions to the Merger specified in Article IV hereof not being satisfied; (k) take or agree to take any action specified in Section 2.8 hereof, or enter into any other material transaction other than those specified above, or agree to do any of the foregoing. 6.2 ACCESS TO INFORMATION; CONFIDENTIALITY From the date hereof to the Effective Time, the Company shall, and shall cause the officers, directors, employees, auditors and agents of the Company to, afford the officers, employees and agents of Sierra complete access at all reasonable times to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company and shall furnish Sierra with all financial, operating and other data and information as Sierra, through its officers, employees or agents, may reasonably request. From the date hereof until the Effective Time, the Company shall provide Sierra with monthly and other financial statements of the Company as they become available internally at the Company, all of which financial statements shall be prepared in conformity with GAAP and shall fairly present the financial position and results of operations of the Company as of the dates and for the periods therein specified. All information obtained by either party or its officers, directors, employees, auditors or agents pursuant to this Section 6.2 shall be kept confidential in accordance with the confidentiality agreement, dated June 19, 1995 (the "Confidentiality Agreement"), between Sierra and the Company. No investigation pursuant to this Section 6.2 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. Upon the Effective Time, the Confidentiality Agreement shall be deemed to have terminated without further action by the parties thereto. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 37 44 6.3 NO SOLICITATION OF TRANSACTIONS The Company shall not, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, the Company or any business combination with the Company or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. The Company immediately shall cease and cause to be terminated all existing discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company shall notify Sierra promptly if any such proposal or offer, or any inquiry or contact with any Person with respect thereto, is made and shall, in any such notice to Sierra, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact and the terms and conditions of such proposal, offer, inquiry or contact. The Company agrees not to release any third party from, or waive any provision of, any confidentiality or standstill agreement to which the Company is a party. 6.4 NOTIFICATION OF CERTAIN MATTERS The Company shall give prompt notice to Sierra of (a) the occurrence or nonoccurrence of any event which would be likely to cause any representation or warranty of the Company contained in this Agreement to be untrue or inaccurate and (b) any failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.4 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 6.5 FURTHER ACTION; REASONABLE BEST EFFORTS Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby, including, without limitation, using its reasonable best efforts to obtain all waivers, licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company as are necessary for the consummation of the transactions contemplated hereby and to fulfill the conditions to the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, each party to this Agreement shall use its reasonable best efforts to take all such action. No Shareholder will undertake any course of action inconsistent with this Agreement or which would make any representations, warranties or agreements made by such party in this Agreement or any other Operative Documents untrue or any conditions precedent to this Agreement unable to be satisfied at or prior to the Closing. After the Closing Date, each party hereto, at the request of and without any further cost or expense to - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 38 45 the other parties, will take any further actions necessary or desirable to carry out the purposes of this Agreement or any other Operative Document, to vest in the Surviving Corporation full title to all properties, assets and rights of the Company and to effect the issuance of the Sierra Common Stock to the Shareholders pursuant to the terms and conditions hereof. 6.6 PUBLICITY The Company and the Shareholders shall not issue any press release or otherwise make any statements to any third party with respect to this Agreement or the transactions contemplated hereby without the prior written consent of Sierra. ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER 7.1 TERMINATION This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of this Agreement by the Shareholders of the Company): (a) by mutual written consent duly authorized by the Boards of Directors of the Company and Sierra; (b) by either the Company or Sierra, if the Merger has not been consummated by July 31, 1995; provided, however, that the right to terminate this Agreement under this subsection (b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by either the Company or Sierra, if there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Sierra, the Purchaser or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and nonappealable; provided, however, that the party seeking to terminate this Agreement pursuant to this subsection (c) shall have used all reasonable efforts to remove such judgment, injunction, order or decree; (d) at any time prior to the Closing by Sierra if, at any time in the course of its legal, accounting, financial or operational due diligence investigation as to the Company, it shall have become aware of any facts or circumstances that it was not aware of on the date hereof, or any additional facts and circumstances as to matters of which it was aware on the date hereof, in either case that would, in the reasonable judgment of Sierra, make it inadvisable to consummate the Merger or the other transactions contemplated hereby; (e) by the Company, in the event of a material breach by Sierra of any representation, warranty or agreement contained herein which has not been cured or is not curable by July 31, 1995; or - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 39 46 (f) by Sierra, in the event of a material breach by the Company of any representation, warranty or agreement contained herein which has not been cured or is not curable by July 31, 1995. 7.2 EFFECT OF TERMINATION In the event of the termination of this Agreement pursuant to Section 7.1 hereof, there shall be no further obligation on the part of any party hereto, except that nothing herein shall relieve any party from liability for any breach hereof. 7.3 AMENDMENT This Agreement may be amended by Sierra and the Company at any time prior to the Effective Time; provided, however, that no amendment may be made which would reduce the amount or change the type of consideration into which each share of Company Common Stock shall be converted upon consummation of the Merger without the prior written consent of the Shareholders. This Agreement may not be amended except by an instrument in writing signed by Sierra and the Company. 7.4 WAIVER At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any obligation or other act of any other party hereto, (b) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any agreement or condition contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE VIII - SURVIVAL AND INDEMNIFICATION 8.1 SURVIVAL All representations and warranties contained in this Agreement or in the other Operative Documents or in any certificate delivered pursuant hereto or thereto shall survive the Closing for a period of one year, and shall not be deemed waived or otherwise affected by any investigation made or any knowledge acquired with respect thereto. The covenants and agreements contained in this Agreement or in the other Operative Documents shall survive the Closing and shall continue until all obligations with respect thereto shall have been performed or satisfied or shall have been terminated in accordance with their terms. 8.2 INDEMNIFICATION BY THE SHAREHOLDERS From and after the Closing Date, the Shareholders shall jointly and severally indemnify and hold Sierra and its affiliates (the "Sierra Indemnified Parties") harmless from and against, and shall reimburse the Sierra Indemnified Parties for, any and all losses, damages, debts, liabilities, obligations, judgments, orders, awards, writs, injunctions, decrees, fines, penalties, - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 40 47 taxes, costs or expenses (including but not limited to any legal or accounting fees of expenses) ("Losses") arising out of or in connection with: (a) any inaccuracy in any representation or warranty made by the Company or the Shareholders in this Agreement or in any other Operative Document or in any certificate delivered pursuant hereto or thereto, (b) any failure by the Company or any Shareholder to perform or comply, in whole or in part, with any covenant or agreement in this Agreement or in any other Operative Document; or (c) any accounts receivable reflected on the balance sheet of the Company dated May 31, 1995 which are not collected prior to December 31, 1995; provided that Sierra shall use commercially reasonable efforts to collect all such accounts receivable; and provided further, that Sierra shall assign any such uncollected accounts to the Shareholders upon payment by the Shareholders of all liabilities arising in connection with this section 8.2(c). 8.3 INDEMNIFICATION BY SIERRA From and after the Closing Date, Sierra shall indemnify and hold harmless each Shareholder and her successors, assigns, heirs and legatees (the "Company Indemnified Parties"; together with the Sierra Indemnified Parties, the "Indemnified Parties") from and against, and shall reimburse the Company Indemnified Parties for, any and all Losses arising out of or in connection with: (a) any inaccuracy in any representation or warranty made by the Purchaser or Sierra in this Agreement or in any other Operative Document or in any certificate delivered pursuant hereto or thereto, (b) any failure by the Sierra to perform or comply, in whole or in part, with any covenant or agreement in this Agreement or in any other Operative Document 8.4 THRESHOLD AND LIMITATIONS (a) No Indemnified Party shall be entitled to receive any indemnification payment with respect to any Claims until the aggregate Losses for which such Indemnified Parties would be otherwise entitled to receive indemnification exceed $25,000 (the "Threshold"); provided, however, that once such aggregate Losses exceed the Threshold, such Indemnified Parties shall be entitled to indemnification for the aggregate amount of all Losses without regard to the Threshold. (b) In no event shall the liability of the Shareholders hereunder for Losses incurred by Indemnified Parties exceed an amount equal to the number of shares of Sierra Common Stock issued to the Shareholders pursuant to the Merger multiplied by the Closing Average. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 41 48 8.5 PROCEDURE FOR INDEMNIFICATION (a) Any Indemnified Party shall notify the indemnifying party in writing reasonably promptly after the assertion against the indemnified party of any claim by a third party (a "Third Party Claim") in respect of which the indemnified party intends to base a Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve it of any obligation or liability that it may have to the indemnified party except to the extent that the indemnifying party demonstrates that its ability to defend or resolve such Third Party Claim is adversely affected thereby. (b) (i) The indemnifying party shall have the right, upon written notice given to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, to assume the defense or handling of such Third Party Claim, at the indemnifying party's sole expense, in which case the provisions of Section 8.5(b)(ii) below shall govern. (ii) The indemnifying party shall select counsel reasonably acceptable to the Indemnified Party in connection with conducting the defense or handling of such Third Party Claim, and the indemnifying party shall defend or handle the same in consultation with the Indemnified Party and shall keep the Indemnified Party timely apprised of the status of such Third Party Claim. The indemnifying party shall not, without the prior written consent of the Indemnified Party, agree to a settlement of any Third Party Claim. The Indemnified Party shall cooperate with the indemnifying party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (c) (i) If the indemnifying party does not give written notice to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, of the indemnifying party's election to assume the defense or handling of such Third Party Claim, the provisions of Section 8.5(c)(ii) below shall govern. (ii) The Indemnified Party may, at the indemnifying party's expense, select counsel in connection with conducting the defense or handling of such Third Party Claim and defend or handle such Third Party Claim in such manner as it may deem appropriate, provided, however, that the Indemnified Party shall keep the indemnifying party timely apprised of the status of such Third Party Claim and shall not settle such Third Party Claim without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld. If the Indemnified Party defends or handles such Third Party Claim, the indemnifying party shall cooperate with the Indemnified Party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (d) If the Indemnified Party intends to seek indemnification hereunder, other than for a Third Party Claim, then it shall notify the indemnifying party in writing within 90 days after its discovery of facts upon which it intends to base its Claim for indemnification - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 42 49 hereunder, but the failure or delay so to notify the indemnifying party shall not relieve the indemnifying party of any obligation or liability that the indemnifying party may have to the Indemnified Party except to the extent that the indemnifying party demonstrates that the indemnifying party's ability to defend or resolve such Claim is adversely affected thereby. (e) The Indemnified Party may notify the indemnifying party of a Claim even though the amount thereof plus the amount of other Claims previously notified by the Indemnified Party aggregate less than the Threshold. 8.6 OFFSET If and to the extent that any Indemnified Party is entitled to indemnification hereunder, Sierra may offset such indemnification amount against the Escrow Shares as provided in the Escrow Agreement. ARTICLE IX - GENERAL 9.1 EXPENSES Whether or not the transactions contemplated by this Agreement are consummated, each party shall pay its own fees and expenses incident to the negotiation, preparation and carrying out of this Agreement and the other Operative Documents (except that the reasonable legal, accounting and brokerage fees and expenses of the Company and the Shareholders, to the extent such fees and expenses are covered by paragraph (c) of Section 1.6.3 of this Agreement, shall be paid by Sierra); provided, however, that, should any action be brought hereunder, the attorneys' fees and expenses of the prevailing party shall be paid by the other party to such action. The Shareholders shall pay any transfer or similar taxes which may be payable in connection with the transactions contemplated by this Agreement. 9.2 BANK LOANS At or within one day of Closing, Sierra shall pay to Eagle Bank all outstanding principal and accrued interest owed by the Company to Eagle Bank as of such date; provided however, that Sierra shall not be obligated to pay any amount in excess of the total principal and interest as reflected in the letter dated July 13, 1995 from Eagle Bank (the "Payoff Quotation"), attached hereto as Exhibit 9.2. Sierra shall make commercially reasonable efforts to have Eagle Bank release the personal obligations of Judith D. McNary and Mary Elizabeth Tatem. 9.3 EMPLOYEE AGREEMENTS At or as soon as practicable after the Closing, each employee of the Company shall have executed and delivered Sierra's standard form Confidentiality Agreement and Sierra's standard form Invention Assignment and Proprietary Information Agreement. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 43 50 9.4 NOTICES Any notice or demand desired or required to be given hereunder shall be in writing given by personal delivery or certified or registered mail, telegram or confirmed facsimile transmission, addressed as respectively set forth below or to such other address as any party shall have previously designated by such a notice. The effective date of any notice or request shall be three days from the date it is sent by the addressor with charges prepaid so long as it is in fact received within five days, or when successful transmission is confirmed if sent by facsimile, or when personally delivered. TO THE PURCHASER AND TO SIERRA: Sierra On-Line, Inc. 3380 146th Place S.E., Suite 300 Bellevue, WA 98007 Fax: (206) 649-0214 Attention: General Counsel with a copy to: Perkins Coie 1201 Third Avenue, 40th Floor Seattle, Washington 98101-3099 Fax: (206) 583-8500 Attention: Stephen A. McKeon TO THE SHAREHOLDERS: At their respective addresses set forth on Schedule 2.1 to the Disclosure Memorandum. TO THE COMPANY: Green Thumb Software, Inc. 75 Manhattan Drive, Suite 100 Boulder, Colorado 80303 Fax: (303) 499-1389 Attention: President with a copy to: Ireland, Stapleton, Pryor & Pascoe 1675 Broadway, Suite 2600 Denver, CO 80202 Fax: (303) 623-2062 Attention: Susan L. Oakes, Esq. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 44 51 9.5 SEVERABILITY If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. 9.6 ENTIRE AGREEMENT This Agreement and the other Operative Documents constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede, except as set forth in Section 6.2 hereof, all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof. 9.7 ASSIGNMENT This Agreement shall not be assigned by operation of law or otherwise, except that Sierra may assign all or any of its rights and obligations hereunder to any of its affiliates, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations, and further provided that any such assignment shall not change the consideration due to the Shareholders hereunder. 9.8 PARTIES IN INTEREST This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 9.9 SPECIFIC PERFORMANCE The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 45 52 9.10 GOVERNING LAW This Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington applicable to contracts executed in and to be performed in that State. All actions and proceedings arising out of or relating to this Agreement shall be heard and determined in any Washington state or federal court thereof. 9.11 HEADINGS The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 9.12 COUNTERPARTS This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 46 53 IN WITNESS WHEREOF, the parties hereto have entered into and signed this Agreement as of the date and year first above written. SIERRA ON-LINE, INC. By /s/ Michael A. Brochu ----------------------------------- Its Executive Vice President & CFO --------------------------------- GREEN THUMB ACQUISITION CORPORATION By /s/ Michael A. Brochu ----------------------------------- Its President --------------------------------- GREEN THUMB SOFTWARE, INC. By /s/Judith D. McNary ----------------------------------- Its President --------------------------------- SHAREHOLDERS: /s/Judith D. McNary ------------------------------------- Judith D. McNary /s/Mary Elizabeth Tatem ------------------------------------- Mary Elizabeth Tatem /s/Carol Lynn Robertson ------------------------------------- Carol Lynn Robertson /s/Janet T. Koerner ------------------------------------- Janet T. Koerner - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 47 EX-2.04 5 AGREEMENT AND PLAN OF MERGER DATED SEPT. 12, 1995 1 AGREEMENT AND PLAN OF MERGER AMONG SIERRA ON-LINE, INC., ARION ACQUISITION CORP., ARION SOFTWARE, INC. AND THE SHAREHOLDERS OF ARION SOFTWARE, INC. DATED AS OF SEPTEMBER 12, 1995 2 CONTENTS ARTICLE I - THE MERGER ............................................................................. 1 1.1 The Merger ........................................................................... 1 1.2 The Closing .......................................................................... 1 1.3 Effective Date and Time .............................................................. 2 1.4 Articles of Incorporation of the Surviving Corporation ............................... 2 1.5 Bylaws of the Surviving Corporation .................................................. 2 1.6 Conversion of Shares ................................................................. 2 1.6.1 Exchange Ratio ................................................................ 2 1.6.2 Escrow ........................................................................ 3 1.6.3 Special Definitions ........................................................... 3 1.6.4 Exchange of Certificates ...................................................... 4 1.6.5 No Fractional Shares .......................................................... 4 1.6.6 Dissenting Shareholders ....................................................... 4 1.6.7 No Further Transfers .......................................................... 5 1.7 Pooling Restrictions on Transfer of the Securities ................................... 5 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS ............................................................... 5 2.1 Good Title, etc. ..................................................................... 5 2.2 Organization ......................................................................... 6 2.3 Enforceability ....................................................................... 6 2.4 Capitalization ....................................................................... 7 2.5 Subsidiaries and Affiliates .......................................................... 7 2.6 No Approvals or Notices Required; No Conflicts With Instruments ...................... 8 2.7 Financial Statements ................................................................. 9 2.8 Absence of Certain Changes or Events ................................................. 9 2.9 Taxes ................................................................................ 12 2.10 Property ............................................................................. 13 2.11 Contracts ............................................................................ 15 2.12 Customers and Suppliers .............................................................. 16 2.13 Orders, Commitments and Returns ...................................................... 16 2.14 Claims and Legal Proceedings ......................................................... 16
- -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page i 3 2.15 Labor Matters ........................................................................ 17 2.16 Employee Benefit Plans ............................................................... 17 2.17 Patents, Trademarks, etc. ............................................................ 18 2.18 Accounts Receivable .................................................................. 20 2.19 Inventory ............................................................................ 21 2.20 Corporate Books and Records .......................................................... 21 2.21 Licenses, Permits, Authorizations, etc. .............................................. 21 2.22 Compliance With Laws ................................................................. 21 2.23 Insurance ............................................................................ 23 2.24 Brokers or Finders ................................................................... 24 2.25 Government Contracts ................................................................. 24 2.26 Absence of Questionable Payments ..................................................... 24 2.27 Personnel ............................................................................ 25 2.28 Bank Accounts ........................................................................ 25 2.29 Insider Interests .................................................................... 25 2.30 Securities Act Matters ............................................................... 26 2.31 Pooling Matters ...................................................................... 28 2.32 Full Disclosure ...................................................................... 28 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND SIERRA ....................................................................... 29 3.1 Organization ......................................................................... 29 3.2 Enforceability ....................................................................... 29 3.3 Legal Proceedings .................................................................... 30 3.4 Securities ........................................................................... 30 3.5 Tax Consequences ..................................................................... 30 ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER AND SIERRA ....................................................................... 30 4.1 Accuracy of Representations and Warranties ........................................... 30 4.2 Performance of Agreements ............................................................ 30 4.3 Opinion of Counsel for the Company ................................................... 31 4.4 Shareholder Approval ................................................................. 31
- -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page ii 4 4.5 Resignations ......................................................................... 31 4.6 Consents to Merger ................................................................... 31 4.7 Officers' Certificate ................................................................ 31 4.8 Principals' Certificates ............................................................. 31 4.9 Material Adverse Change .............................................................. 31 4.10 Due Diligence ........................................................................ 32 4.11 Approvals and Consents ............................................................... 32 4.12 Proceedings and Documents; Secretary's Certificate ................................... 32 4.13 Nonforeign Affidavit ................................................................. 32 4.14 Compliance With Laws ................................................................. 32 4.15 Pooling of Interests ................................................................. 32 4.16 Other Agreements ..................................................................... 33 4.17 Legal Proceedings .................................................................... 33 4.18 Operative Documents .................................................................. 33 ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY ............................................................... 33 5.1 Accuracy of Representations and Warranties ........................................... 33 5.2 Performance of Agreements ............................................................ 33 5.3 Opinion of Counsel ................................................................... 33 5.4 Officers' Certificate ................................................................ 34 5.5 Legal Proceedings .................................................................... 34 5.6 Operative Documents .................................................................. 34 ARTICLE VI - COVENANTS ............................................................................. 34 6.1 Conduct of Business by the Company Pending the Merger ................................ 34 6.2 Access to Information; Confidentiality ............................................... 36 6.3 No Solicitation of Transactions ...................................................... 36 6.4 Notification of Certain Matters ...................................................... 37 6.5 Further Action; Reasonable Best Efforts .............................................. 37 6.6 Publicity ............................................................................ 37 ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER ..................................................... 37 7.1 Termination .......................................................................... 37
- -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page iii 5 7.2 Effect of Termination ................................................................ 38 7.3 Amendment ............................................................................ 38 7.4 Waiver ............................................................................... 39 ARTICLE VIII - SURVIVAL AND INDEMNIFICATION ........................................................ 39 8.1 Survival ............................................................................. 39 8.2 Indemnification ...................................................................... 39 8.3 Threshold and Limitations ............................................................ 40 8.4 Procedure for Indemnification ........................................................ 40 8.6 Offset ............................................................................... 41 ARTICLE IX - GENERAL ............................................................................... 41 9.1 Expenses ............................................................................. 41 9.2 Employee Agreements .................................................................. 42 9.3 Notices .............................................................................. 42 9.4 Severability ......................................................................... 43 9.5 Entire Agreement ..................................................................... 43 9.6 Assignment ........................................................................... 43 9.7 Parties in Interest .................................................................. 43 9.8 Specific Performance ................................................................. 44 9.9 Governing Law ........................................................................ 44 9.10 Headings ............................................................................. 44 9.11 Counterparts ......................................................................... 44 9.12 Waiver of Jury Trial ................................................................. 44 9.13 Shareholders' Agreement .............................................................. 44 9.14 Arbitration .......................................................................... 44
- -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page iv 6 EXHIBITS 1.3 - Articles of Merger 1.4 - Articles of Incorporation of the Surviving Corporation 1.5 - Bylaws of the Surviving Corporation 1.6 - Form of Escrow Agreement 2.1 - Disclosure Memorandum 2.2 - Form of Registration Rights Agreement 2.3 - Form of Noncompetition Agreement 4.3 - Form of Opinion of Counsel for the Company 4.13 - Foreign Investment in Real Property Tax Act Affidavit 4.16 - Agreements to be Amended or Terminated 5.3 - Form of Opinion of Counsel for Sierra 5.4 - Form of Sierra Officer's Certificate - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page v 7 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "Agreement") is made and entered into as of September 12, 1995 by and among Sierra On-Line, Inc., a Delaware corporation ("Sierra"), Arion Acquisition Corp., a Washington corporation (the "Purchaser"), Arion Software, Inc., a Texas corporation (the "Company"), and the shareholders of the Company listed on the signature pages hereto (the "Shareholders"). RECITALS A. The Company and the Purchaser believe it advisable and in the best interests of such corporations to effect the merger of the Company and the Purchaser (the "Merger") pursuant to this Agreement. B. The Board of Directors and the Shareholders of the Company have approved the Merger. C. The Board of Directors and the sole shareholder of the Purchaser have approved the Merger. Sierra is the sole shareholder of the Purchaser. D. For federal income tax purposes, the parties hereto intend to treat the Merger as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). AGREEMENT In consideration of the terms hereof, the parties hereto agree as follows: ARTICLE I - THE MERGER 1.1 THE MERGER Upon the terms and subject to the conditions hereof, (a) at the Effective Time (as defined in Section 1.3 hereof) the separate existence of the Purchaser shall cease and the Purchaser shall be merged with and into the Company (the Company is sometimes referred to herein as the "Surviving Corporation"), and (b) from and after the Effective Time, the Merger shall have all the effects of a merger under the laws of the State of Washington, the State of Texas and other applicable law. 1.2 THE CLOSING The closing of the Merger pursuant to this Agreement (the "Closing") shall take place on the earliest practicable business day after the conditions to the Closing of the Merger set forth in Articles IV and V hereof are satisfied or waived (the "Closing Date") at 2:00 p.m. local time at the offices of Perkins Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington, - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 1 8 or such other time or location as Sierra and the Company shall agree. At the Closing, each of the parties hereto shall deliver all such documents, instruments, certificates and other items as may be required under this Agreement or the other Operative Documents (as defined in Section 2.1) or otherwise. 1.3 EFFECTIVE DATE AND TIME On the Closing Date and subject to the terms and conditions hereof, articles of merger (collectively, the "Articles of Merger") complying with the applicable provisions of the Washington Business Corporation Act ("Washington Law") and the Texas Business Corporation Act ("Texas Law), substantially in the form or forms attached hereto as Exhibit 1.3, and in such form as required by, and executed in duplicate in accordance with, Washington Law and Texas Law, shall be delivered for filing to the Secretary of State of the State of Washington (the "Washington Secretary of State") and the Secretary of State of the State of Texas (the "Texas Secretary of State"), respectively. The Merger shall become effective on the date (the "Effective Date") and at the time (the "Effective Time") of filing of the Articles of Merger or at such other time as may be specified in the Articles of Merger as filed. If the Washington Secretary of State or the Texas Secretary of State requires any changes in the Articles of Merger as a condition to filing the Articles of Merger or issuing its certificate to the effect that the Merger is effective, Sierra, the Purchaser, the Company and the Shareholders will execute any necessary revisions incorporating such changes, provided such changes are not inconsistent with and do not result in any substantial change in the terms of this Agreement. 1.4 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION At the Effective Time, the Articles of Incorporation of the Company shall be in the form attached hereto as Exhibit 1.4 and shall be the Articles of Incorporation of the Surviving Corporation. Thereafter, the Articles of Incorporation of the Surviving Corporation may be amended in accordance with their terms and as provided by law. 1.5 BYLAWS OF THE SURVIVING CORPORATION At the Effective Time, the Bylaws of the Company shall be in the form attached hereto as Exhibit 1.5 and shall be the Bylaws of the Surviving Corporation. Thereafter, the Bylaws may be amended or repealed in accordance with their terms, the Articles of Incorporation of the Surviving Corporation and as provided by law. 1.6 CONVERSION OF SHARES 1.6.1 EXCHANGE RATIO As of the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof: - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 2 9 (a) All shares of any class of capital stock of the Company held by the Company as treasury shares shall be cancelled. (b) Each issued and outstanding share of Common Stock of the Company, $1.00 par value per share ("Company Common Stock"), shall be converted into the right to receive from Sierra a number of shares of common stock of Sierra, $.01 par value per share ("Sierra Common Stock"), determined as follows (such shares being referred to herein as the "Merger Consideration" or the "Securities"): (i) at or as soon as practicable after the Closing, a number of shares of Sierra Common Stock determined by dividing the Net Closing Shares (as defined below) by the total number of shares of Company Common Stock outstanding immediately prior to the Effective Time (the "Closing Consideration"); plus (ii) on or before the earlier of one year after the Closing Date and the date on which Sierra's independent auditors issue their report with respect to the financial statements of Sierra for the first fiscal year of Sierra ending after the Closing, and subject to adjustment in accordance with the terms of an Escrow Agreement in substantially the form attached hereto as Exhibit 1.6 (the "Escrow Agreement") to be entered into at the Closing among the Shareholders and Sierra, a number of shares of Sierra Common Stock determined by dividing the Escrow Shares (as defined below) by the total number of shares of Company Common Stock outstanding immediately prior to the Effective Time. (c) Each issued and outstanding share of capital stock of the Purchaser shall be converted into one share of common stock of the Surviving Corporation. 1.6.2 ESCROW As soon as practicable after the Closing, Sierra shall deposit into escrow, in accordance with the terms of the Escrow Agreement, a number of shares of Sierra Common Stock (excluding any fractional shares) equal to the total number of Escrow Shares. The Escrow Shares, or the proceeds from any disposition thereof in accordance with the Escrow Agreement, shall be distributed from escrow in accordance with the Escrow Agreement. 1.6.3 SPECIAL DEFINITIONS (a) The term "Aggregate Closing Shares" shall mean a number of shares (excluding any fractional share) of Sierra Common Stock determined by dividing $2,250,000 by the Closing Average (as defined below). (b) The term "Net Closing Shares" shall mean a number of shares of Sierra Common Stock equal to 90% of the Aggregate Closing Shares. (c) The term "Escrow Shares" shall mean a number of shares of Sierra Common Stock equal to 10% of the Aggregate Closing Shares. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 3 10 (d) The term "Closing Average" shall mean 37.375. 1.6.4 EXCHANGE OF CERTIFICATES As soon as practicable after the Effective Date, Sierra shall make available, and each Shareholder will be entitled to receive, upon surrender to Sierra of one or more certificates representing Company Common Stock for cancellation, certificates representing the number of shares of Sierra Common Stock that such Shareholder is entitled to receive at Closing pursuant to Section 1.6.1 hereof. The shares of Sierra Common Stock that each Shareholder shall be entitled to receive at the Closing pursuant to the Merger shall be deemed to have been issued at the Effective Time. No interest shall accrue on the Merger Consideration. If the Merger Consideration (or any portion thereof) is to be delivered to any person other than the person in whose name the certificate or certificates representing shares of Company Common Stock surrendered in exchange therefor is registered, it shall be a condition to such exchange that the person requesting such exchange shall pay to Sierra any transfer or other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the certificate or certificates so surrendered, or shall establish to the satisfaction of Sierra that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither Sierra nor any other party hereto shall be liable to a holder of shares of Company Common Stock for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat and similar laws. 1.6.5 NO FRACTIONAL SHARES No certificates or scrip representing fractional shares of Sierra Common Stock shall be issued upon the surrender for exchange of certificates representing Company Common Stock pursuant to the Merger, and no dividend, stock split or other distribution with respect to Sierra Common Stock shall relate to any such fractional interest, and any such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder. In lieu of any such fractional shares, each holder of Company Common Stock who otherwise would have been entitled to a fraction of a share of Sierra Common Stock upon surrender of certificates representing Company Common Stock for exchange pursuant to the Merger will be paid cash upon such surrender in an amount equal to such fraction multiplied by the Closing Average. 1.6.6 DISSENTING SHAREHOLDERS Any issued and outstanding shares of Company Common Stock held by any Shareholder who, in accordance with Texas Law, dissents from the Merger (a "Dissenting Shareholder") and requires appraisal of such Dissenting Shareholder's shares ("Dissenting Shares") shall not be converted or cancelled as described in Section 1.6.1 hereof but shall become the right to receive such consideration as may be determined to be due to such Dissenting Shareholder pursuant to Texas Law; provided, however, that Dissenting Shares outstanding at the Effective Time and held by a Dissenting Shareholder who shall after the Effective Time withdraw such Dissenting Shareholder's demand for appraisal or lose such - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 4 11 Dissenting Shareholder's right of appraisal as provided by Texas Law shall be deemed to be converted as of the Effective Time into the right to receive the Merger Consideration. 1.6.7 NO FURTHER TRANSFERS After the Effective Time, there shall be no transfers of any shares of Company Common Stock on the stock transfer books of the Surviving Corporation. If, after the Effective Time, certificates formerly representing shares of Company Common Stock are presented to the Surviving Corporation, they shall be forwarded to Sierra and be cancelled and exchanged in accordance with this Section 1.6, subject to applicable law in the case of Dissenting Shares. 1.7 POOLING RESTRICTIONS ON TRANSFER OF THE SECURITIES The Shareholders shall not transfer the Securities received pursuant to the Merger until at least 3 business days after the publication by Sierra of financial results for the first fiscal quarter of Sierra ending after the Closing which contains a period of at least 30 days of combined financial results of Sierra and the Surviving Corporation. ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDERS To induce the Purchaser and Sierra to enter into and perform this Agreement and the other Operative Documents (as defined in Section 2.1 hereof), and except as is otherwise set forth in the Disclosure Memorandum attached hereto as Exhibit 2.1 (the "Disclosure Memorandum"), which exceptions shall specifically identify the paragraph or paragraphs of this Article II to which such exceptions relate, and which shall constitute in its entirety a representation and warranty under this Article II, the Company and the Shareholders jointly and severally represent and warrant to the Purchaser and Sierra as of the date of this Agreement and as of the Closing as follows in this Article II. Except as to Sections 2.2, 2.4 and 2.5 hereof, all references to the Company in this Article II shall include the Company's Subsidiaries (as defined in Section 2.2). Notwithstanding the foregoing, Softways of California represents and warrants only as provided in Section 2.1 and 2.30 of this Article II. 2.1 GOOD TITLE, ETC. Each Shareholder represents with respect to itself only that (a) such Shareholder owns the shares of Company Common Stock listed opposite such Shareholder's name on Schedule 2.1 to the Disclosure Memorandum; (b) such shares of Company Common Stock are free and clear of any lien, encumbrance, adverse claim, restriction on sale or transfer (other than restrictions imposed by applicable securities laws), preemptive right or option; (c) such Shareholder has all necessary power, right and authority to enter into this Agreement and each of the agreements, certificates, instruments and documents executed or delivered pursuant to the terms of this Agreement by such Shareholder, including, without limitation and as applicable, the Escrow Agreement, the Registration Rights Agreement in substantially the - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 5 12 form attached hereto as Exhibit 2.2 to be entered into as of the Closing among Sierra and the Shareholders, and the Noncompetition Agreement in substantially the form attached hereto as Exhibit 2.3 to be entered into as of the Closing among Sierra and each of David MacDonald, Alex Perelberg, Softways of California, Steve Pederson, and Deborah Howitt (collectively, and including this Agreement, the "Operative Documents"), to consummate the transactions contemplated hereby and thereby, and to sell and transfer the shares of Company Common Stock held by such Shareholder hereunder without the consent or approval of any other Person (as defined in Section 2.6 hereof), other than as set forth on Schedule 2.6 to the Disclosure Memorandum; and (d) this Agreement and the other Operative Documents to which such Shareholder is a party have each been duly authorized, executed and delivered by such Shareholder and each is a legal, valid and binding obligation of such Shareholder, enforceable in accordance with its terms. 2.2 ORGANIZATION The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. Each subsidiary of the Company listed on Schedule 2.5 to the Disclosure Memorandum (individually a "Subsidiary" and together the "Subsidiaries") is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, which jurisdictions are set forth in Schedule 2.5 to the Disclosure Memorandum. The Company and each Subsidiary have all requisite corporate power and authority to own, operate and lease their properties and assets, to carry on their respective businesses as now conducted and as proposed to be conducted, and in the case of the Company to enter into and perform its obligations under this Agreement and the Operative Documents, and to consummate the transactions contemplated hereby and thereby. The Company and each Subsidiary are duly qualified and licensed as foreign corporations to do business and are in good standing in each jurisdiction listed on Schedule 2.2, in the case of the Company, and Schedule 2.5, in the case of each Subsidiary, to the Disclosure Memorandum, which jurisdictions constitute all jurisdictions where the character of the Company's or such Subsidiary's properties occupied, owned or held under lease or the nature of the business conducted by the Company or such Subsidiary makes such qualification necessary, except as set forth on Schedule 2.2 or Schedule 2.5, as the case may be, to the Disclosure Memorandum and except where the failure to be so qualified or in good standing would not have a material adverse effect on the business, business prospects, assets, operations or condition (financial or other) of the Company or such Subsidiary. 2.3 ENFORCEABILITY All corporate action on the part of the Company and its officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Operative Documents, the consummation of the Merger, and the performance of all of the Company's obligations under this Agreement and the Operative Documents has been taken or will be taken prior to the Closing. This Agreement has been, and each of the Operative Documents at the Closing will have been, duly executed and delivered by the Company, and this Agreement is, and each of the Operative Documents to - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 6 13 which the Company is a party will be at the Closing, a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 2.4 CAPITALIZATION (a) The authorized capital stock of the Company consists of 1,000,000 shares of Company Common Stock. (b) The issued and outstanding capital stock of the Company consists solely of20,666 shares of Company Common Stock (the "Outstanding Shares"), which are and as of the Closing will be held of record and beneficially by the Shareholders as set forth on Schedule 2.4(b) to the Disclosure Memorandum. The Outstanding Shares are, and immediately prior to the Closing will be, duly authorized and validly issued, fully paid and nonassessable, and issued in compliance with all applicable federal, state and foreign securities laws. No Person other than the Shareholders holds any interest in any of the Outstanding Shares. (c) There are no outstanding rights of first refusal, preemptive rights, options, warrants, conversion rights or other agreements, either directly or indirectly, for the purchase or acquisition from the Company or any Shareholder of any shares of the Company's capital stock or the capital stock of any Subsidiary. (d) The Company is not a party or subject to any agreement or understanding, and there is no agreement or understanding between any Persons (as defined in Section 2.6 hereof), that affects or relates to the voting or giving of written consents with respect to any securities of the Company or the voting by any director of the Company. Except as set forth on Schedule 2.4(d) to the Disclosure Memorandum, no Shareholder or any affiliate thereof is indebted to the Company, and the Company is not indebted to any Shareholder or any affiliate thereof. The Company is not under any contractual or other obligation to register any of its presently outstanding securities or any of its securities which may hereafter be issued. 2.5 SUBSIDIARIES AND AFFILIATES The name, jurisdiction of incorporation and jurisdictions of foreign qualification of each of the Company's Subsidiaries are as set forth on Schedule 2.5 to the Disclosure Memorandum. Except as set forth on Schedule 2.5 to the Disclosure Memorandum, the Company does not own, directly or indirectly, any ownership, equity, profits or voting interest in, or otherwise control, any corporation, partnership, joint venture or other entity, and has no agreement or commitment to purchase any such interest. The Company owns 100% of the issued and outstanding shares of capital stock, or other ownership interests, of each of the Subsidiaries, free and clear of any lien, encumbrance, preemptive right, right of first offer or refusal, or other prior claim, and all the issued and outstanding shares of capital stock, or other ownership interests, of the Subsidiaries are duly authorized and validly issued, fully paid - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 7 14 and nonassessable, and were issued and acquired in compliance with all applicable federal, state and foreign securities and other laws. 2.6 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS (a) Except as set forth on Schedule 2.6(a) to the Disclosure Memorandum, the execution, delivery and performance of this Agreement and the other Operative Documents by the Company and the consummation of the transactions contemplated hereby and thereby will not (i) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to the Company, (ii) require any consent, approval or authorization of, or declaration, filing or registration with, any person, corporation, partnership, joint venture, association, organization, other entity or governmental or regulatory authority (a "Person"), except compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Washington Secretary of State and the Texas Secretary of State (the consent of all such Persons to be duly obtained by the Company at or prior to the Closing), (iii) result in a default (with or without the giving of notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which the Company is a party or by which it is bound or to which any assets of the Company are subject, (iv) result in the creation of any lien or encumbrance upon the assets of the Company or upon any Outstanding Shares or other securities of the Company, (v) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or Bylaws of the Company, or (vi) invalidate or adversely affect any permit, license, authorization or status used in the conduct of the business of the Company. (b) Except as set forth on Schedule 2.6(b) to the Disclosure Memorandum, the execution, delivery and performance of this Agreement by each Shareholder and the consummation of the transactions contemplated hereby will not (i) constitute a violation by such Shareholder (with or without the giving of notice or lapse of time, or both) of any provisions of law or any judgment, decree, order, regulation or rule of any court, agency or other governmental authority applicable to such Shareholder, (ii) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, except for compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Washington Secretary of State and the Texas Secretary of State (the consent of all such Persons to be duly obtained by the Company or the Shareholder at or prior to the Closing), (iii) result in the creation of any lien or encumbrance upon the shares of Company Common Stock owned by such Shareholder, or (iv) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or Bylaws of the Company. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 8 15 2.7 FINANCIAL STATEMENTS The Company has delivered to Sierra (a) consolidated balance sheets and consolidated statements of operations, and retained earnings of the Company as of or for the fiscal years endedMay 31, 1994 and 1995, as compiled by Arthur Naman, independent certified public accountants, and (b) a consolidated balance sheet and consolidated statement of operations and retained earnings of the Company as of and for the three-month period ended August 31, 1995. All of the foregoing financial statements are herein referred to as the "Financial Statements." The consolidated balance sheet of the Company as of August 31, 1995 is herein referred to as the "Company Balance Sheet." The Financial Statements present fairly the financial position, results of operations and changes in financial position of the Company as of the dates and for the periods indicated. The Company has no liabilities or obligations of any nature (absolute, contingent or otherwise) which are not fully reflected or reserved against in the Company Balance Sheet, except (a) liabilities or obligations incurred since the date of the Company Balance Sheet in the ordinary course of business and consistent with past practice which are disclosed to Sierra and are not in excess of $5,000 in the aggregate or $1,000 individually or (b) as specifically set forth on Schedule 2.7 to the Disclosure Memorandum. The Company maintains and will continue to maintain standard systems of accounting which are adequate for its business. Except as set forth on Schedule 2.7 to the Disclosure Memorandum, the Company is not a guarantor, indemnitor, surety or other obligor of any indebtedness of any other Person. The Company's practices with respect to capitalizing software development costs, as reflected in the Financial Statements, are reasonable, in accordance and industry standards, and consistent with the advice of the Company's independent accountants. 2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS Except as specifically set forth on Schedule 2.8 to the Disclosure Memorandum and except for transactions contemplated in this Agreement, since the date of the Company Balance Sheet, neither the Company nor any of its officers or directors in their representative capacities on behalf of the Company has: (a) taken any action or entered into or agreed to enter into any transaction, agreement or commitment other than in the ordinary course of business; (b) forgiven or canceled any indebtedness or waived any claims or rights of material value (including, without limitation, any indebtedness owing by any Shareholder or any officer, director, employee or affiliate of the Company); (c) granted, other than in the ordinary course of business and consistent with past practice, any increase in the compensation of directors, officers, employees or consultants (including any such increase pursuant to any employment agreement or bonus, pension, profit-sharing, lease payment or other plan or commitment) or any increase in the compensation payable or to become payable to any director, officer, employee or consultant; - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 9 16 (d) suffered any material adverse change in its working capital, assets, liabilities (absolute, accrued, contingent or otherwise), earnings, reserves, financial condition, business, prospects or operations; (e) borrowed or agreed to borrow any funds, assumed or become subject to, whether directly or by way of guarantee or otherwise, any obligations or liabilities (absolute, accrued, contingent or otherwise), or incurred any liabilities or obligations (absolute, accrued, contingent or otherwise), which individually or in the aggregate exceed $5,000, except liabilities and obligations incurred in the ordinary course of business and consistent with past practice not to exceed $15,000 in the aggregate, or increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (f) paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of claims, liabilities and obligations reflected or reserved against in the Company Balance Sheet or incurred in the ordinary course of business and consistent with past practice since the date of the Company Balance Sheet, or prepaid any obligation having a fixed maturity of more than 90 days from the date such obligation was issued or incurred; (g) permitted or allowed any of its property or assets (real, personal or mixed, tangible or intangible) to be subjected to any mortgage, pledge, lien, security interest, encumbrance, restriction or charge, except (i) assessments for current taxes not yet due and payable, (ii) landlord's liens for rental payments not yet due and payable, and (iii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that is in the aggregate less than $5,000, was incurred in the ordinary course of business and is not yet due and payable; (h) written down the value of any inventory (including write-downs by reason of shrinkage or markdown) or written off as uncollectible any notes or accounts receivable, except for write-downs and write-offs that are in the aggregate less than $5,000, incurred in the ordinary course of business and consistent with past practice; (i) sold, transferred or otherwise disposed of any of its properties or assets (real, personal or mixed, tangible or intangible), except the sale of inventory in the ordinary course of business and consistent with past practice; (j) disposed of or permitted to lapse any rights to the use of any trademark, trade name, patent or copyright, or disposed of or disclosed to any Person other than representatives of Sierra any trade secret, formula, process or know-how not theretofore a matter of public knowledge; (k) made any single capital expenditure or commitment in excess of $5,000 for additions to property, plant, equipment or intangible capital assets or made aggregate - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 10 17 capital expenditures in excess of $15,000 for additions to property, plant, equipment or intangible capital assets; (l) made any change in any method of accounting or accounting practice or internal control procedure; (m) issued any capital stock or other securities, or declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock, or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of capital stock or other securities of the Company, or otherwise permitted the withdrawal by any of the holders of capital stock of the Company of any cash or other assets (real, personal or mixed, tangible or intangible), in compensation, indebtedness or otherwise, other than payments of compensation in the ordinary course of business and consistent with past practice; (n) paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any Shareholder or any of the Company's officers, directors or employees or any affiliate of any Shareholder or any of the Company's officers, directors or employees, except directors' fees and compensation paid to officers and employees at rates not exceeding the rates of compensation paid during the fiscal year ended December 31, 1994; except for those increased in the ordinary course of business and consistent with past practice. (o) entered into or agreed to enter into, or otherwise suffered to be outstanding, any power of attorney of the Company or any obligations or liabilities (absolute, accrued, contingent or otherwise) of the Company, as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any other Person; (p) received notice of, or otherwise obtained knowledge of: (i) any claim, action, suit, arbitration, proceeding or investigation involving, pending against or threatened against the Company or any employee of the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person; (ii) any valid basis for any claim, action, suit, arbitration, proceeding, investigation or the application of any fine or penalty adverse to the Company or any employee of the Company before or by any Person; or (iii) any outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company or any employee of the Company is a party and where such items in subparagraphs (i), (ii) and (iii) above relate directly to the transactions contemplated herein or which would have any adverse effect upon the business, business prospects, assets, liabilities or financial condition of the Company; (q) entered into or agreed to any sale, assignment, transfer or license of any patents, trademarks, copyrights, trade secrets or other intangible assets of the Company or any amendment or change to any existing license or other agreement relating to intellectual property; - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 11 18 (r) received notice that there has been a loss of, or contract cancellation by, any current or prospective customer, licensor or distributor of the Company; (s) taken any action, or become aware of any action taken by any Shareholder, which alone or together with other facts or circumstances could affect the ability of Sierra to account for the Merger as a "pooling of interests" transaction consistent with GAAP; or (t) agreed, whether in writing or otherwise, to take any action described in this Section 2.8. 2.9 TAXES Except as described on Schedule 2.9 to the Disclosure Memorandum, the Company has (a) duly and timely filed, including valid extensions, with the appropriate governmental agencies (domestic and foreign) all tax returns, information returns and reports ("Returns") for all Taxes (as defined below) required to have been filed with respect to the Company and its business, (b) all such Returns are true, correct and complete, and (c) except as set forth on Schedule 2.9 to the Disclosure Memorandum, paid in full or provided for all Taxes that are due or claimed to be due by any governmental agency. "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, but not limited to, income, excise, gross receipts, property, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, severance, stamp, occupation, windfall profits, social security and unemployment or other taxes imposed by the United States or any agency or instrumentality thereof, any state, county, local or foreign government, or any agency or instrumentality thereof, and any interest or fines, and any and all penalties or additions relating to such taxes, charges, fees, levies or other assessments. Except as described on Schedule 2.9 to the Disclosure Memorandum, (i) the reserves and provisions for Taxes reflected in the Financial Statements are adequate for the payment of Taxes not yet due and payable; (ii) no unresolved claim for assessment or collection of Taxes has been asserted or threatened against the Company, and no audit or investigation by any governmental authority is under way with respect to Taxes, interest or other governmental charges; (iii) to the best of its knowledge, no circumstances exist or have existed which would constitute grounds for assessment against the Company of any tax liability with respect to any period for which Returns have been filed, including, but not limited to, any circumstances relating to the existence of a valid S corporation election for the Company for any such period; (iv) the Company has not filed or entered into any election, consent or extension agreement or any waiver that extends any applicable statute of limitations; (v) any Taxes incurred by the Company or accrued by it since the date of the Company Balance Sheet have arisen in the ordinary course of business; and (vi) the Company has not filed any consent to the application of Section 341(f)(2) of the Code, to any assets held, acquired or to be acquired by it. The Company has furnished Sierra with complete and correct copies of all Returns. There are no tax liens on any property or assets of the Company other than liens for current taxes not yet payable. No claim has been made by an authority in any jurisdiction where the Company does not file Returns that the Company is or may be subject to taxation by that jurisdiction. The Company has not made any payments, is not - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 12 19 obligated to make any payments, and is not a party to any agreement that could obligate it to make any payments that will not be deductible under Section 280G of the Code; the Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(2)(i) of the Code; the Company is not a party to any Tax allocation or sharing agreement, and, except as set forth on Schedule 2.9 to the Disclosure Memorandum, the Company (A) has not been a member of an affiliated group filing a consolidated income Tax Return and (B) does not have any liability for Taxes of any person under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law) as a transferor or successor by contract or otherwise. 2.10 PROPERTY (a) The Company owns no real property other than the leasehold interests described in Schedule 2.10(a) to the Disclosure Memorandum, which contains a complete and accurate list of all real property of the Company which is leased, rented or used by the Company (the "Real Property"). The Company has delivered to Sierra true and complete copies of all written leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to the Real Property and written summaries of the terms of any oral leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to the Real Property. (b) Schedule 2.10(b) to the Disclosure Memorandum contains a complete and accurate list of each item of personal property having a value in excess of $2,000 which is owned, leased, rented or used by the Company (the "Personal Property"); provided that such list need not describe the Listed Intellectual Property or the Intellectual Property Licenses (as defined in Section 2.17 hereof). The Company has delivered to Sierra true and complete copies of all leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to the Personal Property. The Real Property and the Personal Property include all properties and assets (whether real, personal or mixed, tangible or intangible) (other than, in the case of the Personal Property, property rights with an individual value of less than $2,000, the Listed Intellectual Property and the Intellectual Property Licenses) reflected in the Company Balance Sheet and all the properties and assets purchased by the Company since the date of the Company Balance Sheet (except for such properties or assets sold since the date of the Company Balance Sheet in the ordinary course of business and consistent with past practice). The Real Property and the Personal Property include all material property used in the business of the Company. (c) The Company's leasehold interest in each parcel of the Real Property is free and clear of all liens, mortgages, pledges, deeds of trust, security interests, charges, encumbrances and other adverse claims or interests of any kind, except as set forth on Schedule 2.10(c) to the Disclosure Memorandum. Each lease of any portion of the Real Property is valid, binding and enforceable in accordance with its terms against the parties thereto and any other Person with an interest in such Real Property, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor any other party thereto is in default thereunder nor is there any event which with notice or lapse of time, - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 13 20 or both, would constitute a default thereunder. Except as set forth on Schedule 2.6 to the Disclosure Memorandum, no consent is required from any Person under any lease or other agreement or instrument relating to the Real Property in connection with the consummation of the transactions contemplated by this Agreement and the other Operative Documents, and the Company has not received notice that any party to any such lease or other agreement or instrument intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. The Company has not granted any lease, sublease, tenancy or license of, or entered into any rental agreement or contract of sale with respect to, any portion of the Real Property. (d) Except as described on Schedule 2.10(d) to the Disclosure Memorandum, the Company's offices, warehouse and other structures and its Personal Property are of quality consistent with industry standards, are in good operating condition and repair, normal wear and tear excepted, are adequate for the uses to which they are being put, and comply in all material respects with applicable safety and other laws and regulations. (e) Except as set forth on Schedule 2.10(e) to the Disclosure Memorandum, and except for (i) assessments for current taxes not yet due and payable, (ii) landlord's liens for rental payments in respect of the Real Property incurred in the ordinary course of business and not yet due and payable, and (iii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that is in the aggregate less than $2,000, was incurred in the ordinary course of business and is not yet due and payable, the Personal Property is free and clear of all liens, and, other than leased Personal Property which is so noted on the list supplied pursuant to paragraph (b) of this Section 2.10, the Company owns such Personal Property. (f) Except as set forth on Schedule 2.10(f) to the Disclosure Memorandum, each lease, license, rental agreement, contract of sale or other agreement to which the Personal Property is subject is valid, binding and enforceable in accordance with its terms against the parties thereto, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor, to the best of the Company's knowledge, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default by the Company or, to the best of the Company's knowledge, any other party thereunder. Except as set forth on Schedule 2.10(f) to the Disclosure Memorandum, no consent is required from any Person under any lease or other agreement or instrument relating to the Personal Property in connection with the consummation of the transactions contemplated by in this Agreement and the other Operative Documents, and the Company has not received notice that any party to any such lease or other agreement or instrument intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. The Company has not granted any lease, sublease, tenancy or license of any portion of the Personal Property. (g) Neither the whole nor any portion of the leaseholds or any other assets or property of the Company is subject to any currently outstanding governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public 21 authority with or without payment of compensation therefor, nor has any such condemnation, expropriation or taking been proposed. 2.11 CONTRACTS Schedule 2.11 to the Disclosure Memorandum contains a complete and accurate list of all contracts, agreements and understandings, oral or written, to which the Company is currently a party or by which the Company is currently bound, including, without limitation, security agreements, license agreements, software development agreements, credit agreements, conditional sales agreements, instruments relating to the borrowing of money, and distributorship agreements. Except as set forth on Schedule 2.11 to the Disclosure Memorandum, all contracts set forth in such Schedule are valid, binding and enforceable in accordance with their terms against each party thereto, are in full force and effect, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor, to the best of the Company's knowledge, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default by the Company or, to the best of the Company's knowledge, any other party thereunder. True and complete copies of each such written contract (or written summaries of the terms of any such oral contract) have been heretofore delivered to Sierra. Except as specifically set forth on Schedule 2.11 to the Disclosure Memorandum, the Company has no: (a) agreements, contracts, commitments or restrictions requiring the Company to make any charitable contribution; (b) purchase contracts or commitments of the Company that continue for a period of more than 12 months or are in excess of the normal, ordinary and usual requirements of its business or that are at an excessive price to the extent that such excess would be material to the Company's business; (c) outstanding sales or service contracts, commitments or proposals of the Company which are expected by the Company to result in any loss or the realization of less than the Company's usual and customary margins upon completion or performance thereof, in excess of the inventory reserve provided in the Company Balance Sheet, or any outstanding contracts, bids, or sales or service proposals quoting prices which the Company, based upon the Company's current operations, expects not to result in a profit; (d) agreements, understandings, arrangements or contracts that are not, except as provided by law to the contrary without regard to the express terms of such contract, cancellable by it within 30 days' notice without liability, penalty or premium, any agreement or arrangement providing for the payment of any bonus or commission based on sales or earnings, or any compensation agreement or arrangement affecting or relating to former employees of the Company; (e) employment agreement, whether express or implied, or any other agreement for services that contains any severance or termination pay liabilities or obligations; - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 15 22 (f) restriction by agreement from carrying on its business anywhere in the world; (g) notice that any party to a contract intends to cancel, terminate or refuse to renew such contract or to exercise or decline to exercise any option or right thereunder; or (h) material disagreement with any of its suppliers or customers. 2.12 CUSTOMERS AND SUPPLIERS Schedule 2.12 to the Disclosure Memorandum sets forth: (a) a complete and accurate list of the customers of the Company accounting for 2% or more of the Company's sales during the fiscal year last ended showing the approximate total sales by the Company to each such customer during the fiscal year last ended and (b) a complete and accurate list of the suppliers of the Company from whom the Company has purchased 5% or more of the goods or services purchased by the Company in the fiscal year last ended. The Company has no reasonable basis to expect any material modification to its relationship with any customer or supplier named on Schedule 2.12 to the Disclosure Memorandum. 2.13 ORDERS, COMMITMENTS AND RETURNS Schedule 2.13 to the Disclosure Memorandum contains an accurate summary of the Company's total backlog of orders (including all accepted and unfulfilled sales orders) and the aggregate of all outstanding purchase orders issued by the Company (which include all contracts or commitments for the purchase by the Company of materials or other supplies). All such sale and purchase commitments were made in the ordinary course of business. Except as set forth in Schedule 2.13 to the Disclosure Memorandum, there are no outstanding claims against the Company to return merchandise with an aggregate retail value in excess of $5,000 by reason of alleged overshipments, defective merchandise, missed delivery dates, incorrect quantities or otherwise, or of merchandise in the hands of customers under an understanding that such merchandise would be returnable. 2.14 CLAIMS AND LEGAL PROCEEDINGS Except as set forth on Schedules 2.14 and 2.17 to the Disclosure Memorandum, there are no claims, actions, suits, arbitrations, investigations or proceedings pending or involving or, to the Company's best knowledge, threatened against the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person. To the Company's best knowledge, there is no valid basis for any claim, action, suit, arbitration, proceeding or investigation (other than as noted on Schedule 2.14 or 2.17 to the Disclosure Memorandum) which could reasonably be expected to be materially adverse to the business, business prospects, assets, operations or condition (financial or other) of the Company before or by any Person. There are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company is a party which involve the transactions contemplated herein or which would have a material - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 16 23 adverse effect upon the business, business prospects, assets, operations or condition (financial or other) of the Company. 2.15 LABOR MATTERS There are no material labor disputes, employee grievances or disciplinary actions pending or, to the Company's best knowledge, threatened against or involving the Company or any of its present or former employees. The Company has complied with all provisions of law relating to employment and employment practices, terms and conditions of employment, wages and hours, the failure to comply with which could have a material adverse effect upon the business, business prospects, assets, operations or conditions (financial or other) of the Company. The Company is not engaged in any unfair labor practice and has no liability for any arrears of wages or Taxes or penalties for failure to comply with any such provisions of law. There is no labor strike, dispute, slowdown or stoppage pending or, to the Company's best knowledge, threatened against or affecting the Company, and the Company has not experienced any work stoppage or other labor difficulty since its incorporation. No collective bargaining agreement is binding on the Company. The Company has no knowledge of any organizational efforts presently being made or threatened by or on behalf of any labor union with respect to employees of the Company, and the Company has not been requested by any group of employees or others to enter into any collective bargaining agreement or other agreement with any labor union or other employee organization. Each employee, officer and consultant of the Company has executed a Nondisclosure Agreement in the form provided to Sierra. To the best of the Company's knowledge, no employee (or person performing similar functions) of the Company is in violation of any such agreement or any employment agreement, noncompetition agreement, patent disclosure agreement, invention assignment agreement, proprietary information agreement or other contract or agreement relating to the relationship of such employee with the Company or any other party, and the Company will use its best efforts to prevent any such violation. 2.16 EMPLOYEE BENEFIT PLANS Except as set forth on Schedule 2.16 to the Disclosure Memorandum, the Company has no bonus, deferred compensation, incentive, severance pay, pension, profit-sharing, retirement, stock purchase, stock option or any other employee benefit plan, employee fringe benefit plan, arrangement or practice with regard to present or former employees as to which the Company has any liability ("Employee Benefit Plan"), whether formal or informal. Schedule 2.16 to the Disclosure Memorandum contains an accurate and complete description of, and sets forth the annual amount expected to be payable for the fiscal year last ended pursuant to, each Employee Benefit Plan, whether formal or informal. The Company Balance Sheet reflects in the aggregate all amounts accrued but unpaid under the aforesaid plans and arrangements as of the date thereof. The Company has no agreement, arrangement or commitment, whether formal or informal and whether legally binding or not, to create any additional plan or arrangement or to modify or amend any existing Employee Benefit Plan. The Company has delivered to Sierra true, correct and complete copies of all written Employee Benefit Plans of the Company, all contracts related thereto and the most recently - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 17 24 available annual reports, summary plan descriptions, IRS Form 5500s (or 5500-C or 5500-R) and favorable determination letters for such plans. The Company is in compliance in all respects with the terms of its Employee Benefit Plans and with all applicable laws and regulations, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. The Company has extinguished any liabilities to participants, beneficiaries and the Pension Benefit Guaranty Corporation which may have arisen under any such plans previously maintained by them and expects to incur no future liabilities with regard to such plans. Neither the Company nor any "affiliate" of the Company is a party to or has ever made any contributions to, or is subject to any liability with respect to, any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA or any defined benefit plan within the meaning of Section 3(35) of ERISA. The term "affiliate" means any company, trade or business which is a member of the same control group, as defined in Code Section 414(b) or 414(c), with the Company, or any company, trade or business which is a member of an affiliated service group, as defined in Code Section 414(m) or 414(o) with the Company. No prohibited transaction (within the meaning of ERISA Section 406 or Code Section 4975) or failure to meet the requirements of Code Section 4980B(f) has occurred with respect to any Employee Benefit Plan which could subject the Company to any liability. There are no actions, suits or claims pending (other than routine claims for benefits) or which could reasonably be expected to be asserted against any Employee Benefit Plan or the assets of any such plan. 2.17 PATENTS, TRADEMARKS, ETC. Set forth on Schedule 2.17 to the Disclosure Memorandum is a true and complete list of all inventions, patents, trademarks, trade names, brand names, copyrights, Software Products (as defined below), trade secrets and formulae (collectively, the "Listed Intellectual Property") of any kind now used or anticipated to be used in the business of the Company. Schedule 2.17 contains a complete and accurate list of all licenses or agreements which in any way affect the rights of the Company to any of the Listed Intellectual Property (the "Intellectual Property Licenses"); such list indicates the specific Listed Intellectual Property affected by each such license or agreement. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, neither the Company's operations nor any Listed Intellectual Property or Intellectual Property License infringes or provides any basis to believe that its operations or any Listed Intellectual Property or Intellectual Property License would infringe upon any validly issued or pending trademark, trade name, service mark, copyright or, to the knowledge of the Company, any validly issued or pending patent or other right of any other Person, nor, to the knowledge of the Company, is there any infringement by any other Person of any of the Listed Intellectual Property or of the intellectual property to which the Intellectual Property Licenses relate. The consummation of the transactions contemplated hereby and by the other Operative Documents will not alter or impair the Company's rights to any of the Listed Intellectual Property or under any Intellectual Property License. The manner in which the Company has manufactured, packaged, shipped, advertised, labeled and sold its products complies with all applicable laws and regulations pertaining thereto. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 18 25 Except as set forth on Schedule 2.17 of the Disclosure Memorandum, the Company is the sole and exclusive owner or licensee of: (a) the Listed Intellectual Property, the Intellectual Property Licenses and the technology, know-how and processes now used by it, or used in connection with any product now being manufactured and sold by it, in the manner that such product is now being manufactured and sold; and (b) all rights, title and interest of whatever kind or nature throughout the world in and to the fully or partially developed computer software products listed on Schedule 2.17 to the Disclosure Memorandum (the "Software"), with all modifications, enhancements and additions thereto, including, without limitation, all rights in and to all versions thereof and all source code, object code, manuals and other documentation and related materials thereof (collectively, the "Software Products"). Without limiting the generality of the above, the Software Products shall also include all of the Company's related programs, trade secrets, algorithms and processes relating to the Software Products or such programs, the Company's copyright in and to each of the Software Products and all works derivative therefrom (including the registrations of copyright listed on Schedule 2.17 to the Disclosure Memorandum), all current, previous, enhanced and developmental versions of the source and object code and any variations thereof, all user and programmer documentation, all design specifications, all maintenance and installation job control language, all system documentation (including all flow charts, systems procedures and program component descriptions), all procedures for modification and preparation for the release of enhanced versions and all test data available (excluding all proprietary information of third parties) with respect to the Software Products. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, each of the Intellectual Property Licenses is valid, binding and enforceable in accordance with its terms against the parties thereto, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor, to the best of the Company's knowledge, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default by the Company or, to the best of the Company's knowledge, any other party thereunder. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, the Company has not received notice that any party to any of the Intellectual Property Licenses intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. No licenses, sublicenses, covenants or agreements have been granted or entered into by the Company in respect of any of the Listed Intellectual Property except the Intellectual Property Licenses. No director, officer, shareholder or employee of the Company owns, directly or indirectly, in whole or in part, any of the Listed Intellectual Property. The Company does not know and does not have any reasonable basis to believe that there exist any new developments in the manufacture or marketing of the products of the Company or any new or improved products or processes useful in connection with the business of the Company as now conducted or as presently anticipated to be conducted that would have a material adverse effect upon the business, business prospects, assets, operations or condition (financial or other) of the Company. None - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 19 26 of the officers of the Company and none of the Company's employees, consultants, distributors, agents, representatives or advisers has entered into any agreement regarding know-how, trade secrets, assignment of rights in inventions, or prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than the Company. Except as set forth in the Disclosure Memorandum, to the Company's knowledge, no Person has asserted any claim of infringement or other interference with third-party rights with respect to the Listed Intellectual Property. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, (i) the Company has not disclosed any source code regarding the Software Products to any person other than an employee of the Company or to Sierra or the Purchaser, except for any disclosure that would not have a material adverse effect on the business, business prospects, assets, operations or conditions (financial or other) of the Company; (ii) the Company has at all times maintained reasonable procedures to protect and has enforced all trade secrets of the Company; (iii) neither the Company nor any escrow agent is under any contractual or other obligation to disclose the source code or any other proprietary information included in or relating to the Software Products nor, to the knowledge of the Company, is any other party to the Intellectual Property Licenses or any escrow agent under any such obligation to disclose any source code or other proprietary information included in or relating to Software Products, if any, that are licensed to the Company, to any person or entity and no event has taken place, including the execution of this Agreement or any related change in the Company's business activities, which would give rise to such obligation; and (iv) the Company has not deposited any source code regarding the Software Products into any source code escrows or similar arrangements. If, as disclosed on Schedule 2.17 to the Disclosure Memorandum, the Company has deposited any source code to Software Products into source code escrows or similar arrangements, no event has occurred that has or could reasonably form the basis for a release of such source code from such escrows or arrangements. Except as set forth on Schedule 2.17 to the Disclosure Memorandum, the Software Products are free from known significant defects and substantially conform to the specifications, documentation and sample demonstration furnished to the Company's customers, Sierra or the Purchaser. 2.18 ACCOUNTS RECEIVABLE All accounts receivable of the Company reflected in the Company Balance Sheet, or existing at the Effective Time, represent sales actually made in the ordinary course of business. Except as described on Schedule 2.18 to the Disclosure Memorandum, the bad debt reserves and sales return allowances reflected in the Company Balance Sheet are adequate. Set forth on Schedule 2.18 to the Disclosure Memorandum is a full and complete list of all consolidated accounts receivable of the Company existing as of August 31, 1995. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 20 27 2.19 INVENTORY Subject to such reserves and write-downs as may be reflected in the Financial Statements, all items in the inventory reflected in the Company Balance Sheet or as currently owned by the Company are of a quality and quantity usable and saleable in the ordinary course of business. Such inventory consists of materials and supplies used or sold in the business of the Company. 2.20 CORPORATE BOOKS AND RECORDS The Company has furnished to Sierra or its representatives for their examination true and complete copies of (a) the Articles of Incorporation and Bylaws of the Company as currently in effect, including all amendments thereto, (b) the minute books of the Company and (c) the stock transfer books of the Company. Such minutes reflect all meetings of the Company's shareholders, Board of Directors and any committees thereof since the Company's inception, and such minutes accurately reflect in all material respects the events of and actions taken at such meetings. Such stock transfer books accurately reflect all issuances and transfers of shares of capital stock of the Company since its inception. 2.21 LICENSES, PERMITS, AUTHORIZATIONS, ETC. Except as identified in Schedules 2.2 and 2.6 to the Disclosure Memorandum, the Company has received all currently required governmental approvals, authorizations, consents, licenses, orders, registrations and permits of all agencies, whether federal, state, local or foreign, the failure to obtain which would have a material adverse effect on its business, business prospects, assets, operations or condition (financial or other). The Company has not received any notifications of any asserted present failure by it to have obtained any such governmental approval, authorization, consent, license, order, registration or permit, or past and unremedied failure to obtain such items. 2.22 COMPLIANCE WITH LAWS (a) Except as described on Schedule 2.22 to the Disclosure Memorandum, the Company has complied, and is in compliance, with all federal, state, local and foreign laws, rules, regulations, ordinances, decrees and orders applicable to the operation of its business, to its employees, or to the Real Property and the Personal Property, the failure to comply with which would, individually or in the aggregate, have a material adverse effect on the business, assets or operations of the Company, including, without limitation, all such laws, rules, ordinances, decrees and orders relating to antitrust, consumer protection, currency exchange, environmental protection, equal opportunity, health, occupational safety, pension, securities and trading-with-the-enemy matters. The Company has not received any notification of any asserted present or past unremedied failure by the Company to comply with any of such laws, rules, ordinances, decrees or orders. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 21 28 (b) The Company is not currently in violation of any applicable building, zoning, environmental or other law, ordinance or regulation in respect of the Real Property or its plant, structures or operations. No such law, ordinance or regulation would reasonably be expected to prevent the use of substantially all of the Real Property for the conduct thereon of the business of the Company. (c) The Company is not in violation of, and has not violated, in connection with the ownership, use, maintenance or operation of the Real Property or the Personal Property or the conduct of their businesses, any applicable federal, state, county or local statutes, laws, regulations, guidances, rules, ordinances, codes, licenses, permits, judgments, writs, decrees, injunctions or orders of any governmental entity relating to environmental (air, water, groundwater, soil, noise and odor) matters ("Environmental Laws"), including, by way of illustration and not by way of limitation, the Clean Air Act, the Federal Water Pollution Control Act, the Resources Conservation and Recovery Act and the regulations issued thereunder, the Comprehensive Environmental, Response, Compensation, and Liability Act, the Clean Water Act, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the Hazardous Waste Control Act, comparable Texas laws, and the regulations issued thereunder, and all other applicable federal, state, county, local and foreign environmental requirements where such violation might have a material adverse impact on the Company's business, business prospects, assets, operations or condition (financial or other). (d) Except as set forth on Schedule 2.22 to the Disclosure Memorandum, the Company has not transported, stored, treated, recycled, handled or disposed of, or allowed or arranged for any third party to transport, store, treat, recycle, handle or dispose of (i) any flammable substances, explosives, radioactive materials, hazardous substances, hazardous wastes, toxic substances, pollutants, contaminants or any wastes, materials or substances identified in or regulated by any Environmental Laws; (ii) asbestos, polychlorinated biphenyls, urea formaldehyde, nuclear fuel or material, chemical waste, carcinogens and radon, all to the extent regulated by any Environmental Laws; and (iii) gasoline, oil and other petroleum products (collectively, "Regulated Substances"), to or at any location other than a location lawfully permitted to receive such material for such purposes at such time. Set forth on such Schedule 2.22 is a complete and accurate list of all locations to which the Company has ever transported, or caused to be transported or allowed or arranged for any third party to transport, any type of Regulated Substances for storage, treatment, handling, processing, burning, recycling or disposal. (e) Except as set forth on such Schedule 2.22, no real property ever owned by the Company, including, but not limited to, all surface and subsurface soil, sediments, groundwater and surface water located on, in or under such real property, was during the period of use by the Company being contaminated with any Regulated Substances or constituents thereof, which contamination has given or may give rise to any material obligation under any Environmental Laws, the common law or otherwise. To the present, actual knowledge of the Company, except as set forth on such Schedule 2.22, no real property adjacent to or adjoining the Real Property has been so contaminated. To the knowledge of the Company, except as set forth on such Schedule 2.22, no polychlorinated biphenyls, lead- - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 22 29 based materials or asbestos are present in or on the Real Property or in any equipment located therein. (f) Except as set forth on such Schedule 2.22, the Company has recorded or filed and has provided to Sierra true, accurate and complete copies of all reports with respect to any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of drums, barrels, containers or other closed receptacles) (any of the foregoing, a "Release"), required by any Environmental Laws to be filed by the Company with any government authority. Except as disclosed on such Schedule 2.22, the Company has maintained all environmental and operating documents and records substantially in the manner and for the time periods required by any Environmental Laws. (g) Except as disclosed on such Schedule 2.22, the Company has not caused or permitted the Release of any Regulated Substances or constituents thereof on, from or off-site of its property, or of any Release from any facility owned or operated by third parties but with respect to which any of them is alleged to have liability. (h) Except as set forth on such Schedule 2.22, there are no tanks which, when considered with all associated piping, are located either wholly or partially below the surface of the ground, and, without regard to whether they are in contact with soil, within a building or contamination structure or otherwise are located in, on or under the Real Property, and, except as set forth on such Schedule 2.22, the Real Property, or any portion thereof, is not a "wetland" as defined by any law, environmental or otherwise, and is not subject to regulation. (i) Schedule 2.22 to the Disclosure Memorandum contains a true, complete and accurate list, with a description of the nature thereof, of all reports, investigations, studies or environmental audits of any kind with regard to the Real Property. 2.23 INSURANCE The Company maintains (a) insurance on all of its property (including leased premises) that insures against loss or damage by fire or other casualty (including extended coverage) and (b) insurance against liabilities, claims and risks of a nature and in such amounts as are normal and customary in the software publication industry. All insurance policies of the Company are in full force and effect, all premiums with respect thereto covering all periods up to and including the date this representation is made have been paid, and no notice of cancellation or termination has been received with respect to any such policy or binder. Such policies or binders are sufficient for compliance with all requirements of law currently applicable to the Company and of all agreements to which the Company is a party, will remain in full force and effect through the respective expiration dates of such policies or binders without the payment of additional premiums, and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. The Company has not been refused any insurance with respect to its assets or operations, nor has its coverage been limited, by any - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 23 30 insurance carrier to which it has applied for any such insurance or with which it has carried insurance. 2.24 BROKERS OR FINDERS The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by or on behalf of the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Merger, this Agreement or any transaction contemplated hereby. 2.25 GOVERNMENT CONTRACTS The Company has never been, nor as a result of the consummation of the transactions contemplated by this Agreement (without giving any consideration to the identity or conduct of the Purchaser or Sierra) will it be, suspended or debarred from bidding on contracts or subcontracts for any agency of the United States government, nor has such suspension or debarment been threatened or action for suspension or debarment been commenced. The Company has not been nor is it now being audited or, to the knowledge of the Company, investigated by the United States Government Accounting Office, the United States Department of Justice, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency or the inspector general of any agency of the United States government, nor, to the knowledge of the Company, has such audit or investigation been threatened. There is no valid basis for the Company's suspension or debarment from bidding on contracts or subcontracts for any agency of the United States government and there is no valid basis for a claim pursuant to an audit or investigation by the United States Government Accounting Office, the United States Department of Justice, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency or the inspector general of any agency of the United States government, or any prime contractor. The Company has never had a contract or subcontract terminated for default or has ever been determined to be nonresponsible by any agency of the United States government. Except as set forth on Schedule 2.25 to the Disclosure Memorandum, the Company has no outstanding agreements, contracts or commitments which require it to obtain or maintain a government security clearance. 2.26 ABSENCE OF QUESTIONABLE PAYMENTS Neither the Company, nor any director, officer, agent, employee or other Person acting on behalf of the Company, has used any Company funds for improper or unlawful contributions, payments, gifts or entertainment, or made any improper or unlawful expenditures relating to political activity to government officials or others. The Company has adequate financial controls to present such improper or unlawful contributions, payments, gifts, entertainment or expenditures. Neither the Company, nor any current director, officer, agent, employee or other Person acting on behalf of the Company, has accepted or received any improper or unlawful contributions, payments, gifts or expenditures. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 24 31 2.27 PERSONNEL Schedule 2.27 to the Disclosure Memorandum sets forth a true and complete list of: (a) the names and current compensation amounts of all directors and elected and appointed officers of the Company and the family relationships, if any, among such persons; (b) the wage rates for nonsalaried and nonexecutive salaried employees of the Company by classification, and all labor union contracts (if any); (c) all group insurance programs in effect for employees of the Company; and (d) the names and current compensation packages of all independent contractors and consultants of the Company. The Company is not in default with respect to any of its obligations referred to in clause (b) above and has no obligation or liability for severance or back pay owed through or by virtue of the Closing. All employees of the Company are employed on an "at will" basis. 2.28 BANK ACCOUNTS Schedule 2.28 to the Disclosure Memorandum sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the Company maintains safe deposit boxes or accounts of any nature and the names of all Persons authorized to draw thereon, make withdrawals therefrom or have access thereto. 2.29 INSIDER INTERESTS Except as set forth on Schedule 2.29 to the Disclosure Memorandum, no Shareholder or officer or director or other representative of the Company has any interest (other than as a Shareholder of the Company) (a) in any property, real or personal, tangible or intangible, used in or directly pertaining to the business of the Company, including, without limitation, inventions, patents, trademarks or trade names, or (b) in any agreement, contract, arrangement or obligation relating to the Company, its present or prospective business or its operations. Except as set forth on Schedule 2.29 to the Disclosure Memorandum, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, holders, affiliates or any affiliate thereof. The Company and its officers and directors have no interest, either directly or indirectly, in any entity, including, without limitation, any corporation, partnership, joint venture, proprietorship, firm, licensee, business or association (whether as an employee, officer, director, shareholder, agent, independent contractor, security holder, creditor, consultant or otherwise) that presently (a) provides any services, produces and/or sells any products or product lines, or engages in any activity which is the same, similar to or competitive with any activity or business in which the Company is now engaged or proposes to engage; (b) is a supplier, customer, creditor, or has an existing - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 25 32 contractual relationship with any of the Company's employees (or persons performing similar functions); or (c) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of the Company or any property, real or personal, tangible or intangible, that is necessary or desirable for the present or anticipated future conduct of the Company's business. 2.30 SECURITIES ACT MATTERS Each of the Shareholders hereby acknowledges, represents and warrants to the Purchaser and Sierra as follows: (a) Ability to Bear Risk. Such Shareholder is in a financial position to hold the Securities for an indefinite period of time and is able to bear the economic risk and withstand a complete loss of its investment in the Securities. (b) SEC Documents. Such Shareholder acknowledges that he or she has had the opportunity to review to his or her satisfaction all publicly available filings and reports of Sierra filed with the Securities and Exchange Commission (the "SEC") (collectively, the "Public Filings"). Such Shareholder acknowledges that an investment in the Securities involves a high degree of risk. (c) Professional Advice. Such Shareholder has obtained, to the extent that it deems necessary, its own professional advice with respect to the risks inherent in acquiring the Securities, the condition of Sierra and the suitability of its investment in the Securities in light of its financial condition and investment needs. (d) Sophistication. Such Shareholder, either alone or with the assistance of its professional advisors, is a sophisticated investor, is able to fend for itself in the transactions contemplated by this Agreement relating to the Securities and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment in the Securities. (e) Accredited Investor. Such Shareholder is an "accredited investor" as defined in Regulation D under the Securities Act of 1933, as amended (the "1933 Act"). (f) Access to Information. Such Shareholder has been given access to full and complete information regarding Sierra and the Company, including, in particular, the current respective financial conditions of Sierra and the Company and the risks associated therewith, and has utilized such access to its satisfaction for the purpose of obtaining information about Sierra. (g) Acquisition Entirely for Own Account. The Securities are being acquired by such Shareholder for investment for its respective account, not as a nominee or agent, and not with a view to the distribution of any part thereof; such Shareholder has no present intention of selling, granting any participation in or otherwise distributing any of the Securities in a manner contrary to the 1933 Act or to any applicable state securities or Blue - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 26 33 Sky law, nor does such Shareholder have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant a participation to such person or to any third person with respect to any of the Securities. (h) Due Diligence. Such Shareholder has conducted its own due diligence investigation of Sierra and its business and analysis of the merits and risks of an investment in the Securities being acquired pursuant to this Agreement and is not relying on anyone else's investigation or analysis of Sierra or its business or the merits and risks of an investment in the Securities, other than professionals, if any, employed specifically by it to assist it. (i) Restricted Securities. Such Shareholder acknowledges that the Securities have not been and will not prior to issuance be registered under the 1933 Act and that the Securities are characterized under the 1933 Act as "restricted securities" and, therefore, cannot be sold or transferred unless such sale or transfer is registered under the 1933 Act or an exemption from such registration is available. The financial condition of such Shareholder is such that it is not likely that it will be necessary to dispose of any of the Securities in the foreseeable future. In this connection, such Shareholder represents that it is familiar with Rule 144 under the 1933 Act as presently in effect, and understands the resale limitations imposed thereby and by the 1933 Act. (j) Exemption Reliance. Such Shareholder has been advised that the Securities have not been registered under the 1933 Act or any applicable state securities laws, but are being issued under this Agreement pursuant to exemptions from such laws, and that Sierra's reliance upon such exemptions is predicated in part upon the Shareholder's representations contained herein. (k) Further Limitations on Disposition. Without in any way limiting the representations set forth herein, each Shareholder further agrees not to make any disposition of all or any portion of the Securities unless and until: (i) There is in effect a registration statement under the 1933 Act covering such proposed disposition and such disposition is made in accordance with such registration statement; (ii) (A) Such Shareholder shall have notified Sierra of the proposed disposition and shall have furnished Sierra with a detailed statement of the circumstances surrounding the proposed disposition and (B) if reasonably requested by Sierra, such Shareholder shall have furnished Sierra with an opinion of counsel, reasonably satisfactory to Sierra, that such disposition will not require registration under the 1933 Act; or (iii) Sierra shall be satisfied that such proposed disposition complies in all respects with Rule 144 or Rule 145 under the 1933 Act or any successor rule providing a safe harbor for such disposition without registration. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 27 34 (l) Residency. For purposes of the application of state securities laws, each Shareholder is a resident of the jurisdiction specified on Schedule 2.30 to the Disclosure Memorandum. (m) Legend. It is understood that the certificates evidencing the Securities may bear the following or a comparable legend: The securities evidenced by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws, and no interest therein may be sold, distributed, assigned, offered, pledged or otherwise transferred unless (i) there is an effective registration statement under the Act and applicable state securities laws covering any such transaction involving such securities, (ii) this corporation receives an opinion of legal counsel for the holder of the securities reasonably satisfactory to this corporation stating that such transaction is exempt from registration, or (iii) this corporation otherwise satisfies itself that such transaction is exempt from registration. 2.31 POOLING MATTERS The Company has not taken and will not take, and the Shareholders have not taken and will not take, directly or indirectly, and the Company and the Shareholders will use their respective best efforts to prevent any other Person from taking, any actions involving any recapitalization or repurchase or redemption of any securities of the Company, or any grant or acceleration of any options to acquire securities of the Company, or any purchase or sale of securities of Sierra, and to the best of their knowledge there have occurred no other events with respect to or involving the Company or its Shareholders, which taken individually or together would affect the ability of Sierra to account for the transactions contemplated by this Agreement as a "pooling of interests" transaction in accordance with generally accepted accounting principles, and neither the Company nor the Shareholders is aware of any facts which otherwise could prevent such accounting treatment. 2.32 FULL DISCLOSURE No information furnished by the Company or the Shareholders to Sierra or the Purchaser in connection with this Agreement (including, but not limited to, the Financial Statements and all information in the Disclosure Memorandum and the other Exhibits hereto) or the other Operative Documents, or by the Company to the Shareholders in connection with their approval of the Merger and execution and delivery of this Agreement, is false or misleading in any material respect. Neither the Company nor any Shareholder has made any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made or information delivered in or pursuant to this Agreement, including, but not limited to, all Schedules to the Disclosure Memorandum and Exhibits hereto, or in or pursuant to the other Operative Documents, or in or pursuant to closing certificates executed or delivered by the Shareholders or the Company, not misleading. The - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 28 35 Company has provided to Sierra an accurate and complete copy of the disclosure materials (the "Shareholder Disclosure Statement") delivered to the Shareholders in connection with their consideration and approval of the Merger and the other transactions contemplated hereby. The Shareholder Disclosure Statement contains all information required to be set forth therein under all applicable laws (including without limitation applicable federal, state and foreign securities laws). The Shareholder Disclosure Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein not misleading. ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND SIERRA To induce the Company and the Shareholders to enter into and perform this Agreement and the Operative Documents, the Purchaser and Sierra jointly and severally represent and warrant to the Company and the Shareholders as follows in this Article III: 3.1 ORGANIZATION Sierra is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Purchaser is a corporation duly organized and validly existing under the laws of the State of Washington. Each of the Purchaser and Sierra has full corporate power and authority to own, operate and lease its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform this Agreement and the Operative Documents to which either is a party, and to carry out the transactions contemplated hereby and thereby. 3.2 ENFORCEABILITY All corporate action on the part of the Purchaser and Sierra and their respective officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Operative Documents, the consummation of the Merger, and the performance of all of Sierra's and the Purchaser's respective obligations under this Agreement and the Operative Documents has been taken or will be taken prior to the Closing. This Agreement has been, and each of the Operative Documents to which the Purchaser is a party will have been at the Closing, duly executed and delivered by the Purchaser, and this Agreement is, and each of the Operative Documents to which the Purchaser is a party will be at the Closing, a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms. This Agreement has been, and each of the Operative Documents to which Sierra is a party will have been at the Closing, duly executed and delivered by Sierra, and this Agreement is, and each of the Operative Documents to which Sierra is a party will be at the Closing, a legal, valid and binding obligation of Sierra, enforceable against Sierra in accordance with its terms. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 29 36 3.3 LEGAL PROCEEDINGS There is no claim, action, suit, arbitration, proceeding or investigation pending or, to the best knowledge of the Purchaser or Sierra, threatened against the Purchaser or Sierra before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person, which questions the validity of this Agreement or any action taken or to be taken by the Purchaser or Sierra pursuant to this Agreement or in connection with the transactions contemplated hereby. 3.4 SECURITIES The Securities to be issued pursuant to this Agreement have been duly authorized for issuance, and such Securities, when issued and delivered to the Shareholders pursuant to this Agreement, shall be validly issued, fully paid and nonassessable. Other than restrictions arising under any federal or state securities law, rule, regulation or order, this Agreement or any other Operative Document, the securities are not subject to restrictions on transfer. 3.5 TAX CONSEQUENCES Neither Sierra nor Purchaser makes any representation or warranty with respect to, and expressly disclaims any responsibility for, any Tax consequences to the Shareholders arising out of the structure or terms of this Agreement, or the negotiation or consummation hereof. Each Shareholder has consulted with his own tax advisor in such matters and shall be solely responsible for any such tax consequences. ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER AND SIERRA The obligations of the Purchaser and Sierra to perform and observe the covenants, agreements and conditions hereof to be performed and observed by them at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by the Purchaser or Sierra: 4.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of the Company and each Shareholder contained herein (including applicable Exhibits or Schedules to the Disclosure Memorandum) and in the other Operative Documents shall have been true and correct when made and shall be true and correct as of the Closing Date as though made on that date. 4.2 PERFORMANCE OF AGREEMENTS The Company and the Shareholders shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement or any other Operative Document to be performed and complied with by them at or prior to the Closing. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 30 37 4.3 OPINION OF COUNSEL FOR THE COMPANY The Purchaser and Sierra shall have received the opinion letter of Krause & Associates, counsel for the Company and the Shareholders, dated the Closing Date, substantially in the form attached hereto as Exhibit 4.3. 4.4 SHAREHOLDER APPROVAL The Shareholders shall have duly and validly approved the Merger by a vote or written consent in accordance with Texas Law, and no Shareholders holding, in the aggregate, more than 10% of the shares of Company Common Stock shall have elected to claim dissenters' rights under Texas Law. 4.5 RESIGNATIONS The Purchaser and Sierra shall have received copies of resignations effective as of the Closing Date of all the officers and directors of the Company. 4.6 CONSENTS TO MERGER The Company shall have received and shall have delivered to Sierra written consents to the Merger from each of the parties (other than the Company) to those agreements, leases, notes or other documents identified on Schedules 2.6 and 2.17 to the Disclosure Memorandum, which consents shall be satisfactory in all respects to Sierra in its sole and absolute discretion. 4.7 OFFICERS' CERTIFICATE The Purchaser and Sierra shall have received a certificate of the President and the Chief Financial Officer of the Company, dated the Closing Date, in form and substance satisfactory to Sierra, certifying that the conditions to the obligations of the Purchaser and Sierra have been fulfilled. 4.8 PRINCIPALS' CERTIFICATES The Purchaser and Sierra shall have received certificates from each of the David Macdonald and Alex Perelberg (together, the "Principals"), dated the Closing Date, in form and substance satisfactory to Sierra, certifying that the conditions to the obligations of the Purchaser and Sierra have been fulfilled. 4.9 MATERIAL ADVERSE CHANGE Since December 31, 1994 and through the Closing, there shall not have occurred any material adverse change in the business, operations, assets, liabilities, earnings, condition (financial or other), or prospects of the Company, and no material adverse change shall have - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 31 38 occurred in any domestic or foreign laws or regulations affecting the Company or in any third party contractual or other business relationships of the Company. 4.10 DUE DILIGENCE The results of Sierra's due diligence investigation of the Company shall be satisfactory in all respects to Sierra in its sole and absolute discretion. 4.11 APPROVALS AND CONSENTS All transfers of permits or licenses, all approvals, applications or notices to public agencies, federal, state, local or foreign, the granting or delivery of which is necessary for the consummation of the transactions contemplated hereby or for the continued operation of the Company, shall have been obtained, and all waiting periods specified by law shall have passed. All other consents, approvals and notices referred to in this Agreement shall have been obtained or delivered. 4.12 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE All corporate and other proceedings in connection with the transactions contemplated hereby and by the Operative Documents and all documents and instruments incident to such transactions shall have been approved by Sierra's counsel, and Sierra shall have received a certificate of the Secretary of the Company, in form and substance satisfactory to Sierra, as to the authenticity and effectiveness of the actions of the Board of Directors and Shareholders of the Company authorizing the Merger and the transactions contemplated by this Agreement and the Operative Documents and such other documents as are specified by Sierra's counsel. 4.13 NONFOREIGN AFFIDAVIT Sierra and the Purchaser shall have received from the Company, pursuant to Section 1445 of the Code, a Foreign Investment in Real Property Tax Act Affidavit in the form attached hereto as Exhibit 4.13. 4.14 COMPLIANCE WITH LAWS The consummation of the transactions contemplated by this Agreement and the Operative Documents shall be legally permitted by all laws and regulations to which Sierra or the Company is subject. 4.15 POOLING OF INTERESTS As of the Closing no facts shall exist and no events shall have occurred that would, in the opinion of Sierra's independent accountants, prevent Sierra from accounting for the Merger contemplated herein as a "pooling of interests" transaction. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 32 39 4.16 OTHER AGREEMENTS The Agreements listed in Exhibit 4.16 to this Agreement shall have been amended or terminated in a manner satisfactory to Sierra. 4.17 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect which enjoins, restrains, conditions or prohibits consummation of this Agreement or any Operative Document, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Operative Document. 4.18 OPERATIVE DOCUMENTS The Operative Documents shall have been executed and delivered by all parties thereto other than Sierra and the Purchaser. ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY The obligations of the Shareholders and the Company to perform and observe the covenants, agreements and conditions hereof to be performed and observed by them at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by the Company. 5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of the Purchaser and Sierra contained herein and in the other Operative Documents shall have been true and correct when made and shall be true and correct as of the Closing Date as though made on that date. 5.2 PERFORMANCE OF AGREEMENTS The Purchaser and Sierra shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement or any other Operative Document to be performed and complied with by them at or prior to the Closing. 5.3 OPINION OF COUNSEL The Shareholders shall have received the opinion letter of Perkins Coie, counsel for Sierra and the Purchaser, dated the Closing Date, substantially in the form attached hereto as Exhibit 5.3. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 33 40 5.4 OFFICERS' CERTIFICATE The Company shall have received a certificate of the Chief Financial Officer and another officer of Sierra, dated the Closing Date, substantially in the form attached hereto as Exhibit 5.4, certifying that the conditions to the obligations of the Shareholders and the Company have been fulfilled. 5.5 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect which enjoins, restrains, conditions or prohibits consummation of this Agreement or any Operative Document, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Operative Document. 5.6 OPERATIVE DOCUMENTS Sierra and the Purchaser shall have executed and delivered to the Company all the Operative Documents to which they are parties. ARTICLE VI - COVENANTS Between the date of this Agreement and the Effective Time, the parties covenant and agree as set forth in this Article VI. For purposes of this Article VI, all references to the Company shall also include its Subsidiaries. 6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER Unless Sierra shall otherwise agree in writing, the business of the Company shall be conducted in and only in, and the Company shall not take any action except in, the ordinary course of business and in a manner consistent with past practice and in accordance with applicable law; and the Company shall use its best efforts to preserve substantially intact the business organization of the Company, to keep available the services of the current officers, employees and consultants of the Company and to preserve the current relationships of the Company with customers, suppliers and other persons with which the Company has significant business relations. By way of amplification and not limitation, except as otherwise contemplated by this Agreement, the Company shall not, between the date of this Agreement and the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of Sierra: (a) amend or otherwise change its Articles of Incorporation or Bylaws or equivalent organizational documents; (b) issue, sell, pledge, dispose of, grant, encumber or authorize the issuance, sale, pledge, disposition, grant or encumbrance of (i) any shares of capital stock of any class of the Company, or any options, warrants, convertible securities or other rights of - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 34 41 any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of the Company or (ii) any assets of the Company, except for sales in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) reclassify, combine, split, subdivide, redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets) any corporation, partnership, other business organization or division thereof or any material amount of assets; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans or advances, except in the ordinary course of business and consistent with past practice; (iii) enter into any contract or agreement other than in the ordinary course of business, consistent with past practice; (iv) authorize any single capital expenditure which is in excess of $5,000 or capital expenditures which are, in the aggregate, in excess of $10,000 for the Company taken as a whole; or (v) enter into or amend any contract, agreement, commitment or arrangement with respect to any matter set forth in this subsection (e); (f) enter into any employment, consulting or agency agreement, or increase the compensation payable or to become payable to its officers, employees or consultants, except for increases in accordance with existing agreements or past practices for employees of the Company who are not officers of the Company, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee; (g) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures (including, without limitation, procedures with respect to the payment of accounts payable and collection of accounts receivable); (h) make any tax election or settle or compromise any material federal, state, local or foreign income tax liability; (i) pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business and consistent with past practice, of - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 35 42 liabilities reflected or reserved against in the Company Balance Sheet or subsequently incurred in the ordinary course of business and consistent with past practice; (j) take any action that would or is reasonably likely to result in any of the representations and warranties of the Company set forth in this Agreement being untrue, or in any covenant of the Company set forth in this Agreement being breached, or in any of the conditions to the Merger specified in Article IV hereof not being satisfied; (k) take or agree to take any action specified in Section 2.8 hereof, or enter into any other material transaction other than those specified above, or agree to do any of the foregoing. 6.2 ACCESS TO INFORMATION; CONFIDENTIALITY From the date hereof to the Effective Time, the Company shall, and shall cause the officers, directors, employees, auditors and agents of the Company to, afford the officers, employees and agents of Sierra complete access at all reasonable times to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company and shall furnish Sierra with all financial, operating and other data and information as Sierra, through its officers, employees or agents, may reasonably request. From the date hereof until the Effective Time, the Company shall provide Sierra with monthly and other financial statements of the Company as they become available internally at the Company, all of which financial statements shall fairly present the financial position and results of operations of the Company as of the dates and for the periods therein specified. No investigation pursuant to this Section 6.2 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. 6.3 NO SOLICITATION OF TRANSACTIONS The Company shall not, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, the Company or any business combination with the Company or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. The Company immediately shall cease and cause to be terminated all existing discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company shall notify Sierra promptly if any such proposal or offer, or any inquiry or contact with any Person with respect thereto, is made and shall, in any such notice to Sierra, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact and the terms and conditions of such proposal, offer, inquiry or contact. The Company agrees not to release any third party from, or waive any provision of, any confidentiality or standstill agreement to which the Company is a party. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 36 43 6.4 NOTIFICATION OF CERTAIN MATTERS The Company shall give prompt notice to Sierra of (a) the occurrence or nonoccurrence of any event which would be likely to cause any representation or warranty of the Company contained in this Agreement to be untrue or inaccurate and (b) any failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.4 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 6.5 FURTHER ACTION; REASONABLE BEST EFFORTS Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby, including, without limitation, using its reasonable best efforts to obtain all waivers, licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company as are necessary for the consummation of the transactions contemplated hereby and to fulfill the conditions to the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, each party to this Agreement shall use its reasonable best efforts to take all such action. No Shareholder will undertake any course of action inconsistent with this Agreement or which would make any representations, warranties or agreements made by such party in this Agreement or any other Operative Documents untrue or any conditions precedent to this Agreement unable to be satisfied at or prior to the Closing. After the Closing Date, each party hereto, at the request of and without any further cost or expense to the other parties, will take any further actions necessary or desirable to carry out the purposes of this Agreement or any other Operative Document, to vest in the Surviving Corporation full title to all properties, assets and rights of the Company and to effect the issuance of the Sierra Common Stock to the Shareholders pursuant to the terms and conditions hereof. 6.6 PUBLICITY The Company and the Shareholders shall not issue any press release or otherwise make any statements to any third party with respect to this Agreement or the transactions contemplated hereby without the prior written consent of Sierra. ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER 7.1 TERMINATION This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of this Agreement by the Shareholders of the Company): - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 37 44 (a) by mutual written consent duly authorized by the Boards of Directors of the Company and Sierra; (b) by either the Company or Sierra, if the Merger has not been consummated by September 30, 1995; provided, however, that the right to terminate this Agreement under this subsection (b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by either the Company or Sierra, if there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Sierra, the Purchaser or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and nonappealable; provided, however, that the party seeking to terminate this Agreement pursuant to this subsection (c) shall have used all reasonable efforts to remove such judgment, injunction, order or decree; (d) at any time prior to the Closing by Sierra if, at any time in the course of its legal, accounting, financial or operational due diligence investigation as to the Company, it shall have become aware of any facts or circumstances that it was not aware of on the date hereof, or any additional facts and circumstances as to matters of which it was aware on the date hereof, in either case that would, in the reasonable judgment of Sierra, make it inadvisable to consummate the Merger or the other transactions contemplated hereby; (e) by the Company, in the event of a material breach by Sierra of any representation, warranty or agreement contained herein which has not been cured or is not curable by September 30, 1995; or (f) by Sierra, in the event of a material breach by the Company of any representation, warranty or agreement contained herein which has not been cured or is not curable by September 30, 1995. 7.2 EFFECT OF TERMINATION In the event of the termination of this Agreement pursuant to Section 7.1 hereof, there shall be no further obligation on the part of any party hereto, except that nothing herein shall relieve any party from liability for any breach hereof. 7.3 AMENDMENT This Agreement may be amended by Sierra and the Company at any time prior to the Effective Time; provided, however, that no amendment may be made which would reduce the amount or change the type of consideration into which each share of Company Common Stock shall be converted upon consummation of the Merger without the prior written consent of the Shareholders. This Agreement may not be amended except by an instrument in writing signed by Sierra and the Company. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 38 45 7.4 WAIVER At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any obligation or other act of any other party hereto, (b) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any agreement or condition contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE VIII - SURVIVAL AND INDEMNIFICATION 8.1 SURVIVAL All representations and warranties contained in this Agreement or in the other Operative Documents or in any certificate delivered pursuant hereto or thereto shall survive the Closing for a period of one year, and shall not be deemed waived or otherwise affected by any investigation made or any knowledge acquired with respect thereto. The covenants and agreements contained in this Agreement or in the other Operative Documents shall survive the Closing and shall continue until all obligations with respect thereto shall have been performed or satisfied or shall have been terminated in accordance with their terms. 8.2 INDEMNIFICATION From and after the Closing Date, the Shareholders shall jointly and severally indemnify and hold Sierra and its affiliates (the " Indemnified Parties") harmless from and against, and shall reimburse the Indemnified Parties for, any and all losses, damages, debts, liabilities, obligations, judgments, orders, awards, writs, injunctions, decrees, fines, penalties, taxes, costs or expenses (including but not limited to any legal or accounting fees of expenses) ("Losses") arising out of or in connection with: (a) any inaccuracy in any representation or warranty made by the Company or the Shareholders in this Agreement or in any other Operative Document or in any certificate delivered pursuant hereto or thereto, (b) any failure by the Company or any Shareholder to perform or comply, in whole or in part, with any covenant or agreement in this Agreement or in any other Operative Document; (c) any accounts receivable reflected on the balance sheet of the Company dated August 31, 1995 which are not collected prior to February 28, 1996; or (d) any inventory reflected on the balance sheet of the Company dated August 31, 1995 which is written down in accordance with GAAP due to obsolescence or shrink (which occurs prior to Closing), on or prior to December 31, 1995. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 39 46 8.3 THRESHOLD AND LIMITATIONS (a) No Indemnified Party shall be entitled to receive any indemnification payment with respect to any Claims until the aggregate Losses for which such Indemnified Parties would be otherwise entitled to receive indemnification exceed $10,000 (the "Threshold"); provided, however, that once such aggregate Losses exceed the Threshold, such Indemnified Parties shall be entitled to indemnification for the aggregate amount of all Losses without regard to the Threshold. (b) In no event shall the liability of the Shareholders hereunder for Losses incurred by Indemnified Parties exceed an amount equal to the number of shares of Sierra Common Stock issued to the Shareholders pursuant to the Merger multiplied by the Closing Average. 8.4 PROCEDURE FOR INDEMNIFICATION (a) Any Indemnified Party shall notify the indemnifying party in writing reasonably promptly after the assertion against the Indemnified Party of any claim by a third party (a "Third Party Claim") in respect of which the indemnified party intends to base a Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve it of any obligation or liability that it may have to the indemnified party except to the extent that the indemnifying party demonstrates that its ability to defend or resolve such Third Party Claim is adversely affected thereby. (b) (i) The indemnifying party shall have the right, upon written notice given to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, to assume the defense or handling of such Third Party Claim, at the indemnifying party's sole expense, in which case the provisions of Section 8.5(b)(ii) below shall govern. (ii) The indemnifying party shall select counsel reasonably acceptable to the Indemnified Party in connection with conducting the defense or handling of such Third Party Claim, and the indemnifying party shall defend or handle the same in consultation with the Indemnified Party and shall keep the Indemnified Party timely apprised of the status of such Third Party Claim. The indemnifying party shall not, without the prior written consent of the Indemnified Party, agree to a settlement of any Third Party Claim. The Indemnified Party shall cooperate with the indemnifying party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (c) (i) If the indemnifying party does not give written notice to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, of the indemnifying party's election to assume the defense or handling of such Third Party Claim, the provisions of Section 8.5(c)(ii) below shall govern. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 40 47 (ii) The Indemnified Party may, at the indemnifying party's expense, select counsel in connection with conducting the defense or handling of such Third Party Claim and defend or handle such Third Party Claim in such manner as it may deem appropriate, provided, however, that the Indemnified Party shall keep the indemnifying party timely apprised of the status of such Third Party Claim and shall not settle such Third Party Claim without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld. If the Indemnified Party defends or handles such Third Party Claim, the indemnifying party shall cooperate with the Indemnified Party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (d) If the Indemnified Party intends to seek indemnification hereunder, other than for a Third Party Claim, then it shall notify the indemnifying party in writing within six months after its discovery of facts upon which it intends to base its Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve the indemnifying party of any obligation or liability that the indemnifying party may have to the Indemnified Party except to the extent that the indemnifying party demonstrates that the indemnifying party's ability to defend or resolve such Claim is adversely affected thereby. (e) The Indemnified Party may notify the indemnifying party of a Claim even though the amount thereof plus the amount of other Claims previously notified by the Indemnified Party aggregate less than the Threshold. 8.6 OFFSET If and to the extent that any Indemnified Party is entitled to indemnification hereunder, Sierra may offset such indemnification amount against the Escrow Shares as provided in the Escrow Agreement. ARTICLE IX - GENERAL 9.1 EXPENSES If the transactions contemplated by this Agreement are consummated, Sierra shall pay the fees and expenses of the Company and the Shareholders, up to a maximum of $25,000, incident to the negotiation, preparation and execution of this Agreement and the other Operative Documents (including legal and accounting fees and expenses); provided, however, that, should any action be brought hereunder, the attorneys' fees and expenses of the prevailing party shall be paid by the other party to such action. The Shareholders shall pay any transfer or similar taxes which may be payable in connection with the transactions contemplated by this Agreement. In addition, the Shareholders shall be responsible for the fees and expenses incurred by the Company in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby to the extent such fees and expenses exceed the maximum amount referred to above. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 41 48 9.2 EMPLOYEE AGREEMENTS At or as soon as practicable after the Closing, each employee of the Company shall have executed and delivered Sierra's standard form Confidentiality Agreement and Sierra's standard form Invention Assignment and Proprietary Information Agreement. 9.3 NOTICES Any notice or demand desired or required to be given hereunder shall be in writing given by personal delivery or certified or registered mail, telegram or confirmed facsimile transmission, addressed as respectively set forth below or to such other address as any party shall have previously designated by such a notice. The effective date of any notice or request shall be three days from the date it is sent by the addressor with charges prepaid so long as it is in fact received within five days, or when successful transmission is confirmed if sent by facsimile, or when personally delivered. TO THE PURCHASER AND TO SIERRA: Sierra On-Line, Inc. 3380 146th Place S.E., Suite 300 Bellevue, WA 98007 Fax: (206) 649-0214 Attention: General Counsel with a copy to: Perkins Coie 1201 Third Avenue, 40th Floor Seattle, Washington 98101-3099 Fax: (206) 583-8500 Attention: Stephen A. McKeon TO THE SHAREHOLDERS: At their respective addresses set forth on Schedule 2.1 to the Disclosure Memorandum. TO THE COMPANY: Arion Software, Inc. 3355 Bee Cave Road, Suite 507 Austin, Texas 78746 Fax: (512) 327-3786 Attention: President - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 42 49 with a copy to: Krause & Associates Barton Oaks Plaza Two, Suite 385 901 Mopac Expressway Austin, Texas 78746 Fax: (512) 477-6708 Attention: Winston Krause 9.4 SEVERABILITY If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. 9.5 ENTIRE AGREEMENT This Agreement and the other Operative Documents constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede, except as set forth in Section 6.2 hereof, all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof. 9.6 ASSIGNMENT This Agreement shall not be assigned by operation of law or otherwise, except that Sierra may assign all or any of its rights and obligations hereunder to any of its affiliates, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations, and further provided that any such assignment shall not change the consideration due to the Shareholders hereunder. 9.7 PARTIES IN INTEREST This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 43 50 9.8 SPECIFIC PERFORMANCE The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. 9.9 GOVERNING LAW This Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington applicable to contracts executed in and to be performed in that State. All actions and proceedings arising out of or relating to this Agreement shall be heard and determined in any Washington state or federal court thereof. 9.10 HEADINGS The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 9.11 COUNTERPARTS This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 9.12 WAIVER OF JURY TRIAL Each of the Shareholders, Sierra, the Company and the Purchaser hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the actions of such parties in the negotiation, administration, performance and enforcement thereof. 9.13 SHAREHOLDERS' AGREEMENT The Shareholders' Agreement dated November 15, 1991, by and among David Macdonald, Alex Perelberg and the Company is hereby terminated, and all parties thereto waive any restriction on sale or transfer, preemptive right or option, right of first refusal, or any other right or obligation arising under such agreement. 9.14 ARBITRATION Any controversies or claims arising out of or relating to this Agreement or the other Operative Documents shall be fully and finally settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA Rules"), conducted by one arbitrator either mutually agreed upon by Sierra and the Shareholders or - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 44 51 chosen in accordance with the AAA Rules, except that the parties thereto shall have any right to discovery as would be permitted by the Federal Rules of Civil Procedure for a period of 90 days following the commencement of such arbitration, and the arbitrator thereof shall resolve any dispute which arises in connection with such discovery. The prevailing party shall be entitled to costs, expenses and reasonable attorneys' fees, and judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. Arbitration proceedings shall be conducted in Austin, Texas if commenced by Sierria and in Seattle, Washington if commenced by the Shareholders. - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 45 52 IN WITNESS WHEREOF, the parties hereto have entered into and signed this Agreement as of the date and year first above written. SIERRA ON-LINE, INC. By /s/ Kenneth A. Williams ----------------------------------------- Its President and Chief Executive Officer ARION ACQUISITION CORPORATION By /s/ Michael A. Brochu ----------------------------------------- Its President ARION SOFTWARE, INC. By /s/ David Macdonald ----------------------------------------- Its President SHAREHOLDERS: /s/ David Macdonald -------------------------------------------- David Macdonald /s/ Alex Perelberg -------------------------------------------- Alex Perelberg SOFTWAYS OF CALIFORNIA By /s/ Steven W. illegible ----------------------------------------- Its General Partner - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER PAGE 46 EX-2.07 6 AGREEMENT AND PLAN OF MERGER DATED APRIL 12, 1996 1 AGREEMENT AND PLAN OF MERGER AMONG SIERRA ON-LINE, INC., BIRDIE ACQUISITION CORP., HEADGATE, INC. AND THE SHAREHOLDERS OF HEADGATE, INC. DATED AS OF APRIL 12, 1996 2 CONTENTS ARTICLE I - THE MERGER ................................................................................... 1 1.1 The Merger ........................................................................... 1 1.2 The Closing .......................................................................... 2 1.3 Effective Date and Time .............................................................. 2 1.4 Articles of Incorporation of the Surviving Corporation ............................... 2 1.5 Bylaws of the Surviving Corporation .................................................. 2 1.6 Conversion of Shares ................................................................. 3 1.6.1 Exchange Ratio .............................................................. 3 1.6.2 Special Definitions ......................................................... 3 1.6.3 Exchange of Certificates .................................................... 3 1.6.4 No Fractional Shares ........................................................ 4 1.6.5 No Further Transfers ........................................................ 4 1.7 Pooling Restrictions on Transfer of the Securities ................................... 4 1.8 Waiver of Rights Relating to Company Common Stock .................................... 5 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS .......................................... 5 2.1 Good Title, etc. ..................................................................... 5 2.2 No Approvals; No Conflicts ........................................................... 6 2.3 Securities Act Matters ............................................................... 6 2.4 Pooling Matters ...................................................................... 9 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY .............................................. 9 3.1 Organization ......................................................................... 9 3.2 Enforceability ....................................................................... 10 3.3 Capitalization ....................................................................... 10 3.4 Subsidiaries and Affiliates .......................................................... 11 3.5 No Approvals; No Conflicts ........................................................... 11 3.6 Financial Statements ................................................................. 12 3.7 Absence of Certain Changes or Events ................................................. 12
- ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page i 3 3.8 Taxes ................................................................................ 15 3.9 Property ............................................................................. 16 3.10 Contracts ............................................................................ 17 3.11 Customers and Suppliers .............................................................. 18 3.12 Orders, Commitments and Returns ...................................................... 19 3.13 Claims and Legal Proceedings ......................................................... 19 3.14 Labor and Employment Matters ......................................................... 19 3.15 Employee Benefit Plans ............................................................... 20 3.16 Patents, Trademarks, etc. ............................................................ 22 3.17 Accounts Receivable .................................................................. 24 3.18 Inventory ............................................................................ 24 3.19 Corporate Books and Records .......................................................... 25 3.20 Licenses, Permits, Authorizations, etc. .............................................. 25 3.21 Compliance With Laws ................................................................. 25 3.22 Insurance ............................................................................ 25 3.23 Brokers or Finders ................................................................... 26 3.24 Absence of Questionable Payments ..................................................... 26 3.25 Bank Accounts ........................................................................ 26 3.26 Insider Interests .................................................................... 27 3.27 Pooling Matters ...................................................................... 27 3.28 Full Disclosure ...................................................................... 27 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SIERRA AND ACQUISITION SUB ................................ 28 4.1 Organization ......................................................................... 28 4.2 Enforceability ....................................................................... 28 4.3 Securities ........................................................................... 29 4.4 SEC Documents ........................................................................ 29 4.5 No Approvals; No Conflicts ........................................................... 29
- ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page ii 4 ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF SIERRA AND ACQUISITION SUB ............................ 30 5.1 Accuracy of Representations and Warranties ........................................... 30 5.2 Performance of Agreements ............................................................ 30 5.3 Opinion of Counsel for the Company ................................................... 30 5.4 Shareholder Approval ................................................................. 30 5.5 Resignations ......................................................................... 31 5.6 Consents and Approvals ............................................................... 31 5.7 Compliance Certificate ............................................................... 31 5.8 Material Adverse Change .............................................................. 31 5.9 Due Diligence ........................................................................ 31 5.10 Proceedings and Documents; Secretary's Certificate ................................... 31 5.11 Compliance With Laws ................................................................. 32 5.12 Pooling of Interests ................................................................. 32 5.13 Legal Proceedings .................................................................... 32 5.14 Related Agreements and Stock Powers .................................................. 32 ARTICLE VI - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY ..................... 32 6.1 Accuracy of Representations and Warranties ........................................... 33 6.2 Performance of Agreements ............................................................ 33 6.3 Compliance Certificate ............................................................... 33 6.4 Legal Proceedings .................................................................... 33 6.5 Related Agreements ................................................................... 33 ARTICLE VII - COVENANTS .................................................................................. 33 7.1 Conduct of Business by the Company Pending the Merger ................................ 33 7.2 Access to Information; Confidentiality ............................................... 35 7.3 No Alternative Transactions .......................................................... 36 7.4 Notification of Certain Matters ...................................................... 36 7.5 Further Action; Reasonable Best Efforts .............................................. 37 7.6 Publicity ............................................................................ 37
- ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page iii 5 ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER ......................................................... 37 8.1 Termination .......................................................................... 37 8.2 Effect of Termination ................................................................ 38 8.3 Amendment ............................................................................ 38 8.4 Waiver ............................................................................... 39 ARTICLE IX - SURVIVAL AND INDEMNIFICATION ................................................................ 39 9.1 Survival ............................................................................. 39 9.2 Indemnification by Shareholders ...................................................... 39 9.3 Indemnification by Sierra ............................................................ 40 9.4 Threshold and Limitations ............................................................ 40 9.5 Procedure for Indemnification ........................................................ 40 9.6 Holdback ............................................................................. 42 9.6.1 Pledge ...................................................................... 42 9.6.2 Release of Holdback Shares .................................................. 42 9.6.3 Claims Procedure ............................................................ 43 9.6.4 Voting; Disposition ......................................................... 44 9.6.5 Merger or Recapitalization .................................................. 44 9.6.6 Taxation of Dividends ....................................................... 44 ARTICLE X - GENERAL ...................................................................................... 45 10.1 Expenses ............................................................................. 45 10.2 Notices .............................................................................. 45 10.3 Severability ......................................................................... 46 10.4 Entire Agreement ..................................................................... 46 10.5 Assignment ........................................................................... 47 10.6 Parties in Interest .................................................................. 47 10.7 Specific Performance ................................................................. 47 10.8 Governing Law ........................................................................ 47 10.9 Headings ............................................................................. 47 10.10 Counterparts ......................................................................... 47 10.11 Waiver of Jury Trial ................................................................. 48 10.12 Arbitration .......................................................................... 48
- ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page iv 6 10.13 Tax-Free Reorganization .............................................................. 48
EXHIBITS A - Articles of Incorporation of the Surviving Corporation B - Disclosure Memorandum C - Form of Registration Rights Agreement D - Form of Noncompetition Agreement - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page v 7 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "Agreement") is made and entered into as of April 12, 1996 by and among Sierra On-Line, Inc., a Delaware corporation ("Sierra"), Birdie Acquisition Corp., a Utah corporation and wholly-owned subsidiary of Sierra ("Acquisition Sub"), Headgate, Inc., a Utah corporation (the "Company"), and the shareholders of the Company listed on the signature pages hereto (the "Shareholders"). RECITALS A. The Company, the Shareholders, Sierra and Acquisition Sub believe it advisable and in their respective best interests to effect a merger of the Company and Acquisition Sub pursuant to this Agreement (the "Merger"). B. The Board of Directors and the Shareholders of the Company have approved the Merger as required by applicable law. C. The Board of Directors and the sole shareholder of Acquisition Sub have approved the Merger as required by applicable law. D. For federal income tax purposes, the parties hereto intend to treat the Merger as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). AGREEMENT In consideration of the terms hereof, the parties hereto agree as follows: ARTICLE I - THE MERGER 1.1 THE MERGER Upon the terms and subject to the conditions hereof, (a) at the Effective Time (as defined in Section 1.3 hereof) the separate existence of Acquisition Sub shall cease and Acquisition Sub shall be merged with and into the Company (the Company is sometimes referred to herein as the "Surviving Corporation"), and (b) from and after the Effective Time, the Merger shall have all the effects of a merger under the laws of the State of Utah and other applicable law. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 1 8 1.2 THE CLOSING The closing of the Merger pursuant to this Agreement (the "Closing") shall take place on the earliest practicable business day after the conditions to the Closing of the Merger set forth in Articles V and VI hereof are satisfied or waived (the "Closing Date") at 10:00 a.m. local time at the offices of Perkins Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington, or such other time or location as Sierra and the Company shall agree. At the Closing, each of the parties hereto shall deliver all such documents, instruments, certificates and other items as may be required under this Agreement or the other Related Agreements (as defined in Section 2.1) or otherwise. 1.3 EFFECTIVE DATE AND TIME On the Closing Date and subject to the terms and conditions hereof, articles of merger (collectively, the "Articles of Merger") complying with the applicable provisions of the Utah Business Corporation Act ("Utah Law"), in such form and executed in such manner as required by Utah Law, shall be delivered for filing to the Utah Division of Corporations and Commercial Code (the "Utah Division"). The Merger shall become effective on the date (the "Effective Date") and at the time (the "Effective Time") of filing of the Articles of Merger or at such other time as may be specified in the Articles of Merger as filed. If the Utah Division requires any changes in the Articles of Merger as a condition to their filing or to issuing its certificate to the effect that the Merger is effective, Sierra, Acquisition Sub, the Company and the Shareholders will execute any necessary revisions incorporating such changes, provided such changes are not inconsistent with and do not result in any substantial change in the terms of this Agreement. 1.4 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION At the Effective Time, the Articles of Incorporation of the Surviving Corporation shall be deemed to be amended and restated in their entirety as set forth in Exhibit A hereto. Thereafter, the Articles of Incorporation of the Surviving Corporation may be amended in accordance with their terms and as provided by law. 1.5 BYLAWS OF THE SURVIVING CORPORATION At the Effective Time, the Bylaws of the Surviving Corporation shall be amended and restated in their entirety to conform to the Bylaws of Acquisition Sub. Thereafter, the Bylaws of the Surviving Corporation may be amended or repealed in accordance with their terms, the Articles of Incorporation of the Surviving Corporation and as provided by law. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 2 9 1.6 CONVERSION OF SHARES 1.6.1 EXCHANGE RATIO As of the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof: (a) All shares of any class of capital stock of the Company held by the Company as treasury shares shall be canceled. (b) Each issued and outstanding share of common stock of the Company, $1.00 par value per share ("Company Common Stock"), shall be converted into the right to receive from Sierra a number of shares of Sierra common stock, $.01 par value per share ("Sierra Common Stock"), determined by dividing the number of Closing Shares (as defined below) by the total number of shares of Company Common Stock outstanding immediately prior to the Effective Time on a fully diluted basis (such shares of Sierra Common Stock being referred to herein as the "Merger Consideration" or the "Securities" and the quotient so derived being referred to herein as the "Ratio"); provided, however, that 10% of such Securities (the "Holdback Shares") shall be held by, and pledged by the Shareholders at Closing to, Sierra pursuant to Section 9.6 hereof. The number of Securities to be issued to each Shareholder under this paragraph shall be calculated by aggregating all shares of Company Common Stock held by each such Shareholder, so that such number of Securities to be issued shall be equal to the number of shares of Company Common Stock held by such Shareholder multiplied by the Ratio, with cash paid in lieu of any fractional share of Sierra Common Stock pursuant to Section 1.6.4 below. (c) Each issued and outstanding share of capital stock of Acquisition Sub shall be converted into one share of common stock of the Surviving Corporation. 1.6.2 SPECIAL DEFINITIONS The term "Closing Shares" shall mean a number of shares (excluding any fractional share) of Sierra Common Stock determined by dividing (a) $8,090,000 by (b) an amount equal to the average of the last reported sale prices of Sierra Common Stock over the five consecutive trading days ending with the second trading day prior to the Closing Date, which average the parties agree is $33.10 (the "Closing Average"). 1.6.3 EXCHANGE OF CERTIFICATES As soon as practicable after the Effective Date, Sierra shall make available, and each Shareholder will be entitled to receive, upon surrender to Sierra of one or more - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 3 10 certificates representing Company Common Stock for cancellation, certificates representing the number of shares of Sierra Common Stock that such Shareholder is entitled to receive pursuant to Section 1.6.1 hereof; provided, however, that the certificates representing the Holdback Shares shall be retained by Sierra in accordance with Section 9.6 of this Agreement. The shares of Sierra Common Stock that each Shareholder shall be entitled to receive pursuant to the Merger shall be deemed to have been issued at the Effective Time. No interest shall accrue on the Merger Consideration. If the Merger Consideration (or any portion thereof) is to be delivered to any person other than the person in whose name the certificate or certificates representing shares of Company Common Stock surrendered in exchange therefor is registered, it shall be a condition to such exchange that the person requesting such exchange shall pay to Sierra any transfer or other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the certificate or certificates so surrendered, or shall establish to the satisfaction of Sierra that such tax has been paid or is not applicable. Notwithstanding the foregoing, neither Sierra nor any other party hereto shall be liable to a holder of shares of Company Common Stock for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat and similar laws. 1.6.4 NO FRACTIONAL SHARES No certificates or scrip representing fractional shares of Sierra Common Stock shall be issued upon the surrender for exchange of certificates representing Company Common Stock pursuant to the Merger, and no dividend, stock split or other distribution with respect to Sierra Common Stock shall relate to any such fractional interest, and any such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder. In lieu of each such fractional share, Sierra shall pay to the holder thereof, as soon as practicable after the Effective Date, an amount in cash equal to such fraction multiplied by the Closing Average. 1.6.5 NO FURTHER TRANSFERS After the Effective Time, there shall be no transfers of any shares of Company Common Stock on the stock transfer books of the Surviving Corporation. If, after the Effective Time, certificates formerly representing shares of Company Common Stock are presented to the Surviving Corporation, they shall be forwarded to Sierra and be canceled and exchanged in accordance with this Section 1.6, subject to applicable law in the case of Dissenting Shares. 1.7 POOLING RESTRICTIONS ON TRANSFER OF THE SECURITIES In addition to and without limitation of any restrictions on transfer of the Securities contained in the Registration Rights Agreement referred to in Section 2.1 - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 4 11 below, the Shareholders shall not transfer any of the Securities received in the Merger until after the public announcement or release by Sierra of financial results for the first fiscal quarter of Sierra ending after the Closing which contains a period of at least 30 days of combined financial results of Sierra and the Surviving Corporation. 1.8 WAIVER OF RIGHTS RELATING TO COMPANY COMMON STOCK Each Shareholder hereby irrevocably waives, effective immediately prior to and contingent upon the Closing, all rights of first refusal, rights of first offer, preemptive rights and any other rights of such Shareholder relating to transfer or purchase of shares of Company Common Stock, whether or not such rights are in writing, and whether set forth in the Bylaws of the Company or elsewhere, including without limitation the rights contained in Section 2 of Article VI of the Company's Bylaws. The Company hereby irrevocably waives, effective immediately prior to and contingent upon the Closing, all rights of first refusal, rights of first offer, preemptive rights and any other rights of the Company relating to transfer or purchase of shares of Company Common Stock, whether or not such rights are in writing, and whether set forth in the Bylaws of the Company or elsewhere, including without limitation the rights contained in Section 2 of Article VI of the Company's Bylaws. ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS To induce Sierra and Acquisition Sub to enter into and perform this Agreement and the other Related Agreements (as defined in Section 2.1 hereof), the Shareholders, severally but not jointly, represent and warrant to Sierra and Acquisition Sub as of the date of this Agreement and as of the Closing as follows in this Article II. 2.1 GOOD TITLE, ETC. Each Shareholder represents with respect to itself only (and not with respect to any other Shareholder) that (a) such Shareholder owns, beneficially and of record, the shares of Company Common Stock listed opposite such Shareholder's name on Schedule 3.3(b) to the Disclosure Memorandum attached hereto as Exhibit B (the "Disclosure Memorandum"); (b) such shares of Company Common Stock are free and clear of any lien, encumbrance, adverse claim, restriction on sale or transfer (other than restrictions imposed by applicable securities laws), preemptive right or option; (c) such Shareholder has all necessary power, right and authority to enter into this Agreement and each of the agreements, certificates, instruments and documents executed or delivered pursuant to the terms of this Agreement by such Shareholder, including, without limitation and as applicable, the Registration Rights Agreement in - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 5 12 substantially the form attached hereto as Exhibit C to be entered into as of the Closing among Sierra and the Shareholders, and the Noncompetition Agreement in substantially the form attached hereto as Exhibit D to be entered into as of the Closing among Sierra and each of the Shareholders (collectively, the "Related Agreements"), to consummate the transactions contemplated hereby and thereby, and to sell and transfer the shares of Company Common Stock held by such Shareholder hereunder without the consent or approval of any other Person (as defined in Section 2.2 hereof); and (d) this Agreement and the Related Agreements to which such Shareholder is a party have each been duly authorized, executed and delivered by such Shareholder and each is a legal, valid and binding obligation of such Shareholder, enforceable in accordance with its terms. 2.2 NO APPROVALS; NO CONFLICTS The execution, delivery and performance of this Agreement and the Related Agreements by each Shareholder and the consummation of the transactions contemplated hereby and thereby will not (a) constitute a violation by such Shareholder (with or without the giving of notice or lapse of time, or both) of any provisions of law or any judgment, decree, order, regulation or rule of any court, agency or other governmental authority applicable to such Shareholder, (b) require any consent, approval or authorization of, or declaration, filing or registration with, any person, corporation, partnership, joint venture, association, organization, other entity or governmental or regulatory authority (a "Person"), except for compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Utah Division (the consent of all such Persons to be duly obtained by the Company or the Shareholder at or prior to the Closing), (c) result in the creation of any lien or encumbrance upon the shares of Company Common Stock owned by such Shareholder, or (d) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or Bylaws of the Company. 2.3 SECURITIES ACT MATTERS Each of the Shareholders hereby acknowledges, represents and warrants to Acquisition Sub and Sierra as follows: (a) CUC Merger Agreement. Such Shareholder has read and is familiar with the terms of this Agreement and Plan of Merger dated as of February 19, 1996, as amended, among Sierra, CUC International Inc., a Delaware corporation ("CUC"), and Larry Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of CUC, (the "CUC Merger Agreement") under which, among other things, each share of Sierra Common Stock outstanding immediately prior to the consummation of the merger therein contemplated (the "CUC Merger") would be converted into 1.225 shares of common stock of CUC. Such Shareholder understands - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 6 13 that the CUC Merger may or may not be consummated, that an investment in the Securities could result in such Shareholder holding CUC common stock if the CUC Merger is consummated, and that such Shareholder is aware of the risks of both the consummation and nonconsummation of the CUC Merger. (b) Ability to Bear Risk. Such Shareholder is in a financial position to hold the Securities for an indefinite period of time and is able to bear the economic risk and withstand a complete loss of his investment in the Securities. (c) SEC Documents. Such Shareholder acknowledges that he has had the opportunity to review to his satisfaction all publicly available filings and reports of Sierra and CUC filed with the Securities and Exchange Commission, including without limitation the SEC Documents (as defined in Section 4.4). Such Shareholder acknowledges that an investment in the Securities as contemplated by this Agreement involves a high degree of risk. (d) Professional Advice. Such Shareholder has obtained, to the extent that he deems necessary, his own professional advice with respect to the risks inherent in acquiring the Securities, the condition of Sierra and CUC and the suitability of its investment in the Securities in light of his financial condition and investment needs. (e) Sophistication. Such Shareholder, either alone or with the assistance of his professional advisors, is a sophisticated investor, is able to fend for himself in the transactions contemplated by this Agreement relating to the Securities and has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment in the Securities. (f) Access to Information. Such Shareholder has been given access to full and complete information regarding Sierra, CUC and the Company, including, in particular, the current respective financial conditions of Sierra, CUC and the Company and the risks associated therewith, and has utilized such access to his satisfaction for the purpose of obtaining information about Sierra and CUC. (g) Acquisition Entirely for Own Account. The Securities are being acquired by such Shareholder for investment for its respective account, not as a nominee or agent, and not with a view to the distribution of any part thereof; such Shareholder has no present intention of selling, granting any participation in or otherwise distributing any of the Securities in a manner contrary to the Securities Act of 1933, as amended (the "1933 Act"), or to any applicable state securities or Blue Sky law, nor does such Shareholder have any contract, undertaking, agreement or - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 7 14 arrangement with any person to sell, transfer or grant a participation to such person or to any third person with respect to any of the Securities. (h) Due Diligence. Such Shareholder has conducted his own due diligence investigation of Sierra and its business and analysis of the merits and risks of an investment in the Securities being acquired pursuant to this Agreement and is not relying on anyone else's investigation or analysis of Sierra or its business or the merits and risks of an investment in the Securities, other than professionals, if any, employed specifically by him to assist him. (i) Restricted Securities. Such Shareholder acknowledges that the Securities have not been and will not prior to issuance be registered under the 1933 Act and that the Securities are characterized under the 1933 Act as "restricted securities" and, therefore, cannot be sold or transferred unless such sale or transfer is registered under the 1933 Act or an exemption from such registration is available. The financial condition of such Shareholder is such that it is not likely that it will be necessary to dispose of any of the Securities in the foreseeable future. In this connection, such Shareholder represents that he is familiar with Rule 144 under the 1933 Act as presently in effect, and understands the resale limitations imposed thereby and by the 1933 Act. (j) Exemption Reliance. Such Shareholder has been advised that the Securities are being issued under this Agreement pursuant to exemptions from applicable federal and state securities laws, and that Sierra's reliance upon such exemptions is predicated in part upon the Shareholder's representations contained herein. (k) Further Limitations on Disposition. Without in any way limiting the representations set forth herein or the provisions of the Registration Rights Agreement referred to in Section 2.1, each Shareholder further agrees not to make any disposition of all or any portion of the Securities unless and until: (i) There is in effect a registration statement under the 1933 Act covering such proposed disposition and such disposition is made in accordance with such registration statement; (ii) (A) Such Shareholder shall have notified Sierra of the proposed disposition and shall have furnished Sierra with a detailed statement of the circumstances surrounding the proposed disposition and (B) if reasonably requested by Sierra, such Shareholder shall have furnished Sierra with an opinion of counsel, reasonably satisfactory to Sierra, that such disposition will not require registration under the 1933 Act; or - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 8 15 (iii) Sierra shall be satisfied that such proposed disposition complies in all respects with Rule 144 or Rule 145 under the 1933 Act or any successor rule providing a safe harbor for such disposition without registration. (l) Residency. For purposes of the application of state securities laws, each Shareholder is a resident of Utah. (m) Legend. It is understood that the certificates evidencing the Securities may bear a legend as set forth in the Registration Rights Agreement referred to in Section 2.1. 2.4 POOLING MATTERS The Shareholders have not taken, directly or indirectly, and the Shareholders have no knowledge that any other Person has taken, any actions involving any recapitalization or repurchase or redemption of any securities of the Company, or any grant or acceleration of any options to acquire securities of the Company, or any purchase or sale of securities of Sierra, and to the best of their knowledge there have occurred no other events with respect to or involving the Company or its Shareholders which, taken individually or together, would affect the ability of Sierra to account for the transactions contemplated by this Agreement as a "pooling of interests" transaction in accordance with generally accepted accounting principles consistently applied ("GAAP"), and the Shareholders are not aware of any facts which otherwise could prevent such accounting treatment. ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY To induce Sierra and Acquisition Sub to enter into and perform this Agreement and the other Related Agreements, and except as otherwise set forth in the Disclosure Memorandum, which exceptions shall specifically identify the section or sections of this Article III to which such exceptions relate, and which Disclosure Memorandum shall constitute in its entirety a representation and warranty under this Article III, the Company represents and warrants to Sierra and Acquisition Sub as of the date of this Agreement and as of the Closing as follows in this Article III. 3.1 ORGANIZATION The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah. The Company has all requisite corporate power and authority to own, operate and lease its properties and assets, to carry on its business as now conducted and as proposed to be conducted, to enter into and perform its obligations under this Agreement and the Related Agreements, and to consummate - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 9 16 the transactions contemplated hereby and thereby. The Company is not required to be qualified or licensed as a foreign corporation to do business in any jurisdiction, except where the failure to be so qualified or in good standing would not have a material adverse effect on the business, operations, assets, liabilities (absolute, accrued, contingent or otherwise), sales, margins, profitability, condition (financial or other) or prospects of the Company (a "Material Adverse Effect"). 3.2 ENFORCEABILITY All corporate action on the part of the Company and its officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Related Agreements, the consummation of the Merger, and the performance of all of the Company's obligations under this Agreement and the Related Agreements has been taken or will be taken prior to the Closing. This Agreement has been, and each of the Related Agreements at the Closing will have been, duly executed and delivered by the Company, and this Agreement is, and each of the Related Agreements to which the Company is a party will be at the Closing, a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 3.3 CAPITALIZATION (a) The authorized capital stock of the Company consists of 50,000 shares of Company Common Stock. (b) The issued and outstanding capital stock of the Company consists solely of 1,018 shares of Company Common Stock (the "Outstanding Shares"), which are and as of the Closing will be held of record and beneficially by the Shareholders as set forth on Schedule 3.3(b) to the Disclosure Memorandum. The Outstanding Shares are, and immediately prior to the Closing will be, duly authorized and validly issued, fully paid and nonassessable, and issued in compliance with all applicable federal, state and foreign securities laws. To the best of the Company's knowledge, no Person other than the Shareholders holds any interest in any of the Outstanding Shares. True and correct copies of the stock records of the Company, showing all issuances and transfers of shares of capital stock of the Company since inception, have been provided to Sierra. (c) There are no outstanding rights of first refusal, preemptive rights, options, warrants, conversion rights or other agreements, either directly or indirectly, for the purchase or acquisition from the Company or any Shareholder of any shares of the Company's capital stock or the capital stock of any Subsidiary, except rights that have been validly waived in Section 1.8 of this Agreement. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 10 17 (d) The Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any Persons, that affects or relates to the voting or giving of written consents with respect to any securities of the Company or the voting by any director of the Company. No Shareholder or any affiliate thereof is indebted to the Company, and the Company is not indebted to any Shareholder or any affiliate thereof. The Company is not under any contractual or other obligation to register any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.4 SUBSIDIARIES AND AFFILIATES The Company does not own, directly or indirectly, any ownership, equity, profits or voting interest in, or otherwise control, any corporation, partnership, joint venture or other entity, and has no agreement or commitment to purchase any such interest. 3.5 NO APPROVALS; NO CONFLICTS The execution, delivery and performance of this Agreement and the Related Agreements by the Company and the consummation of the transactions contemplated hereby and thereby will not (a) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to the Company, (b) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, except compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Utah Division (the consent of all such Persons to be duly obtained by the Company at or prior to the Closing), (c) except as noted in clause (b), require any consent or approval under, or result in any default (with or without the giving of notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which the Company is a party or by which it is bound or to which any assets of the Company are subject, (d) result in the creation of any lien or encumbrance upon the assets of the Company or upon any Outstanding Shares or other securities of the Company, (e) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or Bylaws of the Company, or (f) invalidate or adversely affect any permit, license, authorization or status used in the conduct of the business of the Company. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 11 18 3.6 FINANCIAL STATEMENTS The Company has delivered to Sierra (a) consolidated balance sheets and statements of income and expense of the Company as of or for the fiscal years ended December 31, 1995 and 1994, and (b) a consolidated balance sheet and statement of income and expense of the Company as of and for the three-month period ended March 31, 1996. All of the foregoing financial statements are herein referred to as the "Financial Statements." The consolidated balance sheet of the Company as of March 31, 1996 is herein referred to as the "Company Balance Sheet." The Financial Statements fairly present the financial position, results of operations and changes in financial position of the Company as of the dates and for the periods indicated. The Company has no liabilities or obligations of any nature (absolute, contingent or otherwise) which are not fully reflected or reserved against in the Company Balance Sheet, except liabilities or obligations incurred since the date of the Company Balance Sheet in the ordinary course of business and consistent with past practice which are not in excess of $10,000 in the aggregate or $2,000 individually. The Company maintains standard systems of accounting which are adequate for its business. The Company is not a guarantor, indemnitor, surety or other obligor of any indebtedness of any other Person. The Company expenses software development costs on a current basis as incurred. 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS Since the date of the Company Balance Sheet and through the Closing Date, neither the Company nor any of its officers or directors in their representative capacities on behalf of the Company has: (a) taken any action or entered into or agreed to enter into any transaction, agreement or commitment other than in the ordinary course of business; (b) forgiven or canceled any indebtedness or waived any claims or rights of material value (including, without limitation, any indebtedness owing by any Shareholder or any officer, director, employee or affiliate of the Company); (c) granted, other than in the ordinary course of business and consistent with past practice, any increase in the compensation of directors, officers, employees or consultants (including any such increase pursuant to any employment agreement or bonus, pension, profit-sharing, lease payment or other plan or commitment) or any increase in the compensation payable or to become payable to any director, officer, employee or consultant; - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 12 19 (d) suffered any material adverse change in its business, operations, assets, liabilities (absolute, accrued, contingent or otherwise), sales, margins, profitability, condition (financial or other) or prospects; (e) borrowed or agreed to borrow any funds, incurred or become subject to, whether directly or by way of assumption or guarantee or otherwise, any obligations or liabilities (absolute, accrued, contingent or otherwise), except liabilities and obligations incurred in the ordinary course of business and consistent with past practice, or increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (f) paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of claims, liabilities and obligations reflected or reserved against in the Company Balance Sheet or incurred in the ordinary course of business and consistent with past practice since the date of the Company Balance Sheet, or prepaid any obligation having a fixed maturity of more than 90 days from the date such obligation was issued or incurred; (g) permitted or allowed any of its property or assets (real, personal or mixed, tangible or intangible) to be subjected to any mortgage, pledge, lien, security interest, encumbrance, restriction or charge, except (i) assessments for current taxes not yet due and payable, (ii) landlord's liens for rental payments not yet due and payable, and (iii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that was incurred in the ordinary course of business and is not yet due and payable; (h) written down the value of any inventory (including write-downs by reason of shrinkage, markdown or obsolescence) or written off as uncollectible any notes or accounts receivable, except in the ordinary course of business and consistent with past practice; (i) sold, transferred or otherwise disposed of any of its properties or assets (real, personal or mixed, tangible or intangible), except the sale of inventory in the ordinary course of business and consistent with past practice; (j) disposed of or permitted to lapse any rights to the use of any trademark, trade name, patent or copyright, or disposed of or disclosed to any Person other than representatives of Sierra any trade secret, formula, process or know-how not theretofore a matter of public knowledge; - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 13 20 (k) made any single capital expenditure or commitment in excess of $10,000 for additions to property, plant, equipment or intangible capital assets or made aggregate capital expenditures in excess of $10,000 for additions to property, plant, equipment or intangible capital assets; (l) made any change in any method of accounting or accounting practice or internal control procedure; (m) issued any capital stock or other securities, or declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock, or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of capital stock or other securities of the Company, or otherwise permitted the withdrawal by any of the holders of capital stock of the Company of any cash or other assets (real, personal or mixed, tangible or intangible), in compensation, indebtedness or otherwise, other than payments of compensation in the ordinary course of business and consistent with past practice; (n) paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any Shareholder or any of the Company's officers, directors or employees or any affiliate of any Shareholder or any of the Company's officers, directors or employees, except compensation paid to officers and employees at rates not exceeding the rates of compensation paid during the fiscal year last ended, and except for those increased in the ordinary course of business and consistent with past practice. (o) entered into or agreed to enter into, or otherwise suffered to be outstanding, any power of attorney of the Company or any obligations or liabilities (absolute, accrued, contingent or otherwise) of the Company, as guarantor, surety, cosigner, endorser, comaker, indemnitor or otherwise in respect of the obligation of any other Person; (p) received notice of, or otherwise obtained knowledge of: (i) any claim, action, suit, arbitration, proceeding or investigation involving, pending against or threatened against the Company or any employee of the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person; (ii) any valid basis for any claim, action, suit, arbitration, proceeding, investigation or the application of any fine or penalty adverse to the Company or any employee of the Company before or by any Person; or (iii) any outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company or any employee of the Company is a party and where such items in subparagraphs (i), (ii) and (iii) above relate directly to the - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 14 21 transactions contemplated herein or which would have a Material Adverse Effect on the Company; (q) entered into or agreed to any sale, assignment, transfer or license of any patents, trademarks, copyrights, trade secrets or other intangible assets of the Company or any amendment or change to any existing license or other agreement relating to intellectual property, other than in the ordinary course of business; (r) received notice that there has been a loss of, or contract cancellation by, any current or prospective customer, licensor or distributor of the Company; (s) taken any action, or become aware of any action taken by any Shareholder, which alone or together with other facts or circumstances could affect the ability of Sierra to account for the Merger as a "pooling of interests" transaction in accordance with GAAP consistently applied; or (t) agreed, whether in writing or otherwise, to take any action described in this Section 3.7. 3.8 TAXES The Company has (a) duly and timely filed, including valid extensions, with the appropriate governmental agencies (domestic and foreign) all tax returns, information returns and reports ("Returns") for all Taxes (as defined below) required to have been filed with respect to the Company and its business, (b) all such Returns are true, correct and complete in all material respects, and (c) paid in full or provided for all Taxes that are due or claimed to be due by any governmental agency. "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, but not limited to, income, excise, gross receipts, property, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, severance, stamp, occupation, windfall profits, social security and unemployment or other taxes imposed by the United States or any agency or instrumentality thereof, any state, county, local or foreign government, or any agency or instrumentality thereof, and any interest or fines, and any and all penalties or additions relating to such taxes, charges, fees, levies or other assessments. The reserves and provisions for Taxes reflected in the Financial Statements are adequate for the payment of Taxes not yet due and payable; no unresolved claim for assessment or collection of Taxes has been asserted or threatened against the Company, and no audit or investigation by any governmental authority is under way with respect to Taxes, interest or other governmental charges; to the best of its knowledge, no circumstances exist or have existed which would constitute grounds for assessment against the Company of any tax liability with respect to any period for which Returns have been filed, including, but not limited to, any circumstances - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 15 22 relating to the existence of a valid S corporation election for the Company for any such period; the Company has not filed or entered into any election, consent or extension agreement or any waiver that extends any applicable statute of limitations; any Taxes incurred by the Company or accrued by it since the date of the Company Balance Sheet have arisen in the ordinary course of business; and the Company has not filed any consent to the application of Section 341(f)(2) of the Code, to any assets held, acquired or to be acquired by it. The Company has furnished Sierra with complete and correct copies of all Returns. There are no tax liens on any property or assets of the Company other than liens for current taxes not yet payable. No claim has been made by an authority in any jurisdiction where the Company does not file Returns that the Company is or may be subject to taxation by that jurisdiction. The Company has not made any payments, is not obligated to make any payments, and is not a party to any agreement (including without limitation this Agreement) that could obligate it to make any payments that will not be deductible under Section 280G of the Code; the Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(2)(i) of the Code; the Company is not a party to any Tax allocation or sharing agreement, and the Company (A) has not been a member of an affiliated group filing a consolidated income Tax Return and (B) does not have any liability for Taxes of any person under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law) as a transferor or successor by contract or otherwise. The Company's election to be taxed as a Subchapter S Corporation under Section 1361 of the Code has been in effect throughout the existence of the Company and, accordingly, the Company has never been subject to any Tax by reason of being a "C Corporation" (as that term is defined in the Code). 3.9 PROPERTY (a) The Company owns no real property or leasehold interests in real property. Schedule 3.9(a) to the Disclosure Memorandum contains a complete and accurate list of all real property used by the Company (the "Real Property"). There are no written leases, subleases, rental agreements, contracts of sale, tenancies or licenses to which the Company is a party relating to the Real Property. (b) Schedule 3.9(b) to the Disclosure Memorandum contains a complete and accurate list of each item of personal property having a value in excess of $1,000 which is owned, leased, rented or used by the Company (excluding the intellectual property covered by Section 3.16, the "Personal Property"). There are no leases, subleases, rental agreements, contracts of sale, tenancies or licenses to which the Company is a party relating to the Personal Property. The Real Property and the Personal Property include all properties and assets (whether real, personal or mixed, tangible or intangible) (other than, in the case of the Personal Property, property rights - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 16 23 with an individual value of less than $1,000, the Listed Intellectual Property and the Intellectual Property Licenses) reflected in the Company Balance Sheet and all the properties and assets purchased by the Company since the date of the Company Balance Sheet (except for such properties or assets sold since the date of the Company Balance Sheet in the ordinary course of business and consistent with past practice). The Real Property and the Personal Property include all material property used in the business of the Company, other than the intellectual property matters addressed in Section 3.16 of this Agreement. The Company has not granted any lease, sublease, tenancy or license of any portion of the Personal Property. (c) The Personal Property is of quality consistent with industry standards and is in good operating condition and repair, normal wear and tear excepted. (d) Except for (i) assessments for current taxes not yet due and payable and (ii) mechanics', materialmen's, carriers' and other similar statutory liens securing indebtedness that was incurred in the ordinary course of business and is not yet due and payable, the Personal Property is free and clear of all liens, and the Company owns such Personal Property. (e) Neither the whole nor any portion of the assets or property of the Company is subject to any currently outstanding governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor has any such condemnation, expropriation or taking been proposed. 3.10 CONTRACTS Schedule 3.10 to the Disclosure Memorandum contains a complete and accurate list of all contracts, agreements and understandings, oral or written, to which the Company is currently a party or by which the Company is currently bound, including, without limitation, security agreements, license agreements, software development agreements, distribution agreements, joint venture agreements, reseller agreements, credit agreements and instruments relating to the borrowing of money. All contracts set forth in such Schedule are valid, binding and enforceable in accordance with their terms against each party thereto, are in full force and effect, the Company has performed in all material respects all obligations imposed upon it thereunder, and neither the Company nor, to the best of the Company's knowledge, any other party thereto is in material default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a material default by the Company or, to the best of the Company's knowledge, any other party thereunder. True and complete copies of each such written contract (and written summaries of the - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 17 24 terms of any such oral contract) have been heretofore delivered to Sierra. The Company has no: (a) outstanding sales or service contracts, commitments or proposals of the Company which are expected by the Company to result in any loss or the realization of less than the Company's usual and customary margins upon completion or performance thereof, in excess of the inventory reserve provided in the Company Balance Sheet, or any outstanding contracts, bids, or sales or service proposals quoting prices which the Company, based upon the Company's current operations, expects not to result in a profit; (b) contracts with developers, designers, producers, directors, officers, shareholders, employees, agents, consultants, advisors, salesmen, sales representatives, distributors or dealers that are not, except as provided by law to the contrary without regard to the express terms of such contract, cancelable by it within 30 days' notice without liability, penalty or premium, any agreement or arrangement providing for the payment of any bonus or commission based on sales or earnings, or any compensation agreement or arrangement affecting or relating to former employees of the Company; (c) employment agreement, whether express or implied, or any other agreement for services that contains any severance or termination pay liabilities or obligations; (d) noncompetition agreement or other restriction from carrying on its business anywhere in the world; (e) liability or obligation with respect to the return of inventory or merchandise other than on account of a defective condition, incorrect quantities or missed delivery dates; (f) notice that any party to a contract intends to cancel, terminate or refuse to renew such contract or to exercise or decline to exercise any option or right thereunder; or (g) material disagreement with any of its suppliers, customers, distributors, OEM resellers, licensors or licensees. 3.11 CUSTOMERS AND SUPPLIERS Schedule 3.11 to the Disclosure Memorandum sets forth a complete and accurate list of the customers of the Company showing the approximate total sales by the Company to each such customer during the fiscal year last ended. The Company - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 18 25 has no reasonable basis to expect any material modification to its relationship with any customer or supplier. 3.12 ORDERS, COMMITMENTS AND RETURNS Schedule 3.12 to the Disclosure Memorandum contains an accurate summary of the Company's total backlog of orders (including all accepted and unfulfilled sales orders) and the aggregate of all outstanding purchase orders issued by the Company (which include all contracts or commitments for the purchase by the Company of materials or other supplies). All such sale and purchase commitments were made in the ordinary course of business. There are no outstanding claims against the Company to return merchandise by reason of alleged overshipments, defective merchandise, missed delivery dates, incorrect quantities or otherwise, or of merchandise in the hands of customers under an understanding that such merchandise would be returnable. 3.13 CLAIMS AND LEGAL PROCEEDINGS There are no claims, actions, suits, arbitrations, investigations or proceedings pending or involving or, to the Company's best knowledge, threatened against the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person. To the Company's best knowledge, there is no valid basis for any claim, action, suit, arbitration, proceeding or investigation which could reasonably be expected to be materially adverse to the business, operations, assets, liabilities (absolute, accrued, contingent or otherwise), sales, margins, profitability, condition (financial or other) or prospects of the Company before or by any Person. There are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company is a party which involve the transactions contemplated herein or which would have a Material Adverse Effect on the Company. No material disputes have been settled or resolved by litigation or arbitration within the last five years. 3.14 LABOR AND EMPLOYMENT MATTERS There are no material labor disputes, employee grievances or disciplinary actions pending or, to the Company's best knowledge, threatened against or involving the Company or any of its present or former employees. The Company has complied with all provisions of law relating to employment and employment practices, terms and conditions of employment, wages and hours, the failure to comply with which could have a Material Adverse Effect on the Company. The Company is not engaged in any unfair labor practice and has no liability for any arrears of wages or Taxes or penalties for failure to comply with any such provisions of law. There is no labor strike, dispute, slowdown or stoppage pending or, to the Company's best knowledge, - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 19 26 threatened against or affecting the Company, and the Company has not experienced any work stoppage or other labor difficulty since its incorporation. No collective bargaining agreement is binding on the Company. The Company has no knowledge of any organizational efforts presently being made or threatened by or on behalf of any labor union with respect to employees of the Company, and the Company has not been requested by any group of employees or others to enter into any collective bargaining agreement or other agreement with any labor union or other employee organization. Each employee, officer and consultant of the Company has executed a Nondisclosure Agreement in the form provided to Sierra. To the best of the Company's knowledge, no employee (or person performing similar functions) of the Company is in violation of any such agreement or any employment agreement, noncompetition agreement, patent disclosure agreement, invention assignment agreement, proprietary information agreement or other contract or agreement relating to the relationship of such employee with the Company or any other party, and the Company will use its best efforts to prevent any such violation. Schedule 3.14 to the Disclosure Memorandum sets forth a true and complete list of: (a) the names and current compensation amounts of all directors and officers of the Company; (b) the wage rates for nonsalaried and non-officer salaried employees of the Company by classification, and all labor union contracts (if any); (c) all group insurance programs in effect for employees of the Company; and (d) the names and current compensation packages of all independent contractors and consultants of the Company. The Company is not in default with respect to any of its obligations referred to in clause (b) above and has no obligation or liability for severance or back pay owed through or by virtue of the Closing. All employees of the Company are employed on an "at will" basis. 3.15 EMPLOYEE BENEFIT PLANS (a) Employee Benefit Plans. Schedule 3.15(a) to the Disclosure Memorandum sets forth an accurate and complete list and description of each employee benefit plan, policy, program, contract or arrangement, whether formal or informal and whether legally binding or not, covering or benefiting any officer, employee, former employee, director or former director of the Company or any dependents or beneficiaries of any such person, or with respect to which the Company has (or could reasonably be expected to have) any obligation or liability, including, but not limited to, each "employee benefit plan," within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (such items are hereinafter referred to collectively as "Employee Benefit Plans" and each individually as an "Employee Benefit Plan"). (b) Compliance With Laws. With respect to each Employee Benefit Plan: (i) the Company is, and at all times has been, in compliance with, and such - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 20 27 Employee Benefit Plan is, and at all times has been, maintained and operated in material compliance with, the terms of such Employee Benefit Plan and all applicable laws, rules and regulations, including, but not limited to, ERISA and the Code; (ii) all tax returns, information returns, reports and information relating to such Employee Benefit Plan required to be filed with any governmental entity have been accurately, timely and properly filed; (iii) all notices, statements, reports and other disclosure required to be given or made to participants in such Employee Benefit Plan or their beneficiaries have been accurately, timely and properly disclosed or provided; (iv) neither the Company nor any other fiduciary of such Employee Benefit Plan has engaged in any transaction or acted or failed to act in a manner that violates the fiduciary requirements of Section 404 of ERISA with respect to such Employee Benefit Plan; and (v) no event has occurred or, to the best knowledge of the Shareholders or the Company, is threatened or about to occur which would constitute a prohibited transaction under Section 406 of ERISA or under Section 4975 of the Code. Moreover, neither the Company nor any Employee Benefit Plan is liable for any federal, state, local or foreign taxes, including, but not limited to, excise taxes under Sections 4971, 4972, 4975, 4979, 4980 and 4980B of the Code, or taxes on unrelated business income under Section 511 of the Code or any penalty under Section 502 of ERISA, with respect to any Employee Benefit Plan. No Employee Benefit Plan has ever incurred an "accumulated funding deficiency," as defined in Section 301 of ERISA or Section 412 of the Code, whether or not waived. (c) Welfare Plans. No Employee Benefit Plan is subject to the requirements of Section 4980B of the Code and Part 6 of Title I of ERISA. No Employee Benefit Plan that is an "employee welfare benefit plan," within the meaning of Section 3(1) of ERISA, provides or has any obligation to provide benefits with respect to current or former employees of the Company or any other entity beyond their retirement or other termination of service, including, without limitation, post-retirement (or post-termination) medical, dental, life insurance, severance or any other similar benefit, whether provided on an insured or self-insured basis, other than benefits mandated by applicable law. (d) Contributions. All contributions and other payments required to have been made by the Company (including any pre-tax or post-tax contributions or payments by employees or their dependents) to any Employee Benefit Plan (or to any person pursuant to the terms thereof) have been so made or the amount of any such payment or contribution obligation that is not yet due has been properly reflected in the Company's Financial Statements. (e) Other Claims and Investigations. There are no actions, suits or claims (other than routine claims for benefits) pending or, to the best knowledge of the Shareholders or the Company, threatened with respect to any Employee Benefit - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 21 28 Plan or against the assets of any Employee Benefit Plan, nor, to the best knowledge of the Shareholders or the Company, is there a reasonable basis for any such action, suit or claim. None of the Employee Benefit Plans is currently under investigation, audit or review, directly or indirectly, by the IRS or the Department of Labor (the "DOL"), and, to the best knowledge of the Shareholders or the Company, no such action is contemplated or under consideration by the IRS or DOL. (f) Other Binding Commitments. The Company has no agreement, arrangement, commitment or obligation, whether formal or informal, whether written or unwritten, and whether legally binding or not, to create any plan, policy, program, contract or arrangement not identified in Section 3.15(a) of the Disclosure Memorandum or to modify or amend any of the existing Employee Benefit Plans. (g) Multiemployer and Qualified Plans. Neither the Company nor any ERISA Affiliate maintains or contributes to, or has ever maintained or contributed to (or been obligated to contribute to), any multiemployer plan, within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA, or any plan that is subject to Section 302 or Title IV of ERISA or Section 412 of the Code, or any plan intended to be qualified under Section 401(a) or 403(d) of the Code. For purposes of this Section 3.15, "ERISA Affiliate" means any person or entity, whether or not incorporated, that, together with the Company, is (or has ever been) treated as a single employer under Section 414(b), (c), (m) or (o) of the Code. (h) ERISA Affiliates. The Company has no liability or potential liability to participants, beneficiaries or any other person or entity under any employee benefit plan, policy, program, practice, contract or arrangement currently (or previously) maintained or contributed to by any ERISA Affiliate. (i) Payments Resulting From Transactions. The consummation of any transaction contemplated by this Agreement will not result in any (i) payment (whether of severance pay or otherwise) becoming due from the Company to any officer, employee, former employee or director thereof or to the trustee under any "rabbi trust" or similar arrangement, or (ii) benefit under any Employee Benefit Plan being established or becoming accelerated, vested or payable. 3.16 PATENTS, TRADEMARKS, ETC. Set forth on Schedule 3.16 to the Disclosure Memorandum is a true and complete list of: (a) all patents, patent applications, trademarks, trade names and copyrights of the Company (collectively, the "Listed Intellectual Property"), (b) the Company's Software Products (as defined below), and (c) all intellectual property licenses held or granted by the Company as a licensee or licensor (the "Intellectual Property Licenses"). Neither the Company's operations nor any Listed Intellectual - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 22 29 Property nor any of the Company's Software Products infringes or provides any basis to believe that its operations, Software Products or any Listed Intellectual Property would infringe upon any validly issued, existing or pending copyright, trade secret, right of publicity, right of privacy or trade dress or, to the knowledge of the Company, any validly issued or pending patent, trademark, trade name, service mark or other right of any other Person, nor, to the knowledge of the Company, is there any infringement by any other Person of any of the Listed Intellectual Property or of the intellectual property to which the Intellectual Property Licenses relate. The consummation of the transactions contemplated hereby and by the other Related Agreements will not alter or impair the Company's rights to any of the Listed Intellectual Property, Software Products or under any Intellectual Property License. To the best of the Company's knowledge, the manner in which the Company has manufactured, packaged, shipped, advertised, labeled and sold its products complies with all applicable laws and regulations pertaining thereto. The Company is the sole and exclusive owner or licensee of: (a) the Listed Intellectual Property, and (b) all rights, title and interest of whatever kind or nature throughout the world in and to the fully or partially developed computer software products listed on Schedule 3.16 to the Disclosure Memorandum (the "Software"), with all modifications, enhancements and additions thereto, including, without limitation, all rights in and to all versions (including work in progress) thereof and all source code, object code, manuals and other documentation and related materials thereof (collectively, the "Software Products"). The Company owns or holds under the Intellectual Property Licenses all intellectual property rights it reasonably requires to market, license, distribute and otherwise exploit the Software Products. Schedule 3.16 to the Disclosure Memorandum includes a true and complete list of all trademark, service mark, and copyright registrations and applications held by the Company. Each of the Intellectual Property Licenses is valid, binding and enforceable in accordance with its terms against the parties thereto, the Company has performed all obligations imposed upon it thereunder, and neither the Company nor, to the best of the Company's knowledge, any other party thereto is in default thereunder, nor is there any event which with notice or lapse of time, or both, would constitute a default by the Company or, to the best of the Company's knowledge, any other party thereunder. The Company has not received notice that any party to any of the Intellectual Property Licenses intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder. No licenses, sublicenses, - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 23 30 covenants or agreements have been granted or entered into by the Company in respect of any of the Listed Intellectual Property except the Intellectual Property Licenses. No director, officer, shareholder or employee of the Company owns, directly or indirectly, in whole or in part, any of the Listed Intellectual Property. To the Company's knowledge, no Person has asserted any claim of infringement or other interference with third-party rights with respect to the Listed Intellectual Property. The Company has not disclosed any source code of the Software Products to any person other than an employee of the Company or to Sierra or Acquisition Sub, except for any disclosure that would not have a Material Adverse Effect on the Company; neither the Company nor any escrow agent is under any contractual or other obligation to disclose the source code or any other proprietary information included in or relating to the Software Products nor, to the knowledge of the Company, is any other party to the Intellectual Property Licenses or any escrow agent under any such obligation to disclose any source code or other proprietary information included in or relating to Software Products, if any, that are licensed to the Company, to any person or entity and no event has taken place, including the execution of this Agreement or any related change in the Company's business activities, which would give rise to such obligation; and the Company has not deposited any source code regarding the Software Products into any source code escrows or similar arrangements. If, as disclosed on Schedule 3.16 to the Disclosure Memorandum, the Company has deposited any source code to Software Products into source code escrows or similar arrangements, no event has occurred that has or could reasonably form the basis for a release of such source code from such escrows or arrangements. 3.17 ACCOUNTS RECEIVABLE All accounts receivable of the Company reflected in the Company Balance Sheet, or existing at the Effective Time, represent sales actually made in the ordinary course of business and were recorded in the Company's books consistent with past practice. The bad debt reserves and sales return allowances reflected in the Company Balance Sheet are adequate. Set forth on Schedule 3.17 to the Disclosure Memorandum is a full and complete list and aging study of all consolidated accounts receivable of the Company existing as of March 31, 1996. 3.18 INVENTORY All items in the inventory reflected in the Company Balance Sheet or as currently owned by the Company are of a quality and quantity usable and salable in the ordinary course of business. Such inventory consists of materials and supplies used or sold in the business of the Company. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 24 31 3.19 CORPORATE BOOKS AND RECORDS The Company has furnished to Sierra or its representatives for their examination true and complete copies of (a) the Articles of Incorporation and Bylaws of the Company as currently in effect, including all amendments thereto, (b) the minute books of the Company and (c) the stock transfer books of the Company. Such minutes reflect all meetings of the Company's shareholders, Board of Directors and any committees thereof since the Company's inception, and such minutes accurately reflect in all material respects the events of and actions taken at such meetings. Such stock transfer books accurately reflect all issuances and transfers of shares of capital stock of the Company since its inception. 3.20 LICENSES, PERMITS, AUTHORIZATIONS, ETC. The Company has received all currently required governmental approvals, authorizations, consents, licenses, orders, registrations and permits of all agencies, whether federal, state, local or foreign, the failure to obtain which would have a Material Adverse Effect on the Company. The Company has not received any notifications of any asserted present failure by it to have obtained any such governmental approval, authorization, consent, license, order, registration or permit, or past and unremedied failure to obtain such items. 3.21 COMPLIANCE WITH LAWS The Company has at all times complied, and is in compliance, with all federal, state, local and foreign laws, rules, regulations, ordinances, decrees and orders applicable to it, to its employees, or to the Real Property and the Personal Property, the failure to comply with which would, individually or in the aggregate, have a Material Adverse Effect on the Company, including, without limitation, all such laws, rules, ordinances, decrees and orders relating to intellectual property protection, antitrust matters, consumer protection, currency exchange, environmental protection, equal employment opportunity, health and occupational safety, pension and employee benefit matters, securities and investor protection matters, labor and employment matters and trading-with-the-enemy matters. The Company has not received any notification of any asserted present or past unremedied failure by the Company to comply with any of such laws, rules, ordinances, decrees or orders. 3.22 INSURANCE The Company maintains (a) insurance on all of its property (including leased premises) that insures against loss or damage by fire or other casualty (including extended coverage) and (b) insurance against liabilities, claims and risks of a nature and in such amounts as are normal and customary in the software publication - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 25 32 industry. All insurance policies of the Company are in full force and effect, all premiums with respect thereto covering all periods up to and including the date this representation is made have been paid, and no notice of cancellation or termination has been received with respect to any such policy or binder. Such policies or binders are sufficient for compliance with all requirements of law currently applicable to the Company and of all agreements to which the Company is a party, will remain in full force and effect through the respective expiration dates of such policies or binders without the payment of additional premiums, and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. The Company has not been refused any insurance with respect to its assets or operations, nor has its coverage been limited, by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance. 3.23 BROKERS OR FINDERS The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by or on behalf of the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Merger, this Agreement or any transaction contemplated hereby. 3.24 ABSENCE OF QUESTIONABLE PAYMENTS Neither the Company, nor any director, officer, agent, employee or other Person acting on behalf of the Company, has used any Company funds for improper or unlawful contributions, payments, gifts or entertainment, or made any improper or unlawful expenditures relating to political activity to domestic or foreign government officials or others. The Company has adequate financial controls to present such improper or unlawful contributions, payments, gifts, entertainment or expenditures. Neither the Company, nor any current director, officer, agent, employee or other Person acting on behalf of the Company, has accepted or received any improper or unlawful contributions, payments, gifts or expenditures. The Company has at all times complied, and is in compliance, in all respects with the Foreign Corrupt Practices Act and all foreign laws and regulations relating to prevention of corrupt practices and similar matters. 3.25 BANK ACCOUNTS Schedule 3.25 to the Disclosure Memorandum sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the Company maintains safe deposit boxes or accounts of any nature and the names of all Persons authorized to draw thereon, make withdrawals therefrom or have access thereto. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 26 33 3.26 INSIDER INTERESTS No Shareholder or officer or director or other representative of the Company has any interest (other than as a Shareholder of the Company) (a) in any property, real or personal, tangible or intangible, used in or directly pertaining to the business of the Company, including, without limitation, inventions, patents, trademarks or trade names, or (b) in any agreement, contract, arrangement or obligation relating to the Company, its present or prospective business or its operations. There are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, holders, affiliates or any affiliate thereof. The Company and its officers and directors have no interest, either directly or indirectly, in any entity, including, without limitation, any corporation, partnership, joint venture, proprietorship, firm, licensee, business or association (whether as an employee, officer, director, shareholder, agent, independent contractor, security holder, creditor, consultant or otherwise) that presently (a) provides any services, produces and/or sells any products or product lines, or engages in any activity which is the same, similar to or competitive with any activity or business in which the Company is now engaged or proposes to engage; (b) is a supplier, customer, creditor, or has an existing contractual relationship with any of the Company's employees (or persons performing similar functions); or (c) has any direct or indirect interest in any asset or property, real or personal, tangible or intangible, of the Company or any property, real or personal, tangible or intangible, that is necessary or desirable for the present or anticipated future conduct of the Company's business. 3.27 POOLING MATTERS The Company has not taken, directly or indirectly, and the Company has no knowledge that any other Person has taken, any actions involving any recapitalization or repurchase or redemption of any securities of the Company, or any grant or acceleration of any options to acquire securities of the Company, or any purchase or sale of securities of Sierra, and to the best of the Company's knowledge there have occurred no other events with respect to or involving the Company or its Shareholders which, taken individually or together, would affect the ability of Sierra to account for the transactions contemplated by this Agreement as a "pooling of interests" transaction in accordance with GAAP, and the Company is not aware of any facts which otherwise could prevent such accounting treatment. 3.28 FULL DISCLOSURE To the best knowledge of the Company after diligent inquiry, no information furnished by the Company or the Shareholders to Sierra or its representatives in connection with this Agreement (including, but not limited to, the Financial - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 27 34 Statements and all information in the Disclosure Memorandum and the other Exhibits hereto) or the Related Agreements, or by the Company to the Shareholders in connection with their approval of the Merger and execution and delivery of this Agreement, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements so made or information so delivered, in light of the circumstances in which they were made or delivered, not misleading. ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SIERRA AND ACQUISITION SUB To induce the Company and the Shareholders to enter into and perform this Agreement and the Related Agreements, Sierra and Acquisition Sub jointly and severally represent and warrant to the Company and the Shareholders as follows in this Article IV: 4.1 ORGANIZATION Sierra is a corporation validly existing and in good standing under the laws of the State of Delaware. Acquisition Sub is a corporation duly organized and validly existing under the laws of the State of Utah. Each of Sierra and Acquisition Sub has full corporate power and authority to own, operate and lease its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform this Agreement and the Related Agreements to which either is a party, and to carry out the transactions contemplated hereby and thereby. 4.2 ENFORCEABILITY All corporate action on the part of Sierra and Acquisition Sub and their respective officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Related Agreements, the consummation of the Merger, and the performance of all of their respective obligations under this Agreement and the Related Agreements has been taken or will be taken prior to the Effective Time. This Agreement has been, and each of the Related Agreements to which Sierra is a party will have been at the Closing, duly executed and delivered by Sierra, and this Agreement is, and each of the Related Agreements to which Sierra is a party will be at the Closing, a legal, valid and binding obligation of Sierra, enforceable against Sierra in accordance with its terms. This Agreement has been, and each of the Related Agreements to which Acquisition Sub is a party will have been at the Closing, duly executed and delivered by Acquisition Sub, and this Agreement is, and each of the Related Agreements to which Acquisition Sub is a party will be at the Closing, a legal, valid and binding obligation of Acquisition Sub, enforceable against Acquisition Sub in accordance with its terms. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 28 35 4.3 SECURITIES The Securities to be issued pursuant to this Agreement have been duly authorized for issuance, and such Securities, when issued and delivered to the Shareholders pursuant to this Agreement, shall be validly issued, fully paid and nonassessable. 4.4 SEC DOCUMENTS Sierra has furnished the Shareholders with true and complete copies of its Annual Report on Form 10-K for the fiscal year ended March 31, 1995 (the "10-K"), its Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, September 30 and December 31, 1995, its Proxy Statement relating to its 1995 Annual Meeting of Stockholders on August 17, 1995, and its Current Reports on Form 8-K dated November 30, 1995 and February 19, 1996 (collectively, the "SEC Documents"). As of their respective dates, each of the SEC Documents complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder; provided, however, that the audited financial statements of Sierra contained in the 10-K and in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995, and in each such document the related footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations, have been superseded and restated in their entireties by the audited financial statements, and the related footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1995. Such superseded materials should not be relied on in any respect. 4.5 NO APPROVALS; NO CONFLICTS The execution, delivery and performance of this Agreement and the Related Agreements by Sierra and Acquisition Sub and the consummation of the transactions contemplated hereby and thereby will not (a) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to Sierra or Acquisition Sub, (b) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, except (i) the written consent of CUC pursuant to the CUC Merger Agreement and (ii) compliance with applicable securities laws and the filing of all documents necessary to consummate the Merger with the Utah Division (the consent of all such Persons to be duly obtained at or prior to the Closing), (c) except as noted in clause (b), require any consent or approval under, or result in any default (with or without the giving of - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 29 36 notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which Sierra or Acquisition Sub is a party or by which it is bound or to which any assets of Sierra or Acquisition Sub are subject, (d) result in the creation of any lien or encumbrance upon the assets of Sierra or Acquisition Sub, (e) conflict with or result in a breach of or constitute a default under any provision of the Certificate of Incorporation or Bylaws of Sierra or Acquisition Sub, or (f) invalidate or adversely affect any permit, license, authorization or status used in the conduct of the business of Sierra or Acquisition Sub. ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF SIERRA AND ACQUISITION SUB The obligations of Sierra and Acquisition Sub to perform and observe the covenants, agreements and conditions hereof to be performed and observed by them at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by Sierra: 5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of the Company and each Shareholder contained herein (including applicable Exhibits or Schedules to the Disclosure Memorandum) and in the Related Agreements shall have been true and correct when made and shall be true and correct as of the Closing Date as though made on that date. 5.2 PERFORMANCE OF AGREEMENTS The Company and the Shareholders shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement or any Related Agreement to be performed and complied with by them at or prior to the Closing. 5.3 OPINION OF COUNSEL FOR THE COMPANY Sierra shall have received the opinion letter of Van Cott, Bagley, Cornwall & McCarthy, counsel for the Company and the Shareholders, dated the Closing Date, in form and substance satisfactory to Sierra. 5.4 SHAREHOLDER APPROVAL The Shareholders shall have duly and validly approved the Merger by a vote or written consent in accordance with Utah Law. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 30 37 5.5 RESIGNATIONS Sierra shall have received copies of resignations effective as of the Closing Date of all the directors of the Company. 5.6 CONSENTS AND APPROVALS The Company shall have received and shall have delivered to Sierra written consents to the Merger from each of the parties (other than the Company) to those agreements, leases, notes or other documents identified in the Disclosure Memorandum as requiring consent in connection with the Merger, which consents shall be satisfactory in all respects to Sierra in its sole discretion. All transfers of permits or licenses, all approvals of or notices to public agencies, federal, state, local or foreign, the granting or delivery of which is necessary for the consummation of the transactions contemplated hereby or for the continued operation of the Company, shall have been obtained, and all waiting periods specified by law shall have passed. All other consents, approvals and notices referred to in this Agreement shall have been obtained or delivered. 5.7 COMPLIANCE CERTIFICATE Sierra shall have received a certificate of the President and another senior officer of the Company, and of each Shareholder, dated the Closing Date, in form and substance satisfactory to Sierra, certifying that the conditions to the obligations of Sierra and Acquisition Sub set forth in this Article V have been fulfilled. 5.8 MATERIAL ADVERSE CHANGE Since the date of this Agreement and through the Closing, there shall not have occurred any material adverse change in the business, operations, assets, liabilities (absolute, accrued, contingent or otherwise), sales, margins, profitability, condition (financial or other) or prospects of the Company, and no material adverse change shall have occurred in any domestic or foreign laws or regulations affecting the Company or in any third party contractual or other business relationships of the Company. 5.9 DUE DILIGENCE The results of Sierra's due diligence investigation of the Company shall be satisfactory in all respects to Sierra in its sole discretion. 5.10 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE All corporate and other proceedings in connection with the transactions contemplated hereby and by the Related Agreements, and all documents and - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 31 38 instruments incident to such transactions, shall have been approved by Sierra's counsel, and Sierra shall have received a certificate of the Secretary of the Company, in form and substance satisfactory to Sierra, as to the authenticity and effectiveness of the actions of the Board of Directors and Shareholders of the Company authorizing the Merger and the transactions contemplated by this Agreement and the Related Agreements, and such other documents as are specified by Sierra's counsel. 5.11 COMPLIANCE WITH LAWS The consummation of the transactions contemplated by this Agreement and the Related Agreements shall be legally permitted by all laws and regulations to which Sierra or the Company is subject. 5.12 POOLING OF INTERESTS As of the Closing, no facts shall exist and no events shall have occurred that would, in the opinion of Sierra's independent accountants, prevent Sierra from accounting for the Merger contemplated herein, or prevent CUC from accounting for the CUC Merger, as a "pooling of interests" transaction in accordance with GAAP. 5.13 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect which enjoins, restrains, conditions or prohibits consummation of this Agreement or any Related Agreement, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Related Agreement. 5.14 RELATED AGREEMENTS AND STOCK POWERS The Related Agreements shall have been executed and delivered by all parties thereto other than Sierra and Acquisition Sub and the Shareholders shall have delivered to Sierra the executed stock powers contemplated by Section 9.6.1 of this Agreement. ARTICLE VI - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY The obligations of the Shareholders and the Company to perform and observe the covenants, agreements and conditions hereof to be performed and observed by them at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by the Company. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 32 39 6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of Sierra and Acquisition Sub contained herein and in the Related Agreements shall have been true and correct when made and shall be true and correct as of the Closing Date as though made on that date. 6.2 PERFORMANCE OF AGREEMENTS Sierra and Acquisition Sub shall have performed all obligations and agreements and complied with all covenants and conditions contained in this Agreement or any Related Agreement to be performed and complied with by them at or prior to the Closing. 6.3 COMPLIANCE CERTIFICATE The Company shall have received a certificate of an officer of Sierra, dated the Closing Date, substantially in form and substance satisfactory to the Company, certifying that the conditions to the obligations of the Shareholders and the Company set forth in this Article VI have been fulfilled. 6.4 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect which enjoins, restrains, conditions or prohibits consummation of this Agreement or any Related Agreement, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Related Agreement. 6.5 RELATED AGREEMENTS Sierra and Acquisition Sub shall have executed and delivered to the Company all the Related Agreements to which they are parties. ARTICLE VII - COVENANTS Between the date of this Agreement and the Effective Time, the parties covenant and agree as set forth in this Article VII. 7.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER Unless Sierra shall otherwise agree in writing, the business of the Company shall be conducted in and only in, and the Company shall not take any action except in, the ordinary course of business and in a manner consistent with past practice and in accordance with applicable law; and the Company shall use its best efforts to - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 33 40 preserve substantially intact the business organization of the Company, to keep available the services of the current officers, employees and consultants of the Company and to preserve the current relationships of the Company with customers, suppliers and other persons with which the Company has significant business relations. By way of amplification and not limitation, except as otherwise contemplated by this Agreement, the Company shall not, between the date of this Agreement and the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of Sierra: (a) amend or otherwise change its Articles of Incorporation or Bylaws or equivalent organizational documents; (b) issue, sell, pledge, dispose of, grant, encumber or authorize the issuance, sale, pledge, disposition, grant or encumbrance of (i) any shares of capital stock of any class of the Company, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of the Company or (ii) any assets of the Company, except for sales in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) reclassify, combine, split, subdivide, redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets) any corporation, partnership, other business organization or division thereof or any material amount of assets; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans or advances, except in the ordinary course of business and consistent with past practice; (iii) enter into any contract or agreement other than in the ordinary course of business, consistent with past practice; (iv) authorize any single capital expenditure which is in excess of $10,000 or capital expenditures which are, in the aggregate, in excess of $10,000 for the Company taken as a whole; or (v) enter into or amend any contract, agreement, commitment or arrangement with respect to any matter set forth in this subsection (e); (f) enter into any employment, consulting or agency agreement, or increase the compensation payable or to become payable to its officers, employees or consultants, except for increases in accordance with existing agreements or past practices for employees of the Company who are not officers of the Company, or - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 34 41 grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee; (g) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures (including, without limitation, procedures with respect to the payment of accounts payable and collection of accounts receivable); (h) make any tax election or settle or compromise any material federal, state, local or foreign income tax liability; (i) pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business and consistent with past practice, of liabilities reflected or reserved against in the Company Balance Sheet or subsequently incurred in the ordinary course of business and consistent with past practice; (j) take any action that would or is reasonably likely to result in any of the representations and warranties of the Company set forth in this Agreement being untrue, or in any covenant of the Company set forth in this Agreement being breached, or in any of the conditions to the Merger specified in Article V hereof not being satisfied; (k) take or agree to take any action specified in Section 3.7 hereof, or enter into any other material transaction other than those specified above, or agree to do any of the foregoing. 7.2 ACCESS TO INFORMATION; CONFIDENTIALITY From the date hereof to the Effective Time, the Company shall, and shall cause the officers, directors, employees, auditors and agents of the Company to, afford the officers, employees and agents of Sierra complete access at all reasonable times to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company and shall furnish Sierra with all financial, operating and other data and information as Sierra, through its officers, employees or agents, may reasonably request. From the date hereof until the Effective Time, the Company shall provide Sierra with monthly and other financial statements of the Company as they become available internally at the Company, all of which financial statements shall - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 35 42 fairly present the financial position and results of operations of the Company as of the dates and for the periods therein specified. No investigation pursuant to this Section 7.2 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. The parties shall continue to comply with and to perform their respective obligations under the Confidentiality Agreement between Sierra and the Company entered into as of February 6, 1996 (the "Confidentiality Agreement"), which shall be deemed terminated without any further action by the parties hereto at the Effective Time. 7.3 NO ALTERNATIVE TRANSACTIONS Unless this Agreement shall have been terminated in accordance with its terms, the Company and the Shareholders shall not, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, the Company or any business combination with the Company or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate or negotiate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. The Company immediately shall cease and cause to be terminated any existing discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company shall notify Sierra promptly if any such proposal or offer, or any inquiry or contact with any Person with respect thereto, is made and shall, in any such notice to Sierra, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact and the terms and conditions of such proposal, offer, inquiry or contact. The Company agrees not to release any third party from, or waive any provision of, any confidentiality or standstill agreement to which the Company is a party. 7.4 NOTIFICATION OF CERTAIN MATTERS The Company shall give prompt notice to Sierra of (a) the occurrence or nonoccurrence of any event which would be likely to cause any representation or warranty of the Company contained in this Agreement to be untrue or inaccurate and (b) any failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 7.4 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 36 43 7.5 FURTHER ACTION; REASONABLE BEST EFFORTS Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby, including, without limitation, using its reasonable best efforts to obtain all waivers, licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company as are necessary for the consummation of the transactions contemplated hereby and to fulfill the conditions to the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, each party to this Agreement shall use its reasonable best efforts to take all such action. No Shareholder will undertake any course of action inconsistent with this Agreement or which would make any representations, warranties or agreements made by such party in this Agreement or any Related Agreements untrue or any conditions precedent to this Agreement unable to be satisfied at or prior to the Closing. The parties hereto will treat the Merger as a reorganization under Section 368(a) of the Code for income tax purposes, provided that no party hereto makes any representation or warranty to any other party hereto regarding whether the Merger will qualify as a reorganization under such Section. After the Closing Date, each party hereto, at the request of and without any further cost or expense to the other parties, will take any further actions necessary or desirable to carry out the purposes of this Agreement or any Related Agreement, to vest in the Surviving Corporation full title to all properties, assets and rights of the Company and to effect the issuance of the Sierra Common Stock to the Shareholders pursuant to the terms and conditions hereof. 7.6 PUBLICITY The Company and the Shareholders shall not issue any press release or otherwise make any statements to any third party with respect to this Agreement or the transactions contemplated hereby without the prior written consent of Sierra. ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER 8.1 TERMINATION This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of this Agreement by the Shareholders of the Company): (a) by mutual written consent duly authorized by the Boards of Directors of the Company and Sierra; - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 37 44 (b) by either the Company or Sierra, if the Merger has not been consummated by April 15, 1996; provided, however, that the right to terminate this Agreement under this subsection (b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by either the Company or Sierra, if there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Sierra, Acquisition Sub or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and nonappealable; provided, however, that the party seeking to terminate this Agreement pursuant to this subsection (c) shall have used all reasonable efforts to remove such judgment, injunction, order or decree; (d) at any time prior to the Closing by Sierra if, at any time in the course of its legal, accounting, financial or operational due diligence investigation as to the Company, it shall have become aware of any facts or circumstances that it was not aware of on the date hereof, or any additional facts and circumstances as to matters of which it was aware on the date hereof, in either case that would, in the reasonable judgment of Sierra, make it inadvisable to consummate the Merger or the other transactions contemplated hereby; (e) by the Company, in the event of a material breach by Sierra of any representation, warranty or agreement contained herein which has not been cured or is not curable by April 15, 1996; or (f) by Sierra, in the event of a material breach by the Company of any representation, warranty or agreement contained herein which has not been cured or is not curable by April 15, 1996. 8.2 EFFECT OF TERMINATION In the event of the termination of this Agreement pursuant to Section 8.1 hereof, there shall be no further obligation on the part of any party hereto, except that nothing herein shall relieve any party from liability for any breach hereof. 8.3 AMENDMENT This Agreement may be amended by Sierra and the Company at any time prior to the Effective Time; provided, however, that no amendment may be made which would reduce the amount or change the type of consideration into which each share of Company Common Stock shall be converted upon consummation of the Merger - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 38 45 without the prior written consent of the Shareholders. This Agreement may not be amended except by an instrument in writing signed by Sierra and the Company. 8.4 WAIVER At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any obligation or other act of any other party hereto, (b) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any agreement or condition contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE IX - SURVIVAL AND INDEMNIFICATION 9.1 SURVIVAL All representations and warranties contained in this Agreement or in the Related Agreements or in any certificate delivered pursuant hereto or thereto shall survive the Closing for a period of one year, and shall not be deemed waived or otherwise affected by any investigation made or any knowledge acquired with respect thereto. The covenants and agreements contained in this Agreement or in the Related Agreements shall survive the Closing and shall continue until all obligations with respect thereto shall have been performed or satisfied or shall have been terminated in accordance with their terms. 9.2 INDEMNIFICATION BY SHAREHOLDERS From and after the Closing Date, the Shareholders shall jointly and severally (except as provided in Section 9.4(b) below) indemnify and hold Sierra and its officers, directors and affiliates (the "Sierra Indemnified Parties") harmless from and against, and shall reimburse the Sierra Indemnified Parties for, any and all losses, damages, debts, liabilities, obligations, judgments, orders, awards, writs, injunctions, decrees, fines, penalties, taxes, costs or expenses (including but not limited to any legal or accounting fees or expenses) actually incurred (on an after-tax basis) ("Losses") and arising out of or in connection with any inaccuracy in any representation or warranty made by the Company or the Shareholders in this Agreement or in any certificate delivered pursuant hereto or thereto, or any failure by the Company or any Shareholder to perform or comply, in whole or in part, with any covenant or agreement in this Agreement. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 39 46 9.3 INDEMNIFICATION BY SIERRA From and after the Closing Date, Sierra shall indemnify and hold the Company and its officers, directors and affiliates (the "Company Indemnified Parties" and, together with the Sierra Indemnified Parties, the "Indemnified Parties") harmless from and against, and shall reimburse the Company Indemnified Parties for, any and all Losses arising out of or in connection with any inaccuracy in any representation or warranty made by Sierra or Acquisition Sub in this Agreement or in any certificate delivered pursuant hereto, or any failure by Sierra or Acquisition Sub to perform or comply, in whole or in part, with any covenant or agreement in this Agreement. 9.4 THRESHOLD AND LIMITATIONS (a) No Indemnified Party shall be entitled to receive any indemnification payment with respect to any claims for indemnification under this Article IX ("Claims") until the aggregate Losses for which such Indemnified Parties would be otherwise entitled to receive indemnification exceed $75,000 (the "Threshold"); provided, however, that once such aggregate Losses exceed the Threshold, such Indemnified Parties shall be entitled to indemnification for the aggregate amount of all Losses without regard to the Threshold. (b) In no event shall the liability of the Shareholders hereunder for Losses incurred by Indemnified Parties exceed $8,090,000. 9.5 PROCEDURE FOR INDEMNIFICATION (a) An Indemnified Party shall notify the indemnifying party in writing reasonably promptly after the assertion against the Indemnified Party of any claim by a third party (a "Third Party Claim") in respect of which the Indemnified Party intends to base a Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve it of any obligation or liability that it may have to the Indemnified Party except to the extent that the indemnifying party demonstrates that its ability to defend or resolve such Third Party Claim is adversely affected thereby. (b) (i) The indemnifying party shall have the right, upon written notice given to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim, to assume the defense or handling of such Third Party Claim, at the indemnifying party's sole expense, in which case the provisions of Section 9.5(b)(ii) below shall govern. (ii) The indemnifying party shall select counsel reasonably acceptable to the Indemnified Party in connection with conducting the defense or - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 40 47 handling of such Third Party Claim, and the indemnifying party shall defend or handle the same in consultation with the Indemnified Party and shall keep the Indemnified Party timely apprised of the status of such Third Party Claim. The indemnifying party shall not, without the prior written consent of the Indemnified Party, agree to a settlement of any Third Party Claim, unless (A) the settlement provides an unconditional release and discharge of the Indemnified Party and the Indemnified Party is reasonably satisfied with such discharge and release and (B) Sierra shall not have reasonably objected to any such settlement on the ground that the circumstances surrounding the settlement could result in a material adverse impact on the business, operations, assets, liabilities (absolute, accrued, contingent or otherwise), condition (financial or otherwise) or prospects of Sierra or the business conducted by the Company. The Indemnified Party shall cooperate with the indemnifying party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (c) (i) If the indemnifying party does not give written notice to the Indemnified Party within 30 days after receipt of the notice from the Indemnified Party of any Third Party Claim of the indemnifying party's election to assume the defense or handling of such Third Party Claim, the provisions of Section 9.5(c)(ii) below shall govern. (ii) The Indemnified Party may, at the indemnifying party's expense (which shall be paid from time to time by the indemnifying party as such expenses are incurred by the Indemnified Party), select counsel in connection with conducting the defense or handling of such Third Party Claim and defend or handle such Third Party Claim in such manner as it may deem appropriate, provided, however, that the Indemnified Party shall keep the indemnifying party timely apprised of the status of such Third Party Claim and shall not settle such Third Party Claim without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld. If the Indemnified Party defends or handles such Third Party Claim, the indemnifying party shall cooperate with the Indemnified Party and shall be entitled to participate in the defense or handling of such Third Party Claim with its own counsel and at its own expense. (d) If the Indemnified Party intends to seek indemnification hereunder, other than for a Third Party Claim, then it shall notify the indemnifying party in writing 90 days after its discovery of facts upon which it intends to base its Claim for indemnification hereunder, but the failure or delay so to notify the indemnifying party shall not relieve the indemnifying party of any obligation or liability that the indemnifying party may have to the Indemnified Party except to the extent that the indemnifying party demonstrates that the indemnifying party's ability to defend or resolve such Claim is adversely affected thereby. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 41 48 (e) The Indemnified Party may notify the indemnifying party of a Claim even though the amount thereof plus the amount of other Claims previously notified by the Indemnified Party aggregate less than the Threshold. 9.6 HOLDBACK At the Effective Time, the Shareholders shall be deemed to have pledged 10% of the Securities to Sierra as a mechanism to satisfy potential claims for indemnification by Sierra and its affiliates under this Article IX. Any liability of the Shareholders for indemnification under this Article IX shall be satisfied, first, from Holdback Shares pursuant to a setoff under this Section 9.6 and, second, to the extent the Holdback Shares are insufficient to satisfy such liability in full, from other Securities or proceeds from any disposition thereof, as the Shareholders may elect. 9.6.1 PLEDGE The Holdback Shares (which shall include for purposes of this Section 9.6 any distributions accrued or made thereon after the date of this Agreement and any other securities or property which may be issued after the date hereof in exchange for such shares in any merger or recapitalization or similar transaction involving Sierra) shall be deemed as of the Effective Time to be pledged by the Shareholders to, and shall be held by, Sierra or any successor thereto pursuant to this Agreement. The Shareholders shall deliver to Sierra at the Closing appropriate stock powers endorsed in blank and such other documentation as Sierra may reasonably prescribe to carry out the purposes of this Section 9.6. So long as any Holdback Shares are held by Sierra hereunder, Sierra shall have, and the Shareholders hereby grant, effective as of the Effective Time, a perfected, first-priority security interest in such Holdback Shares to secure payment of amounts payable by the Shareholders in respect of indemnification Claims under this Article IX. In connection therewith, each Shareholder expressly agrees to execute and deliver such instruments as Sierra may from time to time reasonably request for the purpose of evidencing and perfecting such security interest. 9.6.2 RELEASE OF HOLDBACK SHARES Sierra shall hold the Holdback Shares in accordance with this Agreement and shall transfer the Holdback Shares only as follows: (a) Holdback Shares shall be re-transferred to Sierra in respect of indemnification Claims made by Sierra under this Article IX when, and to the extent, authorized under paragraph 9.6.3 below. (b) On the Holdback Termination Date (as defined below), any Holdback Shares then remaining pledged to Sierra (which shall exclude shares re- - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 42 49 transferred to Sierra under paragraph (a)) shall be released to the Shareholders pro rata in accordance with their percentage ownership of the Company immediately prior to the Merger, as set forth in Schedule 3.3(b) to the Disclosure Memorandum. Except as otherwise set forth in Section 9.6.5 below, for purposes of this Agreement, the "Holdback Termination Date" shall mean the date one year after the Closing Date. 9.6.3 CLAIMS PROCEDURE The procedure for payment from the Holdback Shares of indemnification amounts to which Sierra or other Indemnified Parties may become entitled under this Article IX shall be as follows: (a) Subject to the limitation that written notice of any Claim for indemnification hereunder must be given to the Shareholders not later than the Holdback Termination Date, from time to time as Sierra determines that it or another Indemnified Party is entitled to an indemnification payment under this Article IX, Sierra may give written notice of the Claim to the Shareholders describing in such notice the nature of the Claim, the amount thereof if then ascertainable and, if not then ascertainable, the estimated maximum amount thereof, and the provisions in this Agreement on which the claim is based. (b) If Sierra has not received written objection to a Claim in accordance with the preceding subparagraph (a) from Shareholders representing at least a majority in interest in the Holdback Shares within 10 business days after notice of such Claim is delivered (the "Response Period"), the Claim stated in such notice shall be conclusively deemed to be approved by the Shareholders, and Sierra shall promptly thereafter transfer to the Indemnified Party from the Holdback Shares an amount of Holdback Shares equal in value to the amount of such Claim. The Holdback Shares to be transferred shall be rounded to the nearest whole share and shall be valued on the basis of the last reported sale price of Sierra's Common Stock on the Nasdaq National Market on the date the notice of claim was delivered. (c) If within the Response Period Sierra shall have received from the Sellers representing at least a majority in interest in the Holdback Shares a written objection to the claim specifying the nature of and grounds for such objection, then such claim shall be deemed to be an "Open Claim," and Sierra shall reserve within the Holdback Shares a number of Holdback Shares equal in value to the amount of such Open Claim (which amount designated for each Open Claim is referred to herein as the "Claim Reserve Amount"). The number of Holdback Shares to be reserved shall be determined (rounded to the nearest whole share) by dividing the amount of the Open Claim by the average of the last reported sale prices of Sierra's Common Stock - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 43 50 on the Nasdaq National Market over the 10 trading days preceding such written objection. The number of Holdback Shares included in the Claim Reserve Amount shall be increased or reduced, as the case may be, on a monthly basis based on the average of the last reported sale prices of Sierra's Common Stock on the Nasdaq National Market over the then preceding 20 trading days. (d) The Claim Reserve Amount for each Open Claim shall be transferred by Sierra from the Holdback Shares only in accordance with either (i) a mutual agreement among Sierra and Shareholders representing at least a majority in interest in all the Holdback Shares, which shall be memorialized in writing, or (ii) a final and binding arbitration decision or order pertaining to the Open Claim, except that on the Holdback Termination Date all Holdback Shares not previously distributed or then required to be distributed to Sierra in accordance with this Section 9.6 shall be released to the Shareholders pro rata in accordance with Schedule 3.3(b) to the Disclosure Memorandum, whether or not all Open Claims have then been resolved. 9.6.4 VOTING; DISPOSITION The Holdback Shares shall be held of record by the Shareholders, who shall have full right to vote the Holdback Shares on all matters coming before the stockholders of Sierra. Each Shareholder hereby agrees not to sell or transfer to any third party any interest in the Holdback Shares prior to any distribution of the Holdback Shares to such Shareholder pursuant to paragraph 9.6.2 of this Agreement. 9.6.5 MERGER OR RECAPITALIZATION In the event of any merger or recapitalization or similar transaction involving Sierra prior to the time when all Holdback Shares have been transferred or released in accordance with the terms of this Section 9.6, such Holdback Shares shall be converted or exchanged in accordance with such transaction in the same manner as other shares of Sierra Common Stock, and any securities or property issued in conversion or exchange thereof shall then be included within the definition of Holdback Shares and shall otherwise become subject to this Agreement in lieu of such shares of Sierra Common Stock. 9.6.6 TAXATION OF DIVIDENDS Each Shareholder hereby acknowledges that, for federal and state income tax purposes, any dividends or other distributions with respect to the Holdback Shares shall be income of the Shareholders. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 44 51 ARTICLE X - GENERAL 10.1 EXPENSES Regardless of whether the transactions contemplated by this Agreement are consummated, each party shall pay its own fees and expenses incident to the negotiation, preparation and execution of this Agreement and the other Related Agreements (including legal and accounting fees and expenses). The Shareholders shall pay any transfer or similar taxes which may be payable in connection with the transactions contemplated by this Agreement. 10.2 NOTICES Any notice or demand desired or required to be given hereunder shall be in writing given by personal delivery, certified or registered mail, confirmed facsimile transmission, or overnight courier service, in each case addressed as respectively set forth below or to such other address as any party shall have previously designated by such a notice. The effective date of any notice or request shall be the date of personal delivery, four days after the date of mailing by certified or registered mail, the date on which successful facsimile transmission is confirmed, or the date undertaken for delivery by a reputable overnight courier service, as the case may be, in each case properly addressed as provided herein and with all charges prepaid. TO SIERRA OR ACQUISITION SUB: Sierra On-Line, Inc. 3380 146th Place S.E., Suite 300 Bellevue, Washington 98007 Fax: (206) 644-7397 Attention: General Counsel with a copy to: Perkins Coie 1201 Third Avenue, 40th Floor Seattle, Washington 98101-3099 Fax: (206) 583-8500 Attention: Stephen A. McKeon TO THE SHAREHOLDERS: At their respective addresses set forth in the Disclosure Memorandum. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 45 52 TO THE COMPANY: Headgate, Inc. 78 West 2050 South Bountiful, Utah 84010 Fax: (801) 298-9169 Attention: President with a copy to: Van Cott, Bagley, Cornwall & McCarthy Suite 1600, 50 South Main Street Salt Lake City, UT 84145 Fax: (801) 534-0058 Attention: Brent Christensen 10.3 SEVERABILITY If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. 10.4 ENTIRE AGREEMENT All prior or contemporaneous agreements, contracts, promises, representations and statements among the parties to this Agreement as to the subject matter hereof (other than the Related Agreements, the Exhibits and Schedules to this Agreement and to the Related Agreements, and the certificates, financial statements and other documents delivered pursuant to this Agreement or to the Related Agreements (together with this Agreement, the "Transaction Documents")) are merged into this Agreement. The Transaction Documents set forth the entire understanding and agreement among the parties with respect to the subject matter hereof and thereof, and there are no terms, conditions, representations, warranties or covenants other than those contained in the Transaction Documents or supplied by law. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 46 53 10.5 ASSIGNMENT This Agreement shall not be assigned by operation of law or otherwise, except that Sierra may assign all or any of its rights and obligations hereunder to any of its affiliates, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations, and further provided that any such assignment shall not change the consideration due to the Shareholders hereunder. 10.6 PARTIES IN INTEREST This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 10.7 SPECIFIC PERFORMANCE Each of the parties acknowledges and agrees that the other parties hereto would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties hereto agrees the other parties hereto shall be entitled to an injunction to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof (including the indemnification provisions hereof) in any competent court having jurisdiction over the parties, in addition to any other remedy to which they may be entitled at law or in equity. 10.8 GOVERNING LAW This Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington applicable to contracts executed in and to be performed in that State. 10.9 HEADINGS The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 10.10 COUNTERPARTS This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 47 54 separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 10.11 WAIVER OF JURY TRIAL Each of the Shareholders, Sierra, the Company and Acquisition Sub hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the actions of such parties in the negotiation, administration, performance and enforcement thereof. 10.12 ARBITRATION Any controversies or claims arising out of or relating to this Agreement or the other Related Agreements shall be fully and finally settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA Rules"), conducted by a panel of three arbitrators chosen in accordance with the AAA Rules, except that the parties thereto shall have any right to discovery as would be permitted by the Federal Rules of Civil Procedure for a period of 90 days following the commencement of such arbitration, and the arbitrators shall resolve any dispute which arises in connection with such discovery. The prevailing party shall be entitled to costs, expenses and reasonable attorneys' fees, and judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. Arbitration proceedings shall be conducted in Salt Lake City, Utah if commenced by Sierra and in Seattle, Washington if commenced by the Shareholders. 10.13 TAX-FREE REORGANIZATION The parties intend this Agreement to be a plan of reorganization under Section 368 of the Code and intend the Merger to be a tax-free reorganization under Section 368(a)(1)(A) of the Code by virtue of the provisions of Section 368(a)(2)(E) of the Code. The parties intend that no consideration that could constitute "other property" within the meaning of Section 356(a) of the Code is being transferred by Sierra for the Company Common Stock in the Merger. The parties shall not take a position on any tax return or before any taxing authority that is inconsistent with this Section 10.13 unless otherwise required by a final and binding determination of a taxing authority with appropriate jurisdiction, and each party agrees to promptly notify the other party of any assertion by a taxing authority of a position that is inconsistent with this Section 10.13. - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 48 55 IN WITNESS WHEREOF, the parties hereto have entered into and signed this Agreement as of the date and year first above written. SIERRA ON-LINE, INC. By: /s/ Kenneth A. Williams ---------------------------------------------- Name: Chief Executive Officer ---------------------------------------- BIRDIE ACQUISITION CORP. By: /s/ Michael A. Brochu ---------------------------------------------- Name: President and Chief Operating Officer ---------------------------------------- HEADGATE, INC. By: /s/ Vance L. Cook ---------------------------------------------- Name: Vance L. Cook, President ---------------------------------------- SHAREHOLDERS: /s/ Vance L. Cook -------------------------------------------------- Name: Vance Cook /s/ Mark Merrill -------------------------------------------------- Name: Mark Merrill /s/ Michael V. Jones -------------------------------------------------- Name: Mike Jones - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Page 49 EX-10.17 7 JOINT VENTURE AGREEMENT DATED JULY 12, 1995 1 JOINT VENTURE AGREEMENT BETWEEN SIERRA ON-LINE, INC. AND PIONEER ELECTRONIC CORPORATION DATED AS OF JULY 12, 1995 2 CONTENTS Section 1. Organization of Company......................................... 1 1.1 Formation of Company............................................ 1 1.2 Name............................................................ 2 1.3 Principal Office of the Company................................. 2 1.4 Purposes and Nature of Business................................. 2 1.5 Term............................................................ 3 1.6 Liability of Parties to Third Parties; Reliance by Third-Party Creditors....................................................... 3 1.6.1 Liability of Parties............................... 3 1.6.2 Reliance by Third Parties.......................... 3 Section 2. Contributions to the Company.................................... 3 2.1 Initial Capital Contributions................................... 3 2.2 Fund Contribution Commitment.................................... 4 2.3 Additional Contributions........................................ 4 2.4 Default in Monetary Obligations................................. 4 2.5 Contributions in Kind........................................... 5 2.5.1 Sierra Game Titles................................. 5 2.5.2 Enabling Technology................................ 5 2.5.3 Services........................................... 5 2.5.4 Operational Contacts............................... 5 2.6 Company Capital................................................. 6 2.7 Loans........................................................... 6
TABLE OF CONTENTS PAGE i 3 Section 3. Management...................................................... 6 3.1 The Board....................................................... 6 3.1.1 Appointment........................................ 6 3.1.2 Term............................................... 7 3.1.3 Removal............................................ 7 3.1.4 Board Meetings..................................... 7 3.1.5 Manner of Acting by the Board...................... 7 3.1.6 Voting of the Board................................ 8 3.1.7 Unanimous Voting of the Board...................... 8 3.2 President....................................................... 10 3.2.1 Appointment........................................ 10 3.2.2 Term............................................... 10 3.2.3 Removal............................................ 10 3.3 Auditors........................................................ 10 3.4 Rights of Parties............................................... 11 3.5 Compensation.................................................... 11 Section 4. Company's Dealings With Parties or Affiliates................... 11 4.1 Right of Company to Deal With Parties or Affiliates............. 11 4.2 Cross License of Sierra Titles and Company Titles............... 11 4.3 Distribution Agreement.......................................... 15 4.4 Other Business of Parties....................................... 17 4.5 Company-Developed Technology.................................... 17 Section 5. Distributions and Allocations................................... 18 5.1 Distributions................................................... 18
TABLE OF CONTENTS PAGE ii 4 5.2 Limitations on Distributions.................................... 18 Section 6. Indemnification................................................. 18 6.1 Indemnification................................................. 18 6.2 Nonexclusivity of Rights........................................ 18 6.3 Indemnification of Officers, Employees and Agents............... 18 Section 7. Dissolution of Company; Special Withdrawal Right................ 19 7.1 Events Causing Dissolution...................................... 19 7.2 Liquidation..................................................... 20 7.2.1 Payment............................................ 20 7.2.2 No Right to Assets................................. 20 7.2.3 Enabling Technology................................ 20 7.2.4 Rights to Company-Developed Products and Technology 21 7.2.5 Use of Other Party's Name.......................... 21 7.3 Buy-Out Option.................................................. 21 7.4 Termination Payment............................................. 21 Section 8. Books, Records and Accounting................................... 22 8.1 Books and Records............................................... 22 8.2 Fiscal Year..................................................... 22 8.3 Bank Accounts................................................... 22 8.4 Annual Budget................................................... 23 8.4.1 Annual Budget Planning............................. 23 8.4.2 Review of Annual Performance....................... 23 8.5 Annual Business Plan............................................ 23
TABLE OF CONTENTS PAGE iii 5 Section 9. Dispute Resolution.............................................. 24 9.1 General......................................................... 24 9.2 Unassisted Settlement........................................... 24 9.3 Arbitration and Costs........................................... 24 9.4 Costs........................................................... 24 Section 10. Miscellaneous................................................... 25 10.1 Confidentiality................................................. 25 10.2 Press Releases.................................................. 25 10.3 Governing Law................................................... 25 10.4 Assignment...................................................... 25 10.5 Construction.................................................... 26 10.6 Counterparts.................................................... 26 10.7 No Partnership.................................................. 26 10.8 Entire Agreement................................................ 26 10.9 Notices......................................................... 26 10.10 Waivers......................................................... 28 10.11 Attorney Fees................................................... 28 10.12 Choice of Language.............................................. 28 10.13 Exhibits........................................................ 28
TABLE OF CONTENTS PAGE iv 6 JOINT VENTURE AGREEMENT This Joint Venture Agreement, dated as of July 12, 1995 (the "Effective Date"), is made and entered into by and between Sierra On-Line, Inc., a corporation organized under the laws of the State of Delaware, U.S.A. ("Sierra"), and Pioneer Electronic Corporation, a corporation organized under the laws of Japan ("Pioneer"). Sierra and Pioneer are sometimes referred to herein collectively as the "Parties" and individually as a "Party". The definitions of certain terms used in this Agreement are set forth in Exhibit A. RECITALS A. Sierra is a developer, publisher and distributor of computer games and other software products principally for use on personal computers. B. Pioneer is engaged in various aspects of the consumer electronic entertainment business worldwide. C. Sierra and Pioneer want to enter into a joint business arrangement under which they will jointly form a separate legal entity to develop, produce, publish, distribute, localize and license computer games and other software products in Japan and the rest of Asia. AGREEMENT For and in consideration of the mutual covenants contained in this Agreement, the Parties agree as follows: SECTION 1. ORGANIZATION OF COMPANY 1.1 FORMATION OF COMPANY As soon as practicable following the Effective Date, the Parties shall form a "Kabushiki-Kaisha" corporation under the Commercial Code and other Applicable Laws of Japan (the "Company") to perform the activities of the Company specified in this Agreement. The Company's organizational documents ("Company Organization Documents") shall provide for a single class of voting common stock, include the provisions necessary to implement the terms and conditions set forth in this Agreement and be in a form approved by both Parties. Pioneer shall be responsible for taking all steps necessary to form the Company including filing, registration and notification required by all Applicable Laws in Japan. All costs reasonably incurred by Pioneer in forming the Company shall be reimbursed to Pioneer by the Company as soon as possible following the formation of the Company. JOINT VENTURE AGREEMENT PAGE 1 7 1.2 NAME The name of the Company shall be either Sierra On-Line Pioneer Inc. or Sierra Pioneer Inc. 1.3 PRINCIPAL OFFICE OF THE COMPANY The principal office of the Company shall be located at Meguro-ku or Shibuya-ku, Tokyo, Japan or such other location approved by the Parties from time to time. 1.4 PURPOSES AND NATURE OF BUSINESS The purposes of the Company shall be limited to: (a) localize, publish, distribute and license in Japan and Asia the computer games and other software products acquired under license from Sierra pursuant to the License Agreement described in Section 4.2; (b) develop, produce, publish, distribute and license new computer game and software product titles for personal computers, arcade and video game computers, 32-bit systems, super density discs and other emerging platforms; (c) adapt, convert and port the computer games and software products described in clauses (a) and (b) above for use with different computer platforms (e.g., from MS DOS platforms to arcade and video game machines and 32-bit systems) and publish, distribute and license such games and products in Japan and Asia and, through Sierra, the remainder of the world; (d) localize, publish, distribute and sublicense third-party computer games and software products in Japan and Asia and, through Sierra, the remainder of the world for personal computers, arcade and video game computers, 32-bit systems, super density discs and other emerging platforms; (e) develop other lines of business related to the activities described in clauses (a) through (d) above (e.g., develop, publish and sell hint books for such games and products and develop and sell merchandise that uses characters or other recognizable aspects of such games and products); (f) sublicense to Sierra the right to localize, port, publish, distribute and license outside Japan and Asia the games and products described in clauses (b) through (e) above; (g) engage in any other lawful business activity that is approved in advance by the Board subject to the terms of this Agreement; and (h) engage in all other acts and things necessary, proper or advisable to effect and carry out such purposes of the Company and to operate its business. JOINT VENTURE AGREEMENT PAGE 2 8 1.5 TERM The Company shall commence upon formation after the Effective Date of this Agreement and shall continue in perpetuity unless and until earlier terminated and dissolved pursuant to Section 7.1 of this Agreement. This Agreement shall terminate upon the earlier of (i) dissolution of the Company or (ii) termination as provided in this Agreement. 1.6 LIABILITY OF PARTIES TO THIRD PARTIES; RELIANCE BY THIRD-PARTY CREDITORS 1.6.1 LIABILITY OF PARTIES Except as otherwise provided by Applicable Laws or in this Agreement, no Party shall be personally liable for any debt, obligation or liability of the Company, whether arising in contract or otherwise, solely by reason of being an owner of Shares in the Company. 1.6.2 RELIANCE BY THIRD PARTIES This Agreement is entered into between the Parties for the exclusive benefit of the Parties and their permitted successors and assigns. Specifically (but not by way of limitation), this Agreement is not intended for the benefit of any creditor of the Company or any other person. Except to the extent provided by Applicable Laws, and then only to that extent, no such creditor or third party shall have any rights under this Agreement or under any other agreement between the Company and either Party, either with respect to any contribution to the Company or otherwise. SECTION 2. CONTRIBUTIONS TO THE COMPANY 2.1 INITIAL CAPITAL CONTRIBUTIONS Each Party shall contribute the following amounts to the Company ("Initial Capital Contribution") upon the formation of the Company and shall receive the following percentage of the authorized and issued Shares:
INITIAL CAPITAL PARTY CONTRIBUTION SHARE PERCENTAGE ----- --------------- ----------------- Sierra 153,000,000 yen 51% Pioneer 147,000,000 yen 49%
2.2 FUND CONTRIBUTION COMMITMENT In addition to the Initial Capital Contributions, the Parties shall make additional Capital Contributions or Loans pro rata in accordance with their respective number of Shares (i) in such amounts as shall be determined by the President as provided in Section 3.2 or (ii) upon a majority vote of the Board upon the occurrence of a Trigger Event or (iii) up to a maximum of 20 million yen per Party in any fiscal year in the absence of a Trigger Event upon a majority vote of the Board or JOINT VENTURE AGREEMENT PAGE 3 9 (iv) upon the unanimous vote of the Board, in each case subject to a maximum aggregate contribution (whether by Loan or Capital Contribution and including the Initial Capital Contribution) of Five Hundred Twenty Million Four Hundred Eight Thousand One Hundred Japanese Yen (520,408,100 yen) in the case of Sierra and Five Hundred Million Japanese Yen (500,000,000 yen) in the case of Pioneer. The Trigger Events are the following: (a) If the Company's working capital is insufficient to enable the Company to operate and perform in the ordinary course of business in accordance with the Annual Budget (or the Revised Annual Budget, if applicable) for such fiscal year; or (b) The Company has insufficient resources to fund any capital expenditure identified in the Annual Budget (or the Revised Annual Budget, if applicable) for such fiscal year. 2.3 ADDITIONAL CONTRIBUTIONS Any call for Capital Contributions or Loans in excess of or in any manner other than those specified in Sections 2.1 or 2.2 above shall be subject to the approval of each contributing Party. 2.4 DEFAULT IN MONETARY OBLIGATIONS In the event of any default by a Party in the performance of its monetary obligations under Section 2.1 or 2.2 of this Agreement, the other Party may demand in writing that such default be cured. If the defaulting Party shall fail to cure the default within ten (10) days after receipt of such demand, the other Party may, on behalf of the defaulting Party, advance to the Company the amount remaining in default. Such advance shall be treated as a loan to the defaulting Party bearing interest at the rate of fifteen percent (15%) or at the maximum rate permitted by Applicable Laws, whichever is less, computed and compounded daily. The loan shall be payable ten (10) days after demand for payment is received by the defaulting Party from the advancing Party. The advancing Party shall have a preferred right of distribution with respect to any such amounts advanced and no distributions or payments in liquidation shall be made by or on behalf of the Company to the defaulting Party until such amount together with interest has been repaid in full. The rights of the advancing Party set forth in this Section 2.4 are in addition to, and not in lieu of, any other rights or remedies afforded under this Agreement, by law or otherwise on account of the default. 2.5 CONTRIBUTIONS IN KIND 2.5.1 SIERRA GAME TITLES Sierra will license and provide to the Company the computer games and software of Sierra and its Affiliates as provided in the License Agreement described in Section 4.2 below. 2.5.2 ENABLING TECHNOLOGY In addition to their respective Capital Contributions, Loans and the licenses described in Section 4.2 below, each Party shall also license and provide to the Company during the JOINT VENTURE AGREEMENT PAGE 4 10 term of this Agreement on a non-exclusive, non-transferable, non-sublicensable, royalty-free basis and solely for the internal use by the Company in the development of the Company's games and products all development tools and enabling technology reasonably useful for the creation and development of the software products in the areas of computer games, consumer education, edutainment or other similar consumer software products for use on personal computers, video game machines and any new or emerging platform, such as 32-bit CD-ROM game machines, that such Party is now or hereafter legally and contractually entitled to so license or sublicense to the Company. A list of such tools and enabling technology that as of the Effective Date each Party is entitled to license or sublicense to the Company is set forth in Exhibit C. The Company shall be obligated to keep all such tools and technology confidential as provided in Section 10.1 and limit access to such tools and technology to persons who have a need to know. The Parties shall notify the Company of any and all third party royalties that will arise out of the Company's use of their respective tools and technology and if the Company proceeds to use such items, the Company shall pay or reimburse the licensing Party for any and all third party royalties due on the Company's use of the same. 2.5.3 SERVICES In addition, each Party shall contribute development, marketing and management support to the Company at no charge. Pioneer shall transfer experienced and qualified administrative staff and content producers from Pioneer or its Affiliates to the Company and shall provide the Company with access to the third-party software developers with whom Pioneer and its Affiliates have been working to perform work for the Company on the same terms and conditions used with Pioneer. Each Party shall also provide the Company at no charge access to and use of the facilities of such Party that are useful for the Company's development and publication of products (e.g., Pioneer's or Sierra's audiovisual digital recording studios). 2.5.4 OPERATIONAL CONTACTS Sierra, at its own expense, shall appoint one or more of its employees to be dedicated solely to the activity of acting as the liaison and coordinator between Sierra and the Company regarding the conduct of the Company's business and the Company's dealings with Sierra pursuant to Section 4. 2.6 COMPANY CAPITAL (a) No Party shall be paid interest on any Capital Contribution. (b) No Party shall have the right to withdraw, or receive any return of, its Capital Contributions or Loans, except as may be specifically provided in this Agreement. No Party shall have priority over the other Party, either as to the return of its Capital Contributions or Loans or as to profits, losses or distributions, except as otherwise specifically provided in this Agreement or under Applicable Laws. JOINT VENTURE AGREEMENT PAGE 5 11 (c) Under circumstances requiring a return of any Capital Contribution or Loan, no Party shall have the right to receive property, other than cash, except as may be specifically provided in this Agreement. 2.7 LOANS After a request for an additional contribution to the Company (other than the Initial Capital Contribution) is made as provided above, the Parties shall discuss whether all or any portion of such contribution shall be made in the form of a Loan. Upon the majority decision of the Board, each Party may advance the approved portion in the form of a Loan, subject to such terms and conditions as may be established by the Board with respect to such Loans (e.g., interest rate, liquidation preference and the like). In addition to such contributions, the Company may borrow money from the Parties pro rata in accordance with the number of Shares they own at such times and in such amounts and upon such terms as shall be determined by a unanimous vote of the Parties or the Board. No such Loan shall increase the interest of the Party making the Loan in the capital of the Company, or affect any Party's Shares or share of the profits, losses and distributions of the Company. SECTION 3. MANAGEMENT 3.1 THE BOARD The business of the Company shall be conducted in accordance with policies, decisions, guidelines and budgets made or approved by the Board, subject to the terms of this Agreement. 3.1.1 APPOINTMENT The Board shall be composed of five (5) Directors. Sierra shall designate three (3) Directors and Pioneer shall designate two (2) Directors. Sierra and Pioneer shall each vote their Shares or otherwise cause the appointment or election of the Directors designated by the other Party as provided above. The initial Directors shall be: Designated by Sierra: Mr. Michael Brochu Mr. Al Higginson Mr. Kenneth Williams Designated by Pioneer: Mr. Kimihiko Sugano Mr. Hajime Wada 3.1.2 TERM Each Director shall hold office for a term expiring on his or her death, resignation or removal from office or upon the expiration of such shorter term as may be required under Applicable Laws. JOINT VENTURE AGREEMENT PAGE 6 12 3.1.3 REMOVAL Any Party may at any time remove and replace any of the Directors designated by it by giving written notice of the replacement to the other Party. Sierra and Pioneer shall each vote their Shares or otherwise cause the removal and replacement of a Director designated by the other Party as requested by that Party. 3.1.4 BOARD MEETINGS The Company shall hold regular quarterly Board meetings. In addition, any Director may call a meeting of the Board by giving all other Directors notice thereof at least ten (10) Business Days in advance of the meeting or such shorter notice as agreed upon in writing by all Directors. All meetings of the Board shall be held at the principal office of the Company or at such other place as may be determined by the Board. To the extent permitted under Applicable Laws, a meeting of the Board may be held by conference telephone or similar communications equipment by means of which all Directors participating in the meeting can hear each other at the same time; participation by such means shall constitute presence at such meeting. There shall be a quorum if at least one (1) Director designated by each Party is in attendance. Minutes shall be kept of each Board meeting and provided to all Directors. 3.1.5 MANNER OF ACTING BY THE BOARD To the extent permitted by Applicable Laws and subject to the terms of this Agreement, the Board may act by consensus, by adoption pursuant to vote taken at a meeting of the Board (any Director designated by a Party may vote by proxy for any Director(s) designated by such Party who is absent), or by written instrument signed by all Directors or signed by at least one (1) Director designated by each Party. 3.1.6 VOTING OF THE BOARD On each matter put to a vote of the Board, each Director present in person or by proxy at the meeting shall be entitled to cast a vote. Except for the matters described in Section 3.1.7 below, any matter put to a vote shall be deemed adopted by the Board upon receiving the affirmative vote of three (3) Directors including without limitation the following: (a) approval of the Annual Business Plan and the Annual Budget; (b) approval of the Revised Annual Budget; (c) the Company entering into contracts, borrowing from or lending money, guarantee of any indebtedness or other obligation or acquisition, sale, disposition or encumbrance (e.g., by easement, mortgage, deed of trust, security agreement or otherwise) of any property, in each case (i) in the ordinary course of business, (ii) involving amounts up to 30 million yen, and (iii) which was not contemplated or authorized in the applicable Annual Budget or Annual Business Plan; JOINT VENTURE AGREEMENT PAGE 7 13 (d) the authorization of any person or entity (other than the President), or the delegation of any authority (e.g., by appointment of an agent or otherwise), to enter into any contract on behalf of the Company not otherwise in contravention of the terms of this Agreement, (e) approval of the President and all other officers and key management of the Company, and, if the Company has not achieved the anticipated revenue and profit for two (2) successive fiscal years as set forth in the Annual Budgets for such years, removal of the President and such officers and key management; (f) approval or changing the pricing of the Company's products as proposed by the President from time to time; (g) the establishment of Company bank accounts; (h) calling for Capital Contributions or Loans pursuant to Section 2.2 upon the occurrence of a Trigger Event; and (i) calling for Capital Contributions or Loans pursuant to Section 2.2 up to a maximum of 20 million yen per Party in any fiscal year in the absence of a Trigger Event. 3.1.7 UNANIMOUS VOTING OF THE BOARD The Company and its officers shall not have authority to do or take any of the following actions without the unanimous approval of either the Board or the Parties: (a) sell, exchange or otherwise dispose of all or substantially all of the assets of the Company; (b) issue, sell or transfer any Shares or other equity or debt interests in the Company to any third party; (c) file for bankruptcy by or on behalf of the Company or otherwise take action to dissolve the Company; (d) consolidate or merge the Company with any other entity; (e) except as expressly provided in this Agreement make calls for Capital Contributions or Loans pursuant to Section 2.2 in the absence of a Trigger Event or make any calls for Capital Contributions or Loans pursuant to Section 2.3; (f) any authorization of withdrawals from the capital of the Company; (g) any authorization of dividends, distributions or other payments from the Company to any Party; JOINT VENTURE AGREEMENT PAGE 8 14 (h) the Company's borrowing or lending of money with either Party or any Affiliate of a Party; (i) entering into or amending any contract between the Company and a Party or between the Company and any Affiliate of a Party; (j) entering into any contracts granting a third party the right to publish, distribute and license computer games and software products in Japan or Asia; (k) undertake any transaction out of the ordinary course of business; (l) the approval of any business or activity to be conducted by the Company that is not permitted pursuant to subsection 3.1.6 above or that is other than those specified in Section 1.4; (m) the Company's entering into contracts, borrowing from or lending money, guarantee of any indebtedness or other obligation or acquisition, sale, disposition or encumbrance (e.g., by easement, mortgage, deed of trust, security agreement or otherwise) of any property, that involve amounts greater than 30 million yen and is either outside the ordinary course of business or not contemplated or authorized in the applicable Annual Business Plan or Annual Budget; (n) amend, supplement or modify the Company Organization Documents; (o) removal of the President or any officer of the Company except as authorized under Section 3.1.6(e); and (p) sublicense or otherwise transfer any technology or know-how of the Company or any rights therein, other than rights to reproduce, use and distribute the Company's products, to any Party (except as expressly provided in this Agreement) or any third party. 3.2 PRESIDENT The President shall manage the day-to-day business and affairs of the Company, recommend pricing for the Company's products and implement the policies, decisions, guidelines, Annual Business Plans, Annual Budgets and other acts of the Board; provided, however, the President shall not have the authority to do or take any of the actions described in Sections 3.1.6 and 3.1.7 without the advance approval of the Board or the Parties as provided therein. The President shall have the authority to take actions and make decisions on behalf of the Company in compliance with the policies, decisions, guidelines, Annual Business Plans, Annual Budgets and other acts of the Board and as expressly provided in this Agreement. In addition, the President shall have the authority, in his or her reasonable discretion, to enter into contracts, reallocate Annual Budget amounts, or take other reasonable action in the ordinary course of business (including emergencies) on behalf of the Company in each case involving amounts up to 10 million yen (subject to an aggregate annual maximum amount of 10 million yen) even though such contract or action was not contemplated or authorized in the applicable Annual Business Plan or Annual Budget or by the Board. The JOINT VENTURE AGREEMENT PAGE 9 15 President shall also have the right to require additional Capital Contributions or Loans in the above situations in amounts not greater than 10 million yen per Party subject to a maximum of 20 million yen per Party in any fiscal year. 3.2.1 APPOINTMENT The President shall be the individual nominated by Pioneer and approved by the Board. The Parties agree that the initial President shall be Mr. Hajime Wada. 3.2.2 TERM The President shall hold office for a term expiring on his or her death, resignation or removal from office or such shorter term specified by Applicable Laws. 3.2.3 REMOVAL The President shall be removed upon the request of Pioneer or the majority vote of the Board pursuant to Section 3.1.6(e) or the unanimous vote of the Board. The replacement President shall be appointed as provided in Section 3.2.1. 3.3 AUDITORS Each Party shall nominate one (1) individual to be a statutory auditor (Kansayaku) to the Company. In the event Applicable Laws require the number of statutory auditors to be increased, each Party shall nominate a second auditor. Sierra and Pioneer shall each vote their Shares or cause the appointment or election of the auditor(s) nominated by the other Party. The auditors shall have the right to attend meetings of the Board and perform the other auditor functions required under Applicable Laws, but such auditors shall not have any voting rights. 3.4 RIGHTS OF PARTIES Except as otherwise set forth in this Agreement, no Party shall have any right or power to take part in the management or control of the Company or its business affairs or to act for or bind the Company in any way. 3.5 COMPENSATION The President and the other officers and employees of the Company shall be entitled to reasonable compensation as approved by the Board for services rendered to the Company. SECTION 4. COMPANY'S DEALINGS WITH PARTIES OR AFFILIATES 4.1 RIGHT OF COMPANY TO DEAL WITH PARTIES OR AFFILIATES The Company may, upon the unanimous approval of the Board or the Parties, enter into agreements, contracts or arrangements with one or more of the Parties pursuant to which that Party JOINT VENTURE AGREEMENT PAGE 10 16 provides goods, technologies or services (including without limitation the contributions identified in Section 2.5) to the Company in connection with the Company's activities. The terms of such agreements, contracts or arrangements shall be those mutually agreed upon by the Company and that Party and shall be embodied in a written agreement. 4.2 CROSS LICENSE OF SIERRA TITLES AND COMPANY TITLES Within thirty (30) Business Days after the Effective Date, Sierra will enter into and the Parties will cause the Company to enter into a written license agreement in a form approved by the Parties ("License Agreement"), the key terms of which are summarized below: (a) Sierra will license to the Company the right to publish and distribute for use on any platform and for use in Japan and Asia all computer games and software products of Sierra and its Affiliates to the extent that Sierra is now or hereafter legally and contractually entitled to license the same to the Company; (b) Sierra will license to the Company the right to adapt, convert, localize, port and translate for use on any platforms and for use in Japan and Asia all computer games and software products of Sierra and its Affiliates to the extent that Sierra is now or hereafter legally and contractually entitled to license the same to the Company and to publish and distribute such games and products within Japan and Asia; (c) Sierra will license to the Company the right to purchase pre-packaged U.S. units of all Sierra computer games and software products to the extent that Sierra is now or hereafter legally and contractually entitled to license the same to the Company for distribution in Japan and Asia (a list of the computer games and software products described in clauses (a) through (c) that Sierra is legally and contractually entitled to license to the Company as of the date of this Agreement are listed in the attached Exhibit D); (d) the Company will pay Sierra on a quarterly basis a royalty equal to ten percent (10%) of the gross revenue (minus credits and returns) attributable to the Company's distribution and licensing of the computer games and software products described in clauses (a) and (b) above; (e) the Company will pay Sierra on a quarterly basis a purchase price of approximately eighty percent (80%) of Sierra's then current U.S. wholesale price F.O.B. (UCC terms) Sierra's shipping facility in the U.S. (exclusive of duties, tariffs and freight) for the applicable product for the computer games and software products described in clause (c) above; (f) Sierra will license to the Company the rights necessary to develop and engage in other lines of business in Japan and Asia related to the activities described in clauses (a) through (c) above, including rights related to music and merchandising (but not including hint books or strategy guides in any form or media) and to use the trademarks and trade dress of Sierra in the manner specified by Sierra with respect to such products and activities, each only to the extent that Sierra is legally and contractually entitled to so offer and license such rights to the Company. JOINT VENTURE AGREEMENT PAGE 11 17 Royalties for the Company's exercise of the license rights described in this clause (f) shall be negotiated in good faith between Sierra and the Company. (g) Except for rights and licenses that Sierra is legally or contractually obligated to honor as of the Effective Date, the licenses described in clauses (a) through (c) and clause (f) above will be exclusive with respect to distribution of such products in Japan and nonexclusive with respect to distribution of such games and products in the rest of Asia. The Company shall have an option (the "Asia Option") during the twelve (12) month period commencing January 1, 1996 to convert the Asia license from a nonexclusive basis to an exclusive basis as described below, subject to any rights and licenses that Sierra is legally or contractually obligated to honor as of such exercise, provided the Parties have agreed upon a business plan for the relevant portion of the Asia market. To exercise the Asia Option, the Company shall deliver a proposed business plan to Sierra within such twelve (12) month period and the Company and Sierra shall negotiate in good faith for a period of ninety (90) days from such delivery regarding resolution of any objections that Sierra has to such plan. The Company's exclusivity for the Asia market or any portion thereof shall occur only if and when the Company and Sierra have agreed in their respective sole discretion and in writing upon such business plan and the terms of the exclusivity applicable to such arrangement. From the Effective Date through the earlier of the end of such twelve (12) month period or the end of the ninety (90) days negotiation period described above, Sierra will not enter into any new exclusive distribution arrangement with any third party regarding distribution rights of such Sierra products in Asia. Notwithstanding the foregoing, until the beginning of the ninety (90) day negotiation period, Sierra may enter into non-exclusive arrangements with third parties which have a term not longer than twelve (12) months.During the ninety (90) day negotiation period Sierra will not enter into any new arrangement with respect to distribution in Asia. If the Company exercises the Asia Option and the parties reach agreement as provided above, Sierra will assign to the Company and the Company will assume and perform all distribution arrangements of Sierra in that portion of Asia subject to such exclusivity to the extent such arrangements are assignable. If the Company fails to exercise the Asia Option as provided above within such twelve (12) month period or the Parties are unable to agree in writing for any reason upon the business plan for Asia or the terms of exclusivity applicable to such arrangements within the ninety (90) day negotiation period, Sierra may enter into any exclusive or other arrangements it desires for all or any portion of Asia and upon entering into such arrangements terminate the Company's right to distribute within all or any portion of Asia; (h) If Sierra or its successor obtains computer games and software products through any major business combination including but not limited to merger with or acquisition of or by a third party and such third party has existing distribution arrangements in Japan or Asia with respect to its games or products, Sierra or its successor will have the right to continue any publication, distribution and other relationships in Japan and Asia that may exist with respect to such existing and future games and products rather than license the same to the Company as described above or to condition the licensing of any such games and products to the Company upon the Company and the Parties dedicating reasonably sufficient resources in Sierra's reasonable opinion towards the promotion and marketing of such games and products in Japan and Asia. JOINT VENTURE AGREEMENT PAGE 12 18 (i) The Company will exclusively license to Sierra the right to publish and distribute outside Japan and Asia all computer games and software products (and all rights necessary to develop and engage in other lines of business related to such activities, including rights related to music, merchandising and hint books) that the Company is legally and contractually entitled to so offer and license to Sierra including without limitation the games and products adapted, converted, developed, translated or ported by the Company pursuant to clause (b) above; (j) The Company will exclusively license to Sierra the right to adapt, convert, localize, port and translate for use on different computer platforms or for use outside Japan and Asia all computer games and software products (and all rights necessary to develop and engage in other lines of business related to such activities, including rights related to music, merchandising and hint books) and to use the trademarks and trade dress of the Company in the manner specified by the Company with respect to such products and activities, each only to the extent that the Company is legally and contractually entitled to so offer and license to Sierra and to publish and distribute such games and products outside Japan and Asia; (k) Sierra will pay the Company on a quarterly basis a royalty equal to ten percent (10%) of the revenue attributable to Sierra's distribution and licensing of the computer games and software products described in clauses (i) and (j) above; (l) Sierra and the Company ("licensee") shall each undertake reasonable due diligence to identify any potential patent or copyright each may infringe if it distributes the product of the other ("licensor") (or any translation or other derivative work thereof) licensed under the License Agreement in the licensee's permitted territory and shall promptly notify the licensor of any such potential infringement. The licensee shall not distribute or otherwise exercise its license rights with respect to such product in a manner that would result in such infringement unless and until the licensor and the licensee have determined and effected a commercially reasonable method of avoiding or overcoming such infringement. If notwithstanding such due diligence and efforts, a suit or proceeding is brought against the licensee based upon a claim by a third party that the product of the licensor licensed by the licensee under the License Agreement infringes a patent or copyright in the permitted territory of the licensee, the licensor shall defend the licensee in such suit or proceeding with regard to such claim and indemnify and hold the licensee harmless from and with respect to any damages awarded against the licensee with regard to such claim and reimburse the costs and expenses (including reasonable attorneys' fees and costs) reasonably incurred by the licensee with the licensor's consent with regard to such claim; provided that the licensee promptly notifies the licensor of any such claim, tenders control over the defense and settlement of such claim to the licensor and assists and cooperates with the licensor regarding such claim. The licensee shall be responsible for and reimburse to the licensor fifty percent (50%) of the costs incurred in defending such claim (including reasonable attorneys' fees and costs) and the amounts paid in settlement or awarded as damages with regard to such claim. Notwithstanding the foregoing, the licensor shall have no obligation to defend or indemnify the licensee hereunder to the extent such infringement occurs due to (1) use of the product in combination with any product, equipment, software or data not provided by the licensor under the License Agreement, (2) any adaptation, alteration, modification or translation of the product not made by the licensor or (3) any logo, JOINT VENTURE AGREEMENT PAGE 13 19 trademark, trade dress or name used with the product. The licensee shall be obligated to defend, indemnify and hold harmless the licensor with respect to any infringement claims based upon the matters identified in clauses (1), (2) or (3) above, provided that the licensor promptly notifies the licensee of any such claim, tenders control over the defense and settlement of such claim to the licensor and assists and cooperates with the licensee regarding such claim; (m) Within thirty (30) days of receipt of notice from either the Company or Sierra about a particular product of such party that is subject to the License Agreement, including those products identified in Exhibit D, the receiving party shall notify the other about the platforms and language translations of such product that the receiving party will publish, market and distribute in its territory within nine (9) months after delivery of the deliverables for such product. The notice commencing the thirty (30) day period described above shall not be given before the receiving party has received a copy of the product for evaluation. The licensing party shall have the right to directly or indirectly publish and JOINT VENTURE AGREEMENT PAGE 14 20 distribute such product on all other platforms and languages not selected by the other as provided above in the territory of the other on an exclusive or nonexclusive basis as determined by the licensing party; (n) In addition to its right of termination as a result of a breach of the License Agreement by the Company, Sierra shall have the right, at Sierra's option, to terminate the license granted to the Company under the License Agreement if (i) the Company records a loss for any two (2) consecutive fiscal years, commencing after the first fiscal year of the Company or (ii) the Company's two consecutive fiscal year average pre-tax return on investment (i.e., the Company's pre-tax net income for such fiscal year divided by the sum of the aggregate Capital Contributions and Loans made in lieu of Capital Contributions as of such fiscal year) does not equal or exceed fifteen percent (15%), as calculated beginning at the end of the fourth fiscal year of the Company, and for both of such years the Company fails to achieve the anticipated revenue and net profit goals as set forth in the Annual Budgets; (o) The License Agreement shall automatically terminate upon the dissolution of the Company; (p) In addition to the license fees and royalties described above, the Company and Sierra shall each pay or reimburse the other for any and all third party royalties due on products distributed by the Company or Sierra that are licensed from the other as described above; and (q) Sierra shall have the right to enter into OEM or other similar bundling arrangements with regard to those Sierra products subject to the License Agreement that are exclusive to the Company pursuant to clause (m) above for world-wide or regional distribution that include distribution in Japan, provided that Sierra notifies the Company about such arrangement and pays to the Company that portion of the compensation received by Sierra from such arrangement that is reasonably allocable to the distribution in Japan (and if the Company has exercised the Asia Option that portion of Asia in which the Company has exclusive rights as agreed with Sierra) less ten percent (10%) of such amount as payment of the royalty to Sierra as described in clause (d) above. Similarly, the Company have the right to enter into OEM or other similar bundling arrangements with regard to those Company products subject to the License Agreement that are exclusive to Sierra pursuant to clause (m) above which are not based upon or derived from Sierra products for world-wide or regional distribution that include distribution outside Japan and Asia, provided that the Company notifies Sierra about such arrangement and pays to Sierra that portion of the compensation received by the Company from such arrangement that is reasonably allocable to the distribution outside Japan and Asia less ten percent (10%) of such amount as payment of the royalty to the Company as described in clause (k) above. 4.3 DISTRIBUTION AGREEMENT Within thirty (30) Business Days after the Effective Date, Pioneer will cause its Affiliate, Pioneer LDC, Inc. ("PLDC"), and the Parties will cause the Company, to enter into a JOINT VENTURE AGREEMENT PAGE 15 21 written distribution agreement in a form approved by the Parties ("Distribution Agreement"), the key terms of which are summarized below: (a) PLDC will have the exclusive right to distribute in Japan and, subject to the Company's exercise of the Asia Option, Asia all of the products of the Company, provided, however, that such exclusivity or the Distribution Agreement may be terminated by the Company upon an approval of a majority of the Board if (i) the Company records a loss for any two (2) consecutive fiscal years, commencing after the first fiscal year of the Company or (ii) the Company's two consecutive fiscal year average pre-tax return on investment (i.e., the Company's pre-tax net income for such fiscal year divided by the sum of the aggregate Capital Contributions and Loans made in lieu of Capital Contributions as of such fiscal year) does not equal or exceed fifteen percent (15%), as calculated beginning at the end of the fourth fiscal year of the Company, and for both such years the Company fails to achieve the anticipated revenue and net profit goals as set forth in the Annual Budgets; (b) PLDC will acquire the completed product units from the Company at a price equal to forty-five percent (45%) of the Company's suggested retail price for such product; (c) PLDC will form a sales management team (comprised of at least one person on an exclusive basis and other persons on a nonexclusive basis) dedicated to the marketing, distribution and sale of the Company products. The sales management team duties will include managing and working with PLDC's field sales staff to effectively conduct product promotion, merchandising (e.g., display and shelf arrangement) and sales campaign planning for the Company's products. The sales management team will also participate in the early stages of the Company's title planning and development to provide information regarding customers; (d) PLDC will use its sales, marketing and distribution resources exclusively for the promotion, marketing, distribution and sale of the Company's products and PLDC's own products in the area of computer games and consumer education, edutainment or other similar consumer software products. Without limiting the generality of the foregoing, PLDC will not distribute any personal computer/game machine software product of a third party, unless the Company is the licensee of such product. PLDC will use its best efforts to cause third parties that approach PLDC about the distribution of such products to enter into a license agreement with the Company; (e) PLDC will have the right, with the approval of the President or the Board, to appoint Pioneer or any third party as sub-distributors of the Company's products in Japan and Asia; (f) The Company reserves the right to distribute any or all of its products in Japan and Asia if PLDC cannot or does not distribute such product in accordance with the terms of the Distribution Agreement; and (g) The Distribution Agreement shall automatically terminate upon the dissolution of the Company, the termination of this Agreement or Sierra's exercise of the Buyout Option pursuant to Section 7.3. JOINT VENTURE AGREEMENT PAGE 16 22 4.4 OTHER BUSINESS OF PARTIES Except as expressly provided otherwise in this Agreement or the agreements between the Company and any Party, the Parties may engage in business ventures and activities of any nature and description, independently or with others and whether or not in competition with the business of the Company. Neither the Company nor any of the Parties shall have any rights in or to the independent ventures and activities of other Parties, or the income or profits derived therefrom, by reason of their acquisition of an interest in the Company or their status as Parties. 4.5 COMPANY-DEVELOPED TECHNOLOGY Each Party shall have a non-exclusive, royalty-free, perpetual license to adapt, distribute, use, make, reproduce and sell all new technology developed and owned by the Company (but not including any enabling technology provided to the Company by the other Party or derived from or based upon the products or technology provided to the Company by the other Party) for any purpose other than those competitive with the Company's business. In addition, Sierra and its Affiliates shall have a non-exclusive, royalty-free license to adapt and use the enabling technology now or hereafter licensed to the Company by Pioneer as provided in Section 2.5.2 above and all adaptations, additions, enhancements, modifications and improvements thereto made by or for the Company (except for any such enabling technology that Pioneer is now or hereafter legally or contractually restricted from licensing or sublicensing to Sierra and its Affiliates, such as any third party technology or technology developed by Pioneer with a third party that Pioneer is not legally or contractually permitted to license to Sierra) solely in connection with the creation, development, manufacture and distribution of those products of Sierra and its Affiliates that are related or similar to the products offered by Sierra to the Company for license under the License Agreement, whether or not such product is actually licensed by the Company; provided, however, that (i) Sierra and its Affiliates shall not have the right to sublicense or authorize any third party to use such enabling technology for any other purpose without the prior written consent of the Company and Pioneer; (ii) Sierra and its Affiliates shall use such enabling technology solely with respect to computer games and other software products and not for hardware or other non-software use without the prior written consent of the Company and Pioneer; and (iii) such enabling technology shall be treated by Sierra and its Affiliates as the Confidential Information of Pioneer in accordance with Section 10.1. Pioneer shall notify Sierra of any and all third party royalties that will arise out of Sierra's use of Pioneer's tools and technology and if Sierra proceeds to use such items, Sierra shall pay or reimburse Pioneer for any and all third party royalties arising out of Sierra's use of the same. SECTION 5. DISTRIBUTIONS AND ALLOCATIONS 5.1 DISTRIBUTIONS The Board will make distributions to the Parties as approved by a majority vote of the Board in accordance with the terms of this Agreement. Any such distribution shall be made among the Parties in proportion to the number of Shares owned by each Party. JOINT VENTURE AGREEMENT PAGE 17 23 5.2 LIMITATIONS ON DISTRIBUTIONS No distribution shall be made pursuant to Section 5.1 if, after the distribution is made (a) the Company would be unable to pay its debts as they become due or (b) liabilities of the Company (other than liabilities for which recourse to creditors is limited to specific assets of the Company) would exceed the fair market value of the Company's assets (net of any liabilities to which those assets may be subject) or (c) the rights of Sierra or the Company under Sections 4.2(n), 4.3(a) or 7.1 would be triggered or (d) the Company would be unable to meet the then current Annual Business Plan or Annual Budget. SECTION 6. INDEMNIFICATION 6.1 INDEMNIFICATION To the fullest extent not prohibited by Applicable Laws, the Company shall indemnify and hold harmless each Party from and against any and all losses, claims, demands, costs, damages, liabilities (joint and several), expenses of any nature (including attorneys' fees and disbursements), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative or investigative, in which a Party may be involved, or threatened to be involved, as a party or otherwise, arising out of or incidental to any business of the Company transacted or occurring while that Party was a Party, as the case may be, regardless of whether the Party continues to be a Party at the time any such liability or expense is paid or incurred. 6.2 NONEXCLUSIVITY OF RIGHTS The indemnification provided by this Section shall be in addition to any other rights to which those indemnified may be entitled under any agreement or vote of the Parties, as a matter of law or equity or otherwise, and shall continue as to a Party who has ceased to be a Party, and shall inure to the benefit of the heirs, successors, assigns and administrators of the Party so indemnified. 6.3 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS The Company shall indemnify and advance expenses to an officer, director or employee of the Company to the same extent and subject to the same conditions under which it may indemnify, and advance expenses, to Parties under this Section 6, except to the extent arising out of the intentional misconduct or knowing violation of Applicable Laws by such officer, director or employee. SECTION 7. DISSOLUTION OF COMPANY; SPECIAL WITHDRAWAL RIGHT 7.1 EVENTS CAUSING DISSOLUTION This Agreement shall terminate and the Company shall dissolve upon the happening of any of the following events: JOINT VENTURE AGREEMENT PAGE 18 24 (a) the Bankruptcy of the Company unless the Parties, within ninety (90) days of that event, unanimously agree to continue the Company; (b) the sale or other disposition of all or substantially all of the assets of the Company and the collection of all proceeds from that sale or disposition; (c) the vote of all Parties to dissolve the Company; (d) either Party elects to dissolve the Company by written notice to the other Party within sixty (60) Business Days after the end of the Company's fiscal year if (i) the Company records a loss for any two (2) consecutive fiscal years, commencing after the first fiscal year of the Company or (ii) the Company's two consecutive fiscal year average pre-tax return on investment (i.e., the Company's pre-tax net income for such fiscal year divided by the sum of the aggregate Capital Contributions and Loans made in lieu of Capital Contributions as of such fiscal year) does not equal or exceed fifteen percent (15%), as calculated beginning at the end of the fourth fiscal year of the Company, and for both such years the Company fails to achieve the anticipated revenue and net profit goals as set forth in the Annual Budgets; (e) either Party elects to terminate this Agreement after the License Agreement described in Section 4.2 or the Distribution Agreement described in Section 4.3 is terminated; (f) upon the election of the nondefaulting Party, if the other Party or the other Party's Affiliate is in default of its obligations under this Agreement or the agreements described in Section 4 and fails to cure such default within ninety (90) days of receipt of written notice of such default; or (g) either Party elects to terminate this Agreement by giving at least six (6) months' prior written notice of termination to the other Party and makes the payment to the non-terminating Party as provided in Section 7.4 below; provided, however, that no termination under this clause (g) shall be effective earlier than three (3) years after the date of this Agreement. 7.2 LIQUIDATION 7.2.1 PAYMENT Upon a dissolution of the Company, the Parties or a court-appointed trustee shall take full account of the Company's assets and liabilities and the Company's property shall be liquidated as promptly as is consistent with obtaining its fair value. The proceeds from the liquidation, to the extent they are sufficient, shall be applied and distributed in the following order and priority: (i) First, to the payment and discharge of all of the Company's debts and liabilities (other than those to the Parties) including the establishment of any necessary reserves; JOINT VENTURE AGREEMENT PAGE 19 25 (ii) Second, to the payment of any amounts advanced by a Party pursuant to Section 2.4 above together with any interest thereon as provided therein; (iii) Third, to the payment of any and all Loans and the Company's other debts and liabilities to the Parties; and (iv) Finally, any remaining property and assets of the Company shall be distributed among the Parties pro rata in accordance with their Shares. 7.2.2 NO RIGHT TO ASSETS Each Party shall look solely to the assets of the Company for all distributions with respect to the Company, including the return of a Party's Capital Contributions and a Party's share of cash, and shall have no recourse therefor, upon dissolution or otherwise, against the other Party. Unless otherwise agreed upon by both Parties and except as provided in Section 8.2.3 below, no Party shall have any right to demand or receive property other than cash upon dissolution and termination of the Company. 7.2.3 ENABLING TECHNOLOGY Upon dissolution of the Company or Sierra's exercise of the Buyout Option: (i) the license to the enabling technology of each Party granted to the Company under Section 2.5.2 and the license to Pioneer's enabling technology granted to Sierra under Section 4.5 shall expire, (ii) the Company and Sierra shall destroy or return the licensed enabling technology it received to the licensing party and cease all subsequent use of such licensed enabling technology except that the Company and Sierra may continue for a period of eighteen (18) months after effective date of such dissolution or exercise to distribute products incorporating such technology that were made before dissolution or such exercise as provided in Section 7.2.4 below, and (iii) title to all technology of the Company derived from or otherwise based upon the enabling technology licensed to the Company by a Party and all associated copyright, patent and other intellectual property rights shall be transferred and distributed to that Party. 7.2.4 RIGHTS TO COMPANY-DEVELOPED PRODUCTS AND TECHNOLOGY Upon dissolution of the Company, title to all technology and products of the Company derived from or otherwise based upon technology or products licensed to the Company under the License Agreement and all associated copyright, patent and other intellectual property rights shall be transferred and distributed to Sierra, provided, however, that Pioneer shall have a nonexclusive royalty-bearing license to reproduce and distribute such products in Japan and, if Pioneer has exercised the Asia Option, Asia for a period not greater than two (2) years, subject to the payment to Sierra of a royalty of five and one-tenth percent (5.1%) of the gross revenue (less returns and refunds) realized by Pioneer from such activity. Upon dissolution of the Company, title to all other technology and products developed and owned by the Company and all associated copyright, patent and other intellectual property rights shall be transferred and distributed to and owned by the Parties in equal undivided shares. Sierra shall have the perpetual royalty-free right to JOINT VENTURE AGREEMENT PAGE 20 26 adapt, convert, localize, port, translate and reproduce such technology and products and to use and distribute such products outside Japan and, if the Asia Option has been exercised, Asia for the first year after dissolution and world-wide thereafter. Pioneer shall have the perpetual, royalty-free right to adapt, convert, localize, port, translate and reproduce such technology and products and use and distribute such products within Japan and Asia for the first year after dissolution and world-wide thereafter. 7.2.5 USE OF OTHER PARTY'S NAME Except for Pioneer's continued use (in the same manner as used by the Company) of the trademark and trade dress of Sierra on the products distributed by Pioneer after the dissolution of the Company as provided in the first sentence of Section 7.2.4 above, neither Party shall use the trademarks, trade name or trade dress of the other Party without the prior written consent of the other Party. 7.3 BUY-OUT OPTION Upon the occurrence of any of the dissolution events described in Section 7.1 above, Sierra shall have an option ("Buyout Option") before the effective date of such dissolution to buy all of Pioneer's Shares at the then current fair market value of the Shares (if the Parties cannot agree upon such fair market value, either Party may elect to have such determination made pursuant to the arbitration procedure described in Section 9). 7.4 TERMINATION PAYMENT In the event this Agreement is terminated by a Party pursuant to Section 7.1(g) above, the non-terminating Party shall be entitled to receive the greater of (i) the liquidation proceeds of the Company payable to such Party under Section 7.2 above, (ii) the payment determined under Section 7.3 above if the Buyout Option has been exercised and Sierra is the terminating Party, (iii) the amount of the non-terminating Party's aggregate investment in the Company (both Capital Contributions and Loans) as of the date of termination plus interest thereon from the date(s) such investments were made until the date repaid at the prime commercial rate quoted by the Bank of America, N.A. or its successor as of the effective date of termination or (iv) two times the revenue of the Company for the twelve (12) months preceding such termination times the fraction the denominator of which is the aggregate investment (both Capital Contributions and Loans made in lieu of Capital Contributions) of both Parties in the Company and the numerator of which is the aggregate investment (both Capital Contributions and Loans made in lieu of Capital Contributions) of the non-terminating Party in the Company. The terminating Party shall be responsible for payment of any shortfall between the proceeds of the Company paid to the non-terminating Party under Section 7.2 or, if applicable, Section 7.3 and the amount payable to the non-terminating party as described above. JOINT VENTURE AGREEMENT PAGE 21 27 SECTION 8. BOOKS, RECORDS AND ACCOUNTING 8.1 BOOKS AND RECORDS The Company shall keep and maintain a complete and accurate set of books and records in accordance with generally accepted accounting practices applied in a consistent manner correctly reflecting all transactions of the Company. Unless otherwise agreed to by both Parties, the Company's books shall be maintained on an accrual basis. The Company's books and records shall be kept at its principal office. Each of the Parties shall have access to such books and records and the right to examine, copy and audit the same at all reasonable times. The Company's books shall be audited not less frequently than annually by an independent certified public accountant acceptable to both Parties. The Company will provide each Party with unaudited English language financial statements of the Company (including, but not necessarily limited to, a balance sheet and a statement of the results of business for such period and such additional information reasonably requested by a Party ), within ten (10 Business Days after the end of each calendar month and quarter and audited English language annual financial statements of the Company within forty (40) Business Days after the end of each fiscal year. 8.2 FISCAL YEAR The Company's fiscal year shall be from April 1 through March 31. 8.3 BANK ACCOUNTS All funds of the Company shall be deposited under the name of the Company in such bank account or accounts at such bank or banks as shall be approved from time to time by the Board. All drafts, checks, bills and cash which may from time to time be received by, for or on account of the Company shall be deposited immediately in such account or accounts in the same form in which they are received. Withdrawals from such accounts shall be made only upon the signature of the President or an individual authorized by the Board. 8.4 ANNUAL BUDGET 8.4.1 ANNUAL BUDGET PLANNING No later than thirty (30) Business Days prior to the first day of each fiscal period of the Company (or within thirty (30) Business Days after the Effective Date with respect to the 1995 budget), the President shall submit to the Board for approval a proposed budget setting forth in accordance with generally accepted accounting practices the estimated revenue and expenses of the Company during such fiscal year. The budget shall set forth a monthly operating budget of anticipated revenue, expenses, level of profit and cash flow for such fiscal year. The President shall revise and for a particular fiscal year resubmit the proposed budget as directed by the Board. The budget approved by the Board is referred to herein as the "Annual Budget". If during the course of a fiscal year (i) a significant change of any Annual Budget number is expected or (ii) a loss from operation is expected at the end of such fiscal year, the President shall immediately notify the Board JOINT VENTURE AGREEMENT PAGE 22 28 of a revised version of the Annual Budget (which may include reduced expenses) to address the problem and avoid such loss. The revised Annual Budget approved by the Board is referred to herein as the "Revised Annual Budget." 8.4.2 REVIEW OF ANNUAL PERFORMANCE Within thirty (30) Business Days after the end of each fiscal year of the Company, the President shall submit to the Board and each Party audited financial information and a comparison analysis with the Annual Budget (or Revised Annual Budget). 8.5 ANNUAL BUSINESS PLAN No later than thirty (30) Business Days prior to the first day of each fiscal year of the Company, the President shall submit to the Board for approval a proposed comprehensive business plan setting forth the sales, marketing, operation, development and other plans of the Company for such fiscal year and a business plan setting forth a general outline and direction of the activities planned for the next two fiscal years. The President shall revise and resubmit the proposed business plan as directed by the Board. The business plan approved by the Board for a particular fiscal year is referred to herein as the "Annual Business Plan." For the 1995 business plan, within thirty (30) Business Days after the Effective Date the President shall submit to the Board for approval a proposed comprehensive business plan setting forth the sales, marketing, operation, development and other plans of the Company for developing the Company's business in Japan and Asia during 1995 and business plan setting forth the general outline and direction of the activities planned to continue the development and expansion of such business for 1996 and 1997. SECTION 9. DISPUTE RESOLUTION 9.1 GENERAL If any dispute arises between the Parties relating to this Agreement or the Company, the Parties will follow the procedures set forth in this Section 9, unless otherwise agreed by the Parties at the time the dispute arises. However, either Party may commence litigation within thirty (30) days prior to the date after which the commencement of litigation would be prohibited by any statute of limitations or other law, rule, regulation, or order of similar import or in order to request injunctive or other equitable relief necessary to prevent irreparable harm. In such event, the Parties will (except as may be prohibited by judicial order) nevertheless continue to follow the procedures set forth in this Section 9. 9.2 UNASSISTED SETTLEMENT A Party seeking to initiate the procedures under this Section 9 will give written notice thereof to the other Party. Such notice will state that it is initiating the procedures under this Section 9, describe briefly the nature of the dispute, describe briefly the notifying Party's claim or position in connection with the dispute. The Parties will promptly make such investigation of the dispute as they deem appropriate. The Parties will meet, with each Party represented by an officer JOINT VENTURE AGREEMENT PAGE 23 29 at the level of Vice President or General Manager or higher, and will use good faith efforts to resolve the dispute. If the dispute has not been resolved within thirty (30) days after commencement of such discussions, then either Party may submit the dispute to arbitration under Section 9.3. 9.3 ARBITRATION AND COSTS If any dispute is not resolved after compliance with the procedures set forth in Section 9.2, then either Party may submit the dispute to arbitration to a single arbitrator (if the Parties can agree upon such arbitrator) or to a panel of three (3) arbitrators, with each Party selecting one arbitrator and the two arbitrators so selected choosing the third, in accordance with the Conciliation and Arbitration Rules of the International Chamber of Commerce. Unless otherwise agreed by the Parties, any arbitration hearing will be held at a location convenient to both Parties in Tokyo, if Sierra initiates such arbitration, and in Seattle, if Pioneer initiates such arbitration. Any award made by the arbitrator(s) will be final and binding and may be entered as a judgment in any court having jurisdiction. The arbitration proceedings shall be conducted in the English language. 9.4 COSTS Costs of the arbitrator(s), the court reporter, hearing rooms and other common costs will be paid as determined by the arbitrator(s). If the arbitrator(s) does not make such a determination, such costs will be divided equally between the Parties. Each Party will bear the expense of preparing and presenting its own case in connection with the arbitration and/or mediation (including, but not limited to, its own attorneys' fees and costs of witnesses). SECTION 10. MISCELLANEOUS 10.1 CONFIDENTIALITY Each Party and the Company will exercise the same degree of care, but no less than a reasonable degree of care, to keep confidential the Confidential Information of the other Party or the Company as it uses to protect its own Confidential Information of a like nature. Without limiting the generality of the foregoing, each Party agrees to (and to cause the Company to agree to) (a) instruct and require all of its employees and agents who have access to the Confidential Information to maintain the confidentiality thereof; (b) disclose the Confidential Information of the other Party or the Company only to those individuals that have a "need to know" such Confidential Information; and (c) take such actions as may be reasonable to limit disclosure of the Confidential Information of the other Party or the Company by such individuals. If the Recipient is served with any subpoena or other compulsory judicial or administrative process calling for production of Confidential Information of the other Party or the other Party, the Recipient will immediately notify the Discloser in order that the Discloser may take such action as it deems necessary to protect its interest and Recipient shall cooperate with Discloser to limit the scope and use of the information to be disclosed. JOINT VENTURE AGREEMENT PAGE 24 30 10.2 PRESS RELEASES Neither Party shall make any public announcements regarding this Agreement, the formation of the Company or the other activities contemplated hereunder without first providing the other Party the proposed text of such announcement and obtaining the approval of the other Party, which approval shall not be unreasonably withheld. 10.3 GOVERNING LAW THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF WASHINGTON, WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES. 10.4 ASSIGNMENT Neither Party shall assign its interests or rights under this Agreement, by operation of law or otherwise, without the prior written consent of the other Party; provided, however without relinquishment of its liability under this Agreement either Party may assign this Agreement to an Affiliate who agrees in writing to assume all of that Party's rights and obligations under this Agreement. Subject to the foregoing restriction on assignment, this Agreement shall be fully binding upon, inure to the benefit of and be enforceable by each Party and its permitted successors and assigns. 10.5 CONSTRUCTION Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa. The headings in this Agreement are inserted for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent or intent of this Agreement or any provision hereof. Both parties have had an adequate opportunity to review this Agreement with their respective counsel and negotiate the terms hereof and accordingly this Agreement shall not be construed against either party as the drafter of this Agreement. 10.6 COUNTERPARTS This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 10.7 NO PARTNERSHIP Neither Party will represent or hold itself out as an employee, agent, or franchisee of the other Party. Neither Party will be entitled to and will not attempt to create or assume any obligation, express or implied, on behalf of the other Party. This Agreement will not be interpreted or construed as creating or evidencing any association, or partnership among the Parties or as imposing any partnership or franchisor obligation or liability on either Party. JOINT VENTURE AGREEMENT PAGE 25 31 10.8 ENTIRE AGREEMENT This Agreement, the License Agreement and the Distribution Agreement set forth the entire agreement of the Parties regarding the subject matter hereof and supersede all prior agreements and understandings between the Parties. No amendment of any of the provisions of this Agreement will be valid unless set forth in a written instrument signed by both Parties. 10.9 NOTICES Any notice, demand or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if (a) delivered personally, (b) deposited with a prepaid messenger, express or air courier or similar courier for delivery to the address set forth below, (c) deposited in the official certified or registered mail, postage prepaid to the address set forth below, or (d) transmitted by telecopier or facsimile to the number specified below (with originals mailed the same day by official mail, postage prepaid to the address set forth below): If to