-----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, Om64P5eC8ApAoaG7AFV9o3AnzJ90G2YjI9BdJVkmzO0YbYiyQ7L5Q6XgLZLclW0/ sqHLZTDisl36AYgUlglStw== 0000891618-97-003120.txt : 19970804 0000891618-97-003120.hdr.sgml : 19970804 ACCESSION NUMBER: 0000891618-97-003120 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970718 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970801 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL GENERATION SYSTEMS INC CENTRAL INDEX KEY: 0000934448 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 943140772 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27644 FILM NUMBER: 97650082 BUSINESS ADDRESS: STREET 1: 875 BATTERY ST STREET 2: STE 1850 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4155466600 MAIL ADDRESS: STREET 1: 875 BATTERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 8-K 1 FORM 8-K CURRENT REPORT 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 18, 1997 DIGITAL GENERATION SYSTEMS, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 0-27644 94-3140772 - -------------------------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
875 BATTERY STREET SAN FRANCISCO, CALIFORNIA 94111 ------------------------------------------------------------- (ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 276-6600 NOT APPLICABLE - -------------------------------------------------------------------------------- (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) ================================================================================ 2 Item 2. Acquisition or Disposition of Assets. On July 18, 1997, the Registrant acquired all of the issued and outstanding capital stock of Starcom Mediatech, Inc., a Delaware corporation ("Mediatech") and a wholly-owned subsidiary of IndeNet, Inc., a Delaware corporation ("IndeNet"), for aggregate consideration of approximately $25.8 million, including approximately $5.4 million in assumed debt (the "Mediatech Acquisition"). Mediatech is engaged in the business of media duplication and distribution and the Registrant intends to cause Mediatech to continue this business activity. The Mediatech Acquisition was consummated pursuant to the terms and conditions set forth in a Stock Purchase Agreement, dated as of July 18, 1997 (the "Mediatech Purchase Agreement"), by and between IndeNet and the Registrant. The consideration delivered by the Registrant to IndeNet in payment for the capital stock of Mediatech consisted of the following: (i) $13,988,730 in cash (subject to post-closing adjustment in accordance with the terms of the Mediatech Purchase Agreement based upon the results of a post-closing audit of Mediatech's financial condition as of the date of closing); (ii) 324,355 shares of Common Stock of the Registrant (the "Company Shares"); (iii) a Subordinated Promissory Note payable to the order of IndeNet in the aggregate principal amount of $2,243,806.34 and bearing interest at the rate of 9% per annum (the "Company Note"); and (iv) a Secured Subordinated Promissory Note payable to the order of Thomas H. Baur, a creditor of IndeNet, in the aggregate principal amount of $2,206,193.66 and bearing interest at the rate of 9% per annum (the "Baur Note"). In connection with the Mediatech Acquisition, the Registrant granted certain rights to IndeNet with respect to registration of the Company Shares under the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to such registration rights, IndeNet has the right to request the registration of the Company Shares under the Securities Act in the event that the Registrant shall register securities under the Securities Act for its own account or the account of the Registrant's other security holders. In addition, after the first anniversary of the Mediatech Purchase Agreement, the Registrant has the right to request the registration of the Company Shares under the Securities Act at any time provided that the proceeds of any offering of the Company Shares pursuant to such registration shall exceed $500,000. The Company Note is payable in equal installments of $150,000 on the last day of each successive calender quarter, commencing on October 1, 1997, and matures on October 1, 2001. The Baur Note is also payable in installments, with the first of such installments due and payable in the amount of $350,000 on July 30, 1997, and the second and all subsequent installments due and payable in equal installments of $200,000 on the first day of each successive calender quarter thereafter, commencing on January 1, 1998. The Baur Note matures on January 1, 2000. Prior to the foregoing transaction, no material relationship existed between IndeNet or Mediatech and the Registrant or any of its affiliates, any director or officer of the Registrant, or any associate of any such director or officer. The Registrant drew upon two sources of funds to finance the cash portion of the consideration for the Mediatech Acquisition. An entity affiliated with Kleiner Perkins Caufield & Byers ("Kleiner -2- 3 Perkins") and another affiliated with Dawson-Samberg Capital Management, Inc. ("Dawson-Samberg") each provided the Registrant with a $3.0 million cash loan in exchange for a promissory note, each in the aggregate principal amount of $3.0 million and bearing interest at the rate of 10% per annum. The Registrant funded the remaining portion of the cash consideration for the Mediatech Acquisition from its internal cash reserves. On July 14, 1997, the registrant entered into a Preferred Stock Purchase Agreement, as amended on July 23, 1997 (as amended, the "Stock Purchase Agreement"), with certain investors listed on Exhibit A thereto, pursuant to which the Registrant agreed to issue and sell, in two tranches, up to an aggregate of 4,950,495 shares of its Series A Convertible Preferred Stock for aggregate consideration of approximately $17.5 million in cash, or $3.535 per share. The Registrant closed the first of such tranches on July 28, 1997 in which the Registrant issued and sold an aggregate of 2,012,376 shares of its Series A Convertible Preferred Stock for aggregate consideration of approximately $7,113,751 in cash. The Registrant used the proceeds of this first tranche to repay the entire amount owed under the promissory notes issued by the Registrant in favor of Kleiner Perkins and Dawson-Samberg in connection with the Mediatech Acquisition. Due to the requirements of the National Association of Securities Dealers (the "NASD"), the closing of the second of such tranches, in which the Registrant intends to issue and sell up to an aggregate of 2,944,119 additional shares of its Series A Convertible Preferred Stock, is contingent upon obtaining shareholder approval for the issuance of such shares in connection with such second tranche. The Registrant is aware that the holders of a majority of the issued and outstanding shares of its capital stock entitled to vote thereon have entered into a voting agreement pursuant to which such shareholders have agreed to vote in favor of the issuance of shares of Series A Convertible Preferred Stock in connection with such second tranche. The Registrant intends to use the proceeds from the sale of such shares in the second tranche to replenish the cash reserves expended by the Registrant to fund a portion of the cash consideration for the Mediatech Acquisition. In connection with the transactions contemplated by the Stock Purchase Agreement, the Registrant granted certain rights to the investors purchasing shares of its Series A Convertible Preferred Stock under the Stock Purchase Agreement with respect to registration under the Securities Act of the Common Stock underlying such shares of Series A Convertible Preferred Stock. Such rights are substantially similar to the registration rights granted to IndeNet in connection with the Mediatech Acquisition, as described above. The Registrant's issuance, pursuant to the Stock Purchase Agreement, of shares of its Series A Convertible Preferred Stock in the first tranche described above was exempt from the registration requirements of the Securities Act in reliance upon the exemption from registration provided by Rule 506 of Regulation D promulgated under the Securities Act. The Registrant's issuance, pursuant to the Stock Purchase Agreement, of additional shares of its Series A Convertible Preferred Stock in the second tranche described above is also expected to be exempt from the registration requirements of the Securities Act in reliance upon the same exemption. Item 5. Other Events. -3- 4 The Registrant has entered into the Stock Purchase Agreement described above pursuant to which the Registrant issued and sold an aggregate of 2,012,376 shares of its Series A Convertible Preferred Stock on July 28, 1997. As noted above, the Registrant intends to issue and sell up to an aggregate of 2,944,119 additional shares of its Series A Convertible Preferred Stock at a second closing under the Stock Purchase Agreement, contingent upon obtaining shareholder approval for such second tranche. Item 7. Financial Statements and Exhibits. (a) Financial Statements of Business Acquired. It is impracticable for the Registrant to provide the required financial statements for the business acquired at the time of filing this report on Form 8-K, but the Registrant will file such required financial statements by amendment to this report on Form 8-K as soon as practicable, but not later than sixty (60) days after this report must be filed with the Securities and Exchange Commission. (b) Pro Forma Financial Information. It is impracticable for the Registrant to provide the required financial statements for the business acquired at the time of filing this report on Form 8-K, but the Registrant will file such required financial statements by amendment to this report on Form 8-K as soon as practicable, but not later than sixty (60) days after this report must be filed with the Securities and Exchange Commission. (c) Exhibits. 2.1 Stock Purchase Agreement, dated as of July 18, 1997, by and between IndeNet, Inc., a Delaware corporation, and Digital Generation Systems, Inc., a California corporation. 2.2 Preferred Stock Purchase Agreement, dated as of July 14, 1997, by and among Digital Generation Systems, Inc. and the parties listed on the Schedule of Purchasers attached as Exhibit A thereto. 2.3 Amendment to Preferred Stock Purchase Agreement, dated as of July 23, 1997, by and among Digital Generation Systems, Inc. and the purchasers listed on Exhibit A thereto. 2.4 Certificate of Determination of Rights of Series A Convertible Preferred Stock of Digital Generation Systems, Inc., filed by the Secretary of State of the State of California on July 16, 1997. -4- 5 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DIGITAL GENERATION SYSTEMS, INC. A California Corporation Dated: August 1, 1997 By: /s/Thomas P. Shanahan ------------------------------------- Title: Vice President & Chief Financial Officer ---------------------------------- -5- 6 EXHIBIT INDEX
Exhibit No. Exhibit ------- ------- 2.1 Stock Purchase Agreement, dated as of July 18, 1997, by and between IndeNet, Inc., a Delaware corporation, and Digital Generation Systems, Inc., a California corporation. 2.2 Preferred Stock Purchase Agreement, dated as of July 14, 1997, by and among Digital Generation Systems, Inc. and the parties listed on the Schedule of Purchasers attached as Exhibit A thereto. 2.3 Amendment to Preferred Stock Purchase Agreement, dated as of July 23, 1997, by and among Digital Generation Systems, Inc. and the purchasers listed on Exhibit A thereto. 2.4 Certificate of Determination of Rights of Series A Convertible Preferred Stock of Digital Generation Systems, Inc., filed by the Secretary of State of the State of California on July 16, 1997.
EX-2.1 2 STOCK PURCHASE AGREEMENT DATED 7-18-97 1 EXHIBIT 2.1 STOCK PURCHASE AGREEMENT By and Between INDENET, INC. A DELAWARE CORPORATION and DIGITAL GENERATION SYSTEMS, INC. A CALIFORNIA CORPORATION July 18, 1997 2 TABLE OF CONTENTS
Page ARTICLE I - PURCHASE AND SALE OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Adjustment with Respect to Purchaser Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Purchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.5 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.6 Closing Deliveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 Ownership of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.5 No Approvals or Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.6 Financial Statements; Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.7 No Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.8 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.9 Restrictions on Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.11 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.12 Agreements, Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.13 Customers and Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.14 Interested Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.15 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.17 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.18 Minute Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.19 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.20 Brokers' and Finders' Fees; Third Party Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.21 Employee Benefit Plans and Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.22 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.23 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.24 Lawful Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.25 Certain Business Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.26 Warranties; Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.27 Complete Copies of Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-i- 3 2.28 Representations Complete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.3 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.4 No Approvals or Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.5 SEC Reports; Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.6 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.7 Compliance with Laws; Governmental Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.9 No Brokers' or Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.10 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE IV - CONDITIONS TO SELLER'S OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.3 Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.4 Good Standing Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.5 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.6 Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.8 Governmental Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.9 Republic Bank Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.10 No Material Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.11 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.12 Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE V - CONDITIONS TO PURCHASER'S OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.3 Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.4 Good Standing Certificate - Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.5 Good Standing Certificate - Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.6 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.7 No Material Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5.8 Resignation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.9 Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.11 Governmental Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.12 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.13 Consent of Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.14 Customer Continuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
-ii- 4 5.15 Vender Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.16 Board Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5.17 State "Blue Sky" Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.18 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.19 Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE VI - COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.1 Conduct of Business of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 6.2 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 6.3 WARN Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.4 Supplements to Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 6.5 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 6.6 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 6.7 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 6.8 Non-competition and Non-solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 6.9 Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6.10 IndeNet Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.11 Debt Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.12 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.13 State Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE VII - TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 7.2 Procedure and Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE VIII - INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 8.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 8.2 Arbitration Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 8.3 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE IX - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 9.1 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 9.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 9.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 9.4 No Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 9.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 9.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 9.7 Complete Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 9.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 9.9 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 9.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 9.11 Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
-iii- 5 EXHIBITS Exhibit 1.2(c) - Purchaser Note Exhibit 1.2(d)A - New Baur Note Exhibit 1.2(d)B - Security Agreement Exhibit 1.2(d)C - Old Baur Notes Exhibit 2.6 - Audited Special-Purpose Balance Sheet Exhibit 4.11 - Legal Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation Exhibit 4.12 - Rights Agreement Exhibit 5.18 - Legal Opinion of Troy & Gould Professional Corporation -iv- 6 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement"), is entered into as of July 18, 1997, by and between IndeNet, Inc., a Delaware corporation ("Seller"), and Digital Generation Systems, Inc., a California corporation ("Purchaser"). WITNESSETH WHEREAS, Seller is the owner of 1,810 shares of common stock, no par value (the "Shares"), of Starcom Mediatech, Inc., a Delaware corporation (the "Company"), such Shares being all of the issued and outstanding shares of capital stock of the Company; and WHEREAS, Purchaser desires to purchase, and Seller desires to sell, the Shares on the terms and subject to the conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants and agreements hereinafter set forth, the mutual benefits to be gained by the performance thereof, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and accepted, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF STOCK 1.1 Transfer of Stock. On the Closing Date (as defined in Section 1.4 hereof), and on the terms and subject to the conditions set forth herein, Seller shall sell, assign, transfer and deliver to Purchaser the Shares, free and clear of all options, pledges, security interests, voting trust or similar arrangements, liens, charges or other encumbrances or restrictions on voting or transfer ("Encumbrances"), other than the restrictions imposed by federal and state securities laws. 1.2 Consideration. On the Closing Date, and on the terms and subject to the conditions set forth herein, in reliance on the representations, warranties, covenants and agreements of the parties set forth herein and in consideration of the sale, assignment, transfer and delivery of the Shares in accordance with Section 1.1 hereof, Purchaser shall deliver to Seller each of the following (sometimes referred to herein as the "Purchase Price"): (a) $13,988,730.00 in cash by wire transfer of immediately available funds to an account designated by Seller (the "Cash Consideration"); 7 (b) 324,355 shares of Common Stock of Purchaser (the "Purchaser Shares"); (c) the 9% Subordinated Promissory Note, in the form attached as Exhibit 1.2(c) hereto, payable by Purchaser to the order of Seller in the aggregate principal amount of $2,243,806.34 (the "Purchaser Note"); and (d) the 9% Secured Subordinated Promissory Note, in the form attached as Exhibit 1.2(d)A hereto, payable by Purchaser to the order of Thomas H. Baur in the aggregate principal amount of $2,206,193.66 (the "New Baur Note"), and secured by all of the shares of the Company pursuant to that certain Security Agreement in the form attached hereto as Exhibit 1.2(d)B (the "Security Agreement"); pursuant to the New Baur Note, Purchaser shall substitute its obligation for the obligations of certain promissory notes payable by Seller to the order of Thomas H. Baur in the aggregate principal amount of $2,206,193.66, copies of which are attached as Exhibit 1.2(d)C hereto (the "Old Baur Notes"); provided, however, that any reduction in the amount of debt evidenced by the Old Baur Notes below $2,206,193.66 in the aggregate at the Closing Date shall increase, dollar for dollar, the aggregate principal amount of the Purchaser Note deliverable by Purchaser to Seller pursuant to Section 1.2(c) as consideration for the Shares. 1.3 Adjustment with Respect to Purchaser Shares. In the event that, on or after the date hereof until the Closing Date, (i) Purchaser shall declare or pay any cash or stock dividend or other distribution, or issue any rights with respect to the outstanding Common Stock of Purchaser, payable or distributable to holders of record of shares of Common Stock of Purchaser on or prior to the Closing Date, or (ii) Purchaser shall effect, with respect to the outstanding Common Stock of Purchaser, a merger, recapitalization, combination, conversion, exchange of shares, issuance of shares or other transaction affecting the Common Stock of Purchaser, effective on a date prior to the Closing Date, then at the Closing, Purchaser shall deliver to Seller together with the Purchaser Shares and the other consideration set forth in Section 1.2 hereof, such cash, securities, assets or rights as Seller would have received pursuant to such dividend, distribution, issuance of rights or other transaction set forth above in this Section 1.3 had Seller been the holder of record of the Purchaser Shares on the record date applicable to such dividend, distribution or issuance of any rights or on the effective date of such other transaction with respect to the outstanding Common Stock of Purchaser. In addition, after the Closing, Purchaser shall deliver to Seller, contemporaneously with the delivery to other holders of the Common Stock of Purchaser, all other cash, securities, assets or rights distributed or issued with respect to the outstanding Common Stock of Purchaser to holders of record of shares of Common Stock of Purchaser on or after the date hereof not previously delivered to Seller pursuant to the foregoing provisions. 1.4 Purchase Price Adjustment. (a) As soon as practicable, but in no event later than thirty (30) days following the Closing Date, Seller shall prepare, at Seller's expense, a Statement of Adjusted Working Capital of the Company as of the close of business on the Closing Date (including the notes thereto, the -2- 8 "Closing Date Statement"). The Closing Date Statement shall present, for the period commencing on June 30, 1997 and ending as of the Closing Date. (i) the "net working capital" of the Company, as defined according to generally accepted accounting principles ("GAAP"), but excluding (A) intercompany receivables and payables, (B) cash and cash equivalents, and (C) borrowings, including the current portion of long-term borrowings (including capitalized leases) (the "Net Working Capital Amount"); (ii) the "net debt" of the Company, as defined as the sum of all borrowings of the Company (whether long-term or short-term and including capitalized leases), less cash and cash equivalents (the "Net Debt Amount"); and (iii) the "gross fixed asset additions" of the Company, as defined as any additions to or investments in fixed assets necessary to the operation of the business of the Company ("Gross Fixed Asset Additions"). (b) During the preparation of the Closing Date Statement and the period of any dispute within the contemplation of this Section 1.4, Purchaser shall cause the Company to (i) provide Seller and its authorized representatives with access to the books, records, facilities and employees of the Company, (ii) provide Seller as promptly as practicable after the Closing Date (but in no event later than fifteen (15) days after the Closing Date) with normal periodic financial information with respect to the Company for the period ending on the Closing Date, and (iii) cooperate with Seller and its authorized representatives with respect to the preparation of the Closing Date Statement, including the provision on a timely basis of all information necessary for or useful in the preparation of the Closing Date Statement. (c) Seller shall deliver a copy of the Closing Date Statement, together with the work papers used in the preparation thereof, to Purchaser promptly after it has been prepared and in no event later than thirty (30) days after the Closing Date. After receipt of the Closing Date Statement, Purchaser shall have thirty (30) days to review the Closing Date Statement, together with the work papers used in the preparation thereof. Purchaser and its authorized representatives shall have full access to all books and records, employees and accounts of Seller to the extent required to complete their review of the Closing Date Statement. Unless Purchaser delivers written notice to Seller on or prior to the 60th day after Purchaser's receipt of the Closing Date Statement specifying in reasonable detail all disputed items and amounts with respect thereto and the basis therefor, Purchaser shall be deemed to have accepted and agreed to the Closing Date Statement. If Purchaser so notifies Seller of its objection to the Closing Date Statement, Purchaser and Seller shall, within thirty (30) days following such notice (the "Resolution Period"), attempt to resolve their differences in good faith with respect to any such disputed items and/or amounts, and any resolution by such parties as to any such disputed items and/or amounts shall be final, binding and conclusive with respect to each of such parties. If following resolution of any disputed items and/or amounts there do not remain in dispute items and/or amounts the net effect of which exceeds $50,000 in the -3- 9 aggregate, then all such items and/or amounts remaining in dispute shall be deemed to have been resolved in favor of the Closing Date Statement delivered by Seller to Purchaser. (d) If at the conclusion of the Resolution Period the net effect of all remaining items and/or amounts shall exceed $50,000 in the aggregate, then upon the request of Purchaser or Seller all items and amounts relating to the Closing Date Statement which remain in dispute shall be submitted to a firm of nationally recognized independent public accountants (the "Neutral Auditors") selected by Seller and Purchaser within ten (10) days after the expiration of the Resolution Period. If Seller and Purchaser are unable to agree on the Neutral Auditors, Seller and Purchaser shall each have the right to request the American Arbitration Association to appoint the Neutral Auditors who shall not have had a material relationship with Seller, Purchaser or any of their respective affiliates within the past four (4) years. Each party agrees to execute, if requested by the Neutral Auditors, a reasonable engagement letter. All fees and expenses relating to the work, if any, to be performed by the Neutral Auditors shall be borne equally by Seller and Purchaser. The Neutral Auditors shall act as an arbitrator to determine, based solely on presentations by Seller and Purchaser, and not by independent review, only those items and/or amounts with respect to the Closing Date Statement which remain in dispute. The Neutral Auditors' determination shall be made within thirty (30) days of their selection, whether or not such presentations by Seller and Purchaser have been made within such period, shall be set forth in a written statement containing a basis for such determination delivered to Seller and Purchaser, and shall be final, binding and conclusive. The term "Adjusted Closing Date Statement," as hereinafter used, shall mean the definitive Closing Date Statement agreed to by Purchaser and Seller in accordance with Section 1.4(c) or the definitive Closing Date Statement resulting from the determinations made by the Neutral Auditors in accordance with this Section 1.4(d) (in addition to those items theretofore agreed to by Seller and Purchaser), in each case prepared in the manner set forth in the last sentence of Section 1.4(a) hereof. (e) The Cash Consideration shall be increased or decreased, as the case may be, dollar for dollar, to the extent that either the Net Working Capital Amount or the Net Debt Amount reflected in the Adjusted Closing Date Statement is greater than or less than, respectively, the Net Working Capital Amount or the Net Debt Amount, as the case may be, reflected in the Audited Special-Purpose Balance Sheet. In addition, the Cash Consideration shall be increased, dollar for dollar, to the extent of any Gross Fixed Asset Additions, if any, since the date of the Audited Special-Purpose Balance Sheet; provided, however, that in no event shall the Cash Consideration be increased by an amount in excess of $100,000 as a result of any Gross Fixed Asset Additions. The amount of any increase to or reduction of the Cash Consideration pursuant to this Section 1.4(e) shall bear interest from the Closing Date through the date of payment at the publicly announced base interest rate of Bank of America NT&SA in effect from time to time from the Closing Date to the date of such payment. The amount of any increase to or reduction of the Cash Consideration pursuant to this Section 1.4(e), together with interest thereon, shall be paid by wire transfer in immediately available funds to the account designated by Seller or Purchaser, as the case may be, within five (5) business days after the Adjusted Closing Date Statement is agreed to by Seller and Purchaser pursuant to Section 1.4(c) hereof, or any remaining disputed items and/or amounts with respect thereto are ultimately determined by the Neutral Auditors pursuant to Section 1.4(d) hereof; -4- 10 provided, however, that in the event that the interest payable with respect to the increase or decrease in the Cash Consideration pursuant to this Section 1.4(e), if any, shall not exceed $5,000, then such interest shall not be due and payable. 1.5 The Closing. The closing (the "Closing") of the transactions contemplated in this Agreement shall take place at the offices of Troy & Gould Professional Corporation, 1801 Century Park East, 16th Floor, Los Angeles, California, at 9:00 A.M., Pacific Standard Time, on July 18, 1997 (the "Closing Date"), or subject to the limitations set forth in Section 7.1 hereof, at such other place and time as may be agreed upon by Seller and Purchaser after satisfaction or waiver of the conditions set forth in Article IV and V hereof assuming reasonable diligence by each of the parties hereto. 1.6 Closing Deliveries. (a) Deliveries by Seller. At or prior to the Closing, Seller shall deliver or cause to be delivered to Purchaser each of the following: (i) a certificate evidencing the Shares, which certificate shall be properly endorsed for transfer or accompanied by duly executed stock powers, in either case executed in favor of Purchaser and otherwise in a form acceptable for transfer on the books of the Company; (ii) a certificate, dated the Closing Date and executed by the Chief Financial Officer of Seller, certifying (A) that each of the representations and warranties of Seller set forth in Article II hereof was accurate in all respects as of the date hereof and is accurate in all respects as of the Closing Date as if made on and as of the Closing Date, and (B) to the fulfillment of the conditions set forth in Article V hereof; and (iii) all other previously undelivered documents required to be delivered by Seller to Purchaser at or prior to the Closing Date in connection with the transactions contemplated hereby. (b) Deliveries by Purchaser. At or prior to the Closing, Purchaser shall deliver or cause to be delivered to Seller each of the following: (i) the Cash Consideration by wire transfer of immediately available funds to an account designated by Seller; (ii) a certificate or certificates evidencing the Purchaser Shares, duly executed by the President and the Secretary of Purchaser; (iii) the Purchaser Note, executed by a duly authorized officer of Purchaser; -5- 11 (iv) the New Baur Note, executed by a duly authorized officer of Purchaser; (v) a certificate, dated the Closing Date and executed by the President and Chief Executive Officer of Purchaser, certifying (A) that each of the representations and warranties of Purchaser set forth in Article III hereof was accurate in all respects as of the date hereof and is accurate in all respects as of the Closing Date as if made on and as of the Closing Date, and (B) to the fulfillment of the conditions set forth in Article IV hereof; and (vi) all other previously undelivered documents required to be delivered by Purchaser to Seller at or prior to the Closing Date in connection with the transactions contemplated hereby. (c) All instruments and documents executed and delivered to Purchaser pursuant hereto shall be in form and substance, and executed in a manner, that is reasonably satisfactory to Purchaser. All instruments and documents executed and delivered to Seller pursuant hereto shall be in form and substance, and executed in a manner, that is reasonably satisfactory to Seller. 1.7 Further Assurances. After the Closing, each party hereto shall from time to time, at the request of the other party and without further cost or expense to such other party, execute and deliver such other instruments of conveyance and transfer and take such other actions as such other party may reasonably request in order to consummate the transactions contemplated hereby and to vest in Purchaser good and valid title to the Shares. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser, subject to such exceptions as are specifically disclosed in the disclosure letter of even date herewith relating to this Agreement and delivered by Seller to Purchaser herewith (the "Disclosure Letter"), as follows: 2.1 Corporate Organization. Each of Seller and the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has full corporate power and authority to own its properties and assets and to carry on its business as now being conducted and is duly qualified or licensed to do business as a foreign corporation in good standing in the jurisdictions in which the ownership of its property or the conduct of its business requires such qualification, except jurisdictions in which the failure to be so qualified or licensed would not have a material adverse effect on the business, assets (including intangible assets), operations, financial condition, results of operations or prospects of the Company (hereinafter referred to as a "Material Adverse Effect"). Seller has delivered to Purchaser complete and correct copies of the Certificate of Incorporation of the Company and all amendments thereto to the date hereof, the Bylaws of the Company as presently in effect, and the Minute Book of the -6- 12 Company. The Company does not own, directly or indirectly, any capital stock or other equity securities of any other corporation or have any direct or indirect equity or other ownership interest in any partnership, association, joint venture or other business entity other than equity securities or ownership interests which are immaterial in amount or significance. 2.2 Capitalization . The authorized capital stock of the Company consists of 5,000 shares of common stock, no par value, of which only the Shares are issued and outstanding and no other shares of any other class or series of capital stock or other equity security of the Company are issued and outstanding. There are no subscriptions, options, warrants, calls, rights, contracts, commitments, understandings, restrictions, agreements or any other arrangements of any character (including any right of conversion or exchange under any outstanding securities or other instruments of the Company), whether written or oral, to which either Seller or the Company is a party or by which any of their respective assets are or may be bound, pursuant to which Seller is or may be obligated to cause the Company, or the Company is or may be obligated, (i) to issue, sell, transfer, deliver, repurchase or redeem, or cause to be issued, sold, transferred, delivered, repurchased or redeemed, any shares of capital stock of the Company, or (ii) to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such subscription, option, warrant, call, right, contract, commitment, understanding, restriction, agreement or other arrangement in respect of any shares of the capital stock of the Company. There are no outstanding or authorized stock appreciation, phantom stock, profit participation or other similar rights with respect to the Company. As a result of the transactions contemplated hereby, at the Closing Purchaser will be the record and beneficial owner of all of the outstanding capital stock of the Company and rights to acquire capital stock of the Company. All of the Shares have been duly authorized and are validly issued, fully paid, nonassessable shares of Common Stock of the Company, free of any preemptive rights created by statute, the Certificate of Incorporation of Seller or the Company, the Bylaws of Seller or the Company, or any agreement to which Seller or the Company is a party or by which Seller or the Company may be bound, and have been issued in full compliance with all federal and state securities laws. The Company has no authorized, issued or outstanding capital stock other than the Shares. 2.3 Ownership of Shares. The Shares are owned by Seller, free and clear of all Encumbrances, other than the restrictions imposed by federal and state securities laws. Upon the consummation of the transactions contemplated hereby, Purchaser will acquire title to the Shares, free and clear of all Encumbrances, other than the restrictions imposed by federal and state securities laws and Encumbrances arising as a result of any action taken by Purchaser or any of its affiliates ("Affiliates"), as defined in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 2.4 Authorization. Seller has full corporate power and authority to execute and deliver this Agreement and each of the related agreements contemplated hereby and to be executed and delivered in connection herewith (the "Related Agreements"), to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The Board of Directors of Seller has duly approved and authorized the execution and delivery by Seller of this Agreement and each of the Related Agreements, the performance by Seller of its obligations -7- 13 hereunder and thereunder, and the consummation by Seller of the transactions contemplated hereby and thereby, and no other corporate proceedings on the part of Seller are necessary to approve and authorize the execution and delivery by Seller of this Agreement and each of the Related Agreements, the performance by Seller of its obligations hereunder and thereunder, and the consummation by Seller of the transactions contemplated hereby and thereby. This Agreement has been, and each of the Related Agreements will be, duly and validly executed and delivered by Seller, and this Agreement constitutes, and each of the Related Agreements will constitute upon the execution and delivery thereof by Seller, a valid and binding agreement of Seller enforceable against Seller in accordance with its respective terms, except to the extent that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses. 2.5 No Approvals or Conflicts. The execution and delivery by Seller of this Agreement does not, and the consummation by Seller of the transactions contemplated hereby will not (i) violate, conflict with or result in a breach of any provision of the Certificate of Incorporation or the Bylaws of Seller or the Company, (ii) violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, give rise to a right of termination, cancellation, modification or acceleration of any obligation or loss of benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties of the Company or on Seller's interest in the Shares under, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement or other instrument to which Seller, the Company, or any of their respective properties or assets are or may be bound, (iii) violate any order, injunction, judgment, ruling, law or regulation of any court or governmental authority applicable to Seller, the Company or any of their respective properties or assets, or (iv) except for applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder, require any consent, approval or authorization of, or notice to, or declaration, filing or registration with, any governmental or regulatory authority or other third party. 2.6 Financial Statements; Undisclosed Liabilities. Attached hereto as Exhibit 2.6 are (i) the audited special-purpose balance sheet of the Company as of March 31, 1997 (the "Audited Special-Purpose Balance Sheet") and the combined audited special-purpose statements of earnings and cash flows of the Company for the fiscal year then ended, and (ii) the unaudited balance sheet of the Company as of June 30, 1997. Such financial statements, including the related notes thereto, if any, are sometimes referred to herein as the "Financial Statements." Except as otherwise disclosed in the notes thereto, the Financial Statements present fairly in all material respects the financial condition and results of operations of the Company as of and for the period ended the date thereof. The Company has no material liabilities, indebtedness, obligations, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, or unmatured, not required to be reflected on a balance sheet prepared in accordance with generally accepted accounting principles ("GAAP"), other than (i) liabilities and obligations that are reflected, accrued or reserved for in the Audited Special-Purpose Balance Sheet or disclosed in the notes thereto, and (ii) obligations incurred in the ordinary course of business and consistent with past practice since the date of the Audited Special-Purpose Balance Sheet. -8- 14 2.7 No Changes. Since the date of the Audited Special-Purpose Balance Sheet, there has not been, occurred or arisen any: (a) transaction by the Company except in the ordinary course of its business as conducted on that date and consistent with the past practices of the Company; (b) amendments or changes to the Certificate of Incorporation or the Bylaws of the Company; (c) capital expenditure or commitment by the Company exceeding $50,000 in any individual case or in the aggregate; (d) destruction of, damage to or loss of any material assets, business or customer of the Company (whether or not covered by insurance); (e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action; (f) change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by the Company, or any change in the independent accountants for the Company; (g) revaluation by the Company of any of its assets; (h) declaration, setting aside or payment of a dividend or other distribution with respect to the Shares, or any direct or indirect redemption, purchase or other acquisition by the Company of its capital stock; (i) increase in the salary or other compensation paid, payable or to become payable by the Company to any of its officers, directors, employees, consultants or advisors, other than cost-of-living adjustments made in the ordinary course of the Company's business not exceeding five percent (5%) in any individual case, or the declaration, payment or commitment or obligation of any kind for the payment by the Company of a bonus or other additional salary or compensation to any such person; (j) agreement, contract, covenant, instrument, lease, license or commitment to which the Company is a party or by which the Company or any of its assets is or may be bound, or any termination, extension, amendment or modification the terms of any agreement, contract, covenant, instrument, lease, license or commitment to which the Company is a party or by which the Company or any of its assets is or may be bound involving a liability of the Company, whether fixed or contingent, in excess of $25,000 and other than in the ordinary course of the Company's business; -9- 15 (k) sale, lease, license or other disposition of any of the assets or properties of the Company other than in the ordinary course of its business, or any creation of any security interest in such assets or properties; (l) loan by the Company to any person or entity, any incurrence by the Company of any indebtedness other than in the ordinary course of its business and in an amount not exceeding $25,000, any guaranteeing by the Company of any indebtedness, any issuance or sale of any debt securities of the Company or any guaranteeing of any debt securities of others, except for advances to employees for travel and business expenses in the ordinary course of business and in an amount not exceeding $25,000 in the aggregate, consistent with the past practices of the Company; (m) waiver or release of any right or claim of the Company, including any write-off or other compromise of any account receivable of the Company, in excess of $25,000 in the aggregate; (n) the commencement, notice or threat of commencement of any lawsuit or proceeding or investigation against the Company or its affiliates, or any occurrence of an event giving rise to any reasonable basis therefor; (o) notice of any claim or potential claim of ownership by any person other than the Company of the Company Intellectual Property (as defined in Section 2.10 hereof) or of infringement by the Company of any other person's Intellectual Property (as defined in Section 2.10 hereof); (p) issuance or sale, or contract to issue or sell, by the Company of any shares of its capital stock or securities exchangeable, convertible or exercisable therefor, or any securities, warrants, options or rights to purchase any of the foregoing; (q) change in pricing or royalties set or charged by the Company to its customers or licensees, or in pricing or royalties set or charged by persons who have licensed Intellectual Property to the Company; (r) any event or condition of any character that has had a Material Adverse Effect on the Company; or any (s) negotiation or agreement by the Company or any officer or employees thereof to do any of the things described in the preceding clauses (a) through (r) (other than negotiations regarding the transactions contemplated hereby). -10- 16 2.8 Tax Matters. (a) Definition of Taxes. For the purposes of this Agreement, "Tax" or, collectively, "Taxes," shall mean (i) any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts, (ii) any liability for the payment of any amounts of the type described in clause (i) of this Section 2.8(a) as a result of being a member of an affiliated, consolidated, combined or unitary group for any period, and (iii) any liability for the payment of any amounts of the type described in clause (i) or (ii) of this Section 2.8(a) as a result of any express or implied obligation to indemnify any other person or as a result of any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (b) Tax Returns and Audits. (i) As of the Closing Date, Seller shall have prepared and timely filed all required federal, state, local and foreign returns, estimates, information statements and reports ("Returns") relating to any and all Taxes concerning or attributable to the Company, or the operations of the Company, and such Returns shall be true and correct and completed in accordance with applicable law. (ii) As of the Closing Date, Seller (A) shall have paid all Taxes it is required to pay in respect of the Company and its operations, and Seller or the Company shall have withheld with respect to employees of the Company all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld in respect of the Company and its operations, and (B) shall have accrued on the Audited Special-Purpose Balance Sheet all accrued and unpaid Taxes concerning or attributable to the Company, or the operations of the Company, for the periods covered thereby and will not have allowed the Company to incur any liability for Taxes for the period prior to the Closing Date other than in the ordinary course of its business. (iii) Seller has not been delinquent in the payment of any Tax concerning or attributable to the Company, or the operations of the Company, nor is there any Tax deficiency outstanding, assessed or proposed against Seller concerning or attributable to the Company, or the operations of the Company, nor has Seller executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax concerning or attributable to the Company, or the operations of the Company. (iv) No audit or other examination of any Return of Seller or the Company is presently in progress concerning or attributable to the Company, or the operations of the Company, nor has Seller or the Company been notified of any request for such an audit or other examination. -11- 17 (v) Seller does not have any liabilities for unpaid federal, state, local and foreign Taxes concerning or attributable to the Company, or the operations of the Company, which have not been accrued or reserved against in accordance with GAAP on the Audited Special-Purpose Balance Sheet, whether asserted or unasserted, contingent or otherwise. (vi) Seller has made available to Purchaser or its legal counsel copies of all foreign, federal and state income and all state sales and use Returns concerning or attributable to the Company, or the operations of the Company, which are in the possession of Seller or the Company. (vii) There are (and immediately following the Closing there will be) no liens, pledges, charges, claims, restrictions on transfer, mortgages, security interests or other encumbrances of any sort (collectively, "Liens") on the assets of the Company relating to or attributable to Taxes other than Liens for Taxes not yet due and payable. (viii) Seller has no knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the assets of the Company. (ix) None of the Company's assets are treated as "tax-exempt use property," within the meaning of Section 168(h) of the Internal Revenue Code of 1986, as amended (the "Code"). (x) As of the Closing Date, there will not be any contract, agreement, plan or arrangement, including, but not limited to, the provisions of this Agreement, covering any employee or former employee of the Company that, individually or collectively, could give rise to the payment of any amount that would not be deductible by the Company as an expense under applicable law. (xi) Seller has not filed any consent agreement under Section 341(f) of the Code relating to the Company, or agreed to have Section 341(f)(4) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company. (xii) Neither Seller nor the Company is a party to any tax sharing, indemnification or allocation agreement relating to the Company, nor does Seller or the Company owe any amount under any such agreement, other than this Agreement. (xiii) The Company's tax basis in its assets for purposes of determining its future amortization, depreciation and other federal income tax deductions is accurately reflected on the tax books and records of Seller and the Company. -12- 18 (xiv) The Company is not, and has not been at any time, a "United States Real Property Holding Corporation" within the meaning of Section 897(c)(2) of the Code. (c) Executive Compensation Tax. The Company does not have, nor will it have as a result of the transactions contemplated hereby, any liabilities for Taxes (for example, under Section 280G of the Code) as a result of the amount of remuneration paid or to be paid to its employees. 2.9 Restrictions on Business Activities. There is no agreement (non-compete or otherwise), commitment, judgment, injunction, order or decree to which Seller or the Company is a party, or otherwise binding upon Seller or the Company, which has or may have the effect of prohibiting or impairing any business practice of the Company, any acquisition of property (tangible or intangible) by the Company or the conduct of business by the Company. Neither Seller nor the Company has entered into any agreement under which the Company is restricted from selling, licensing or otherwise distributing any of its technology or products to or providing services to, customers or potential customers or any class of customers, in any geographic area, during any period of time or in any segment of the market. 2.10 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment. (a) Section 2.10(a) of the Disclosure Letter sets forth a list of all real property currently owned or leased by the Company, and in the case of leased property, the name of the lessor, the date of the lease and each amendment thereto and, with respect to any current lease, the aggregate annual rental and/or other fees payable under any such lease. All such current leases are in full force and effect, are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default) thereunder. (b) The Company has good and valid title to or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any Liens, except as reflected in the Audited Special-Purpose Balance Sheet and except for Liens for Taxes not yet due and payable and such imperfections of title and encumbrances, if any, which are not material in character, amount or extent, and which do not detract from the value, or interfere with the present use, of the property subject thereto or affected thereby. (c) Section 2.10(c) of the Disclosure Letter sets forth a list of all material items of equipment (the "Equipment") owned or leased by the Company and such Equipment (i) is adequate for the conduct of the business of the Company as currently conducted, and (ii) is in good operating condition, regularly and properly maintained, subject to normal wear and tear. -13- 19 (d) The Company has sole and exclusive ownership, free and clear of any Liens, of all customer files and other customer information relating to customers of the Company (the "Customer Information"). No person other than the Company possesses any claims or rights with respect to use of the Customer Information. 2.11 Intellectual Property. (a) For the purposes of this Agreement, the following terms shall have the following respective meanings: (i) "Intellectual Property" shall mean any or all of the following and all rights in, arising out of, or associated therewith: (A) all United States and foreign patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (B) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data and customer lists, and all documentation relating to any of the foregoing; (C) all copyrights, copyrights registrations and applications therefor and all other rights corresponding thereto throughout the world; (D) all mask works, mask work registrations and applications therefor; (E) all industrial designs and any registrations and applications therefor throughout the world; (F) all trade names, logos, common law trademarks and service marks; trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world; (G) all databases and data collections and all rights therein throughout the world; and (H) all computer software including all source code, object code, firmware, development tools, files, records and data, all media on which any of the foregoing is recorded, and (I) any similar, corresponding or equivalent rights to any of the foregoing and (J) all documentation related to any of the foregoing. (ii) "Company Intellectual Property" shall mean any Intellectual Property that is owned by, exclusively licensed to, or was developed or created by the Company. (iii) "Registered Intellectual Property" shall mean all United States, international and foreign: (A) patents, patent applications (including provisional applications); (B) registered trademarks, applications to register trademarks, intent-to-use applications, or other registrations or applications related to trademarks; (C) registered copyrights and applications for copyright registration; (D) any mask work registrations and applications to register mask works; and (E) any other Company Intellectual Property that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any state, government or other public legal authority. (b) Section 2.11(b) of the Disclosure Letter sets forth a list of all Registered Intellectual Property owned by, or filed in the name of, the Company (the "Company Registered Intellectual Property") and lists any proceedings or actions before any court, tribunal (including the United States Patent and Trademark Office (the "PTO") or equivalent authority anywhere in the world) related to any of the Company Registered Intellectual Property. -14- 20 (c) Each item of Company Intellectual Property, including all Company Registered Intellectual Property set forth in Section 2.11(b) of the Disclosure Letter, is free and clear of any Liens. The Company is the exclusive owner of all Company Intellectual Property. (d) To the extent that any Intellectual Property has been developed or created by any person other than the Company for which the Company has, directly or indirectly, paid, the Company has a written agreement with such person with respect thereto and the Company thereby has obtained ownership of, and is the exclusive owner of, all such Intellectual Property by operation of law or by valid assignment. (e) The Company has not transferred ownership of, granted any license of or right to use, or authorized the retention of any rights to use, any Intellectual Property that is or was Company Intellectual Property to any other person. (f) The Company owns or has a written license to all Intellectual Property used in and/or necessary to the conduct of its business as it currently is conducted or is reasonably contemplated to be conducted, including, without limitation, the design, development, manufacture, use, import and sale of the products, technology and services of the Company (including products, technology or services currently under development). (g) Other than "shrink-wrap" and similar widely available commercial end-user licenses, the contracts, licenses and agreements listed in Section 2.11(g) of the Disclosure Letter include all contracts, licenses and agreements, to which the Company is a party with respect to any Intellectual Property of any person other than the Company. No person other than the Company has ownership rights to improvements made by the Company in Intellectual Property which has been licensed to the Company. (h) Section 2.11(h) of the Disclosure Letter lists all contracts, licenses and agreements between the Company and any other person wherein or whereby the Company has agreed to, or assumed, any obligation or duty to warrant, indemnify, reimburse, hold harmless, guaranty or otherwise assume or incur any obligation or liability or provide a right of rescission with respect to the infringement or misappropriation by the Company or such other person of the Intellectual Property of any person other than the Company. (i) The operation of the business of the Company as currently conducted or as reasonably contemplated to be conducted, including, but not limited to, the Company's design, development, use, import, manufacture and sale of the products, technology or services (including products, technology or services currently under development) of the Company, does not infringe or misappropriate the Intellectual Property of any person, violate the rights of any person (including rights to privacy or publicity), or constitute unfair competition or trade practices under the laws of any jurisdiction, and the Company has not received written or oral notice from any person claiming that such operation or any act, product, technology or service (including products, technology or services currently under development) of the Company infringes or misappropriates the Intellectual -15- 21 Property of any person or constitutes unfair competition or trade practices under the laws of any jurisdiction, nor is Seller aware of any basis therefor. (j) Each item of Company Registered Intellectual Property is valid and subsisting, all necessary registration, maintenance and renewal fees in connection with such Company Registered Intellectual Property have been paid and all necessary documents and certificates in connection with such Company Registered Intellectual Property have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such Company Registered Intellectual Property. Section 2.11(j) of the Disclosure Letter lists all actions that must be taken by the Company within sixty (60) days of the Closing Date, including the payment of any registration, maintenance or renewal fees or the filing of any documents, applications or certificates for the purposes of maintaining, perfecting or preserving or renewing any Company Intellectual Property. (k) There are no contracts, licenses or agreements between the Company and any person with respect to Company Intellectual Property under which there is any dispute regarding the scope of such agreement, or performance under such agreement including with respect to any payments to be made or received by the Company thereunder. (l) To the knowledge of Seller, no person is infringing or misappropriating any Company Intellectual Property. (m) The Company has taken all steps that it deems necessary or appropriate to protect the Company's rights in confidential information and trade secrets possessed or used by the Company. (n) No Company Intellectual Property or product, technology or service of the Company is subject to any proceeding or outstanding decree, order, judgment, agreement or stipulation that restricts in any manner the use, transfer or licensing thereof by the Company or may affect the validity, use or enforceability of such Company Intellectual Property. (o) No (i) product, technology, service or publication of the Company, (ii) material published or distributed by the Company, or (iii) conduct or statement of Company, constitutes obscene material, a defamatory statement or material, false advertising or otherwise violates any law or regulation in such a manner or to a degree as to have a Material Adverse Effect. (p) All of the Company's proprietary products, technology and services (including products, technology and services currently under development), and all of the Company's internal, proprietary computer and technology products and systems are capable of fully performing at any and all chronological dates (including, but not limited to, dates after the year 2000), both currently and in the future without any adverse change or effect, or without the need to modify or alter any such products or technology in any respect. -16- 22 2.12 Agreements, Contracts and Commitments. (a) The Company is not a party to nor is it bound by: (i) any material employment or consulting agreement, contract or commitment with an employee or individual consultant or salesperson or consulting or sales agreement, contract or commitment with a firm or other organization; (ii) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated hereby, or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated hereby; (iii) any fidelity or surety bond or completion bond; (iv) any lease of personal property having a value individually in excess of $25,000; (v) any agreement, contract or commitment containing any covenant limiting the freedom of the Company to engage in any line of business or to compete with any person; (vi) any agreement, contract or commitment relating to capital expenditures and involving future payments in excess of $10,000 in any individual case, or $25,000 in the aggregate; (vii) any agreement, contract or commitment relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of the Company's business; (viii) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, other than credit for trade payables incurred in the ordinary course of its business; (ix) any purchase order or contract for the purchase of materials involving in excess of $10,000 in any individual case, or $50,000 in the aggregate; (x) any construction contracts; (xi) any distribution, joint marketing or development agreement; or -17- 23 (xii) any other agreement, contract or commitment that involves $25,000 or more or is not cancelable without penalty within thirty (30) days. (b) The Company is in compliance with and has not breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the terms or conditions of any agreement, contract, covenant, instrument, lease, license or commitment to which the Company is a party or by which it is or may be bound (collectively a "Contract"), nor is Seller aware of any event that would constitute such a breach, violation or default with the lapse of time, giving of notice or both. Each Contract is in full force and effect and is not subject to any default thereunder by any party obligated to the Company pursuant thereto. The Company has obtained, or will obtain prior to the Closing Date, all necessary consents, waivers and approvals of parties to any Contract as are required thereunder in connection with the transactions contemplated hereby or for such Contracts to remain in effect without modification after the Closing. Following the Closing, the Company will be permitted to exercise all of the Company's rights under the Contracts without the payment of any additional amounts or consideration other than ongoing fees, royalties or payments which the Company would otherwise be required to pay had the transactions contemplated hereby not occurred. 2.13 Customers and Suppliers. Section 2.13 of the Disclosure Letter sets forth a list of (i) the ten (10) largest customers of the Company in terms of sales (the "Material Customers") during the fiscal year ended March 31, 1997, and the three month period ended June 30, 1997, each setting forth the approximate total sales revenue of the Company by customer during each of such periods, and (ii) the ten (10) largest suppliers of the Company (the "Material Suppliers") in terms of purchases during the fiscal year ended March 31, 1997, and the three months ended June 30, 1997, each setting forth the approximate total purchases by the Company from each such supplier during each such period. Since June 30, 1997, there has not been any Material Adverse Change in the business relationship of the Company with any Material Customer or Material Supplier. Except for the Material Customers and the Material Suppliers, as the case may be, the Company does not have any Customer that accounted for more than five percent (5%) of the Company's sales revenue during the fiscal year ended March 31, 1997, or any supplier from whom the Company purchased more than five percent (5%) of the goods and services which the Company purchased during the fiscal year ended March 31, 1997. Seller and the Company have not received any notice, nor does Seller or the Company have knowledge of any facts, circumstances or conditions that create a reasonable basis for believing, nor does Seller or the Company believe, that any of the Material Customers or Material Suppliers will terminate, or change in a manner materially adverse to the Company, its business relationship with the Company, or its current level utilization of the services of the Company, either before or within twelve (12) months after the Closing Date. 2.14 Interested Party Transactions. No officer, director or shareholder of the Company (nor any ancestor, sibling, descendant or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an interest), has or has had, directly or indirectly, (i) an interest in any entity which furnished or sold, or furnishes or sells, services, products or technology that the Company furnishes or sells, or proposes to furnish or sell, (ii) any -18- 24 interest in any entity that purchases from or sells or furnishes to the Company, any goods or services, or (iii) a beneficial interest in any Contract; provided, however, that ownership of no more than one percent (1%) of the outstanding voting stock of a publicly traded corporation shall not be deemed an "interest in any entity" for purposes of this Section 2.14. 2.15 Governmental Authorizations. Section 2.15 of the Disclosure Letter sets forth a list of each consent, license, permit, grant or other authorization issued to Seller and/or the Company by a governmental or regulatory authority (i) pursuant to which the Company currently operates or holds any interest in any of its properties or assets, or (ii) which is required for the operation of its business or the holding of any such interest (herein collectively called "Company Authorizations"). The Company Authorizations are in full force and effect and constitute all Company Authorizations required to permit the Company to operate or conduct its business or hold any interest in its properties or assets. 2.16 Litigation. There is no action, suit or proceeding of any nature pending or, to Seller's knowledge, threatened, against the Company, its properties or any of its officers or directors nor, to the knowledge of Seller, is there any reasonable basis therefor. There is no investigation pending or, to Seller's knowledge, threatened, against the Company, its properties or any of its officers or directors by or before any governmental or regulatory authority nor, to the best knowledge of Seller, is there any reasonable basis therefor. No governmental or regulatory authority has at any time challenged or questioned the legal right of the Company to conduct its operations as presently or previously conducted. 2.17 Accounts Receivable. (a) Seller has provided to Purchaser a list of all accounts receivable of the Company ("Accounts Receivable") as of March 31, 1997 along with a range of days elapsed since invoice. (b) All Accounts Receivable of the Company arose in the ordinary course of business and are carried at values determined in accordance with GAAP consistently applied and Seller knows of no reasons why such receivables are not collectible except to the extent of reserves therefor set forth in the Audited Special-Purpose Balance Sheet. No person has any Lien on any of such Accounts Receivable and no request or agreement for deduction or discount has been made with respect to any of such Accounts Receivable. 2.18 Minute Books. The minutes of the Company made available to legal counsel for Purchaser are the only minutes of the Company and contain a reasonably accurate summary of all meetings of the Board of Directors (or committees thereof) of the Company and its shareholders or actions by written consent since the date of incorporation of the Company. -19- 25 2.19 Environmental Matters. (a) Hazardous Material. The Company has not (i) operated any underground storage tanks at any property that the Company has at any time owned, operated, occupied or leased, or (ii) illegally released any material amount of any substance that has been designated by any governmental or regulatory authority or by applicable federal, state or local law to be radioactive, toxic, hazardous or otherwise a danger to health or the environment, including, without limitation, PCBs, asbestos, petroleum, and urea-formaldehyde and all substances listed as hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to the United States Resource Conservation and Recovery Act of 1976, as amended, and the regulations promulgated pursuant to said laws (a "Hazardous Material"), but excluding office and janitorial supplies properly and safely maintained. No Hazardous Materials are present in, on or under any property, including, but not limited to, the land, any improvements thereto, any ground water and surface water thereof, that the Company has at any time owned, operated, occupied or leased. (b) Hazardous Materials Activities. The Company has not transported, stored, used, manufactured, disposed of, released or exposed its employees or others to Hazardous Materials in violation of any law in effect on or before the Closing Date, nor has the Company disposed of, transported, sold, or manufactured any product containing a Hazardous Material (any or all of the foregoing being collectively referred to as "Hazardous Materials Activities") in violation of any rule, regulation, treaty or statute promulgated by any governmental or regulatory authority in effect prior to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity. (c) Permits. The Company currently holds all environmental approvals, permits, licenses, clearances and consents (the "Environmental Permits") necessary for the conduct of the Company's Hazardous Material Activities and other businesses of the Company as such activities and businesses are currently being conducted. (d) Environmental Liabilities. No action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or to Seller's knowledge, threatened, concerning any Environmental Permit, Hazardous Material or any Hazardous Materials Activity of the Company. Seller is not aware of any fact or circumstance which could involve the Company in any environmental litigation or impose upon the Company any environmental liability. 2.20 Brokers' and Finders' Fees; Third Party Expenses. The Company has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. -20- 26 2.21 Employee Benefit Plans and Compensation. (a) For purposes of this Section 2.21, the following terms shall have the following respective meanings: (i) "Affiliate" shall mean any other person or entity under common control with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code and the regulations thereunder. (ii) "Employee Plan" shall mean any plan, program, policy, practice, contract, agreement or other arrangement providing for bonuses, severance, termination pay, deferred compensation, pensions, profit sharing, performance awards, stock or stock-related awards, fringe benefits or other employee benefits of any kind, whether formal or informal, written or otherwise, funded or unfunded and whether or not legally binding, including without limitation, any plan which is or has been maintained, contributed to, or required to be contributed to, by the Company or any Affiliate for the benefit of any "Employee" (as defined below), and pursuant to which the Company or any Affiliate has or may have any material liability, contingent or otherwise. (iii) "Employee" shall mean any current, former, or retired employee, consultant, officer, or director of the Company or any Affiliate. (iv) "Employee Agreement" shall mean each employment, severance, consulting or similar agreement or contract between the Company or any Affiliate and any Employee. (b) Schedule. Section 2.21(b) of the Disclosure Letter sets forth a list of each Employee Plan and each Employee Agreement, together with a schedule of all liabilities, whether or not accrued, under each such Employee Plan. The Company does not have any plan or commitment, whether legally binding or not, to establish any new Employee Plan or Employee Agreement, to modify any Employee Plan or Employee Agreement (except to the extent required by law or to conform any such Employee Plan or Employee Agreement to the requirements of any applicable law, in each case as previously disclosed to Parent in writing, or as required by this Agreement), or to enter into any Employee Plan or Employee Agreement, nor does Seller have any intention or commitment to do any of the foregoing with respect to the Company. (c) Documents. Seller has provided to Purchaser (i) correct and complete copies of all documents embodying each Employee Plan and each Employee Agreement including all amendments thereto and copies of all forms of agreement and enrollment used therewith, (ii) the most recent annual actuarial valuations, if any, prepared for each Employee Plan, (iii) the three most recent annual reports (Series 5500 and all schedules thereto), if any, required under ERISA or the Code in connection with each Employee Plan or related trust, (iv) the most recent summary plan description together with the most recent summary of material modifications, if any, required under ERISA with respect to each Employee Plan, (v) all IRS determination letters and rulings relating to -21- 27 Company Employee Plans and copies of all applications and correspondence to or from the IRS or the Department of Labor ("DOL") with respect to any Employee Plan, (vi) if the Employee Plan is funded, the most recent annual and periodic accounting of Employee Plan assets, (vii) all material agreements and contracts relating to each Employee Plan, including but not limited to, administrative service agreements, group annuity contracts and group insurance contracts, and (viii) all communications material to any Employee or Employees relating to any Employee Plan and any proposed Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any liability to the Company. (d) Employee Plan Compliance. (i) The Company has performed all obligations required to be performed by it under each Employee Plan and each Employee Plan has been established and maintained in accordance with its terms and in compliance with all applicable laws, statutes, orders, rules and regulations, including ERISA and the Code; (ii) each Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has either received a favorable determination letter with respect to each such Plan from the IRS or has remaining a period of time under applicable Treasury regulations or IRS pronouncements in which to apply for such a determination letter and make any amendments necessary to obtain a favorable determination; (iii) no "prohibited transaction," within the meaning of Section 4975 of the Code or Section 406 or 407 of ERISA, has occurred with respect to any Company Employee Plan; (iv) there are no actions, suits or claims pending, or, to the knowledge of Seller threatened or anticipated (other than routine claims for benefits), against any Employee Plan or against the assets of any Employee Plan; (v) each Employee Plan can be amended, terminated or otherwise discontinued after the Closing in accordance with its terms, without liability to the Company, Purchaser or any Affiliate (other than ordinary administration expenses typically incurred in a termination event); (vi) there are no inquiries or proceedings pending or, to the knowledge of Seller or any Affiliates, threatened by the IRS or DOL with respect to any Employee Plan; and (vii) neither the Company nor any Affiliate is subject to any penalty or tax with respect to any Employee Plan under Section 402(i) of ERISA or Section 4975 through 4980 of the Code. (e) Pension Plans. The Company does not now, nor has it ever, maintained, established, sponsored, participated in, or contributed to, any Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code. (f) Multiemployer Plans. At no time has the Company contributed to or been requested to contribute to any Multiemployer Plan. (g) No Post-Employment Obligations. No Employee Plan provides, or has any liability to provide, life insurance, medical or other employee benefits to any Employee upon his or her retirement or termination of employment for any reason, except as may be required by statute, and neither the Company has represented, promised or contracted (whether in oral or written form) to any Employee (either individually or to Employees as a group) that such Employee(s) would be -22- 28 provided with life insurance, medical or other employee welfare benefits upon their retirement or termination of employment, except to the extent required by statute. (h) No COBRA Violation. Neither the Company nor any Affiliate has violated, nor will it prior to the Closing and in any material respect violate, any of the health care continuation requirements of COBRA or any similar provisions of state law applicable to its employees. (i) Effect of Transaction. The execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Employee Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee. (j) Employment Matters. Seller and/or the Company, as the case may be, (i) is in compliance with all applicable laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Employees; (ii) has withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments to Employees or other persons who by virtue of their activities performed on behalf of the Company may be deemed employees within the meaning of applicable law; (iii) is not liable for any arrears of wages or any taxes or any penalty for failure to comply with any of the foregoing; and (iv) is not liable for any payment to any trust or other fund or to any governmental or administrative authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for Employees or other persons who by virtue of their activities performed on behalf of the Company may be deemed employees within the meaning of applicable law (other than routine payments to be made in the normal course of business and consistent with past practice). (k) Labor. No work stoppage or labor strike against the Company is pending or, to the knowledge of Seller, threatened. The Company is not involved in or threatened with any labor dispute, grievance, or litigation relating to labor, safety or discrimination matters involving any Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, would, individually or in the aggregate, result in liability to the Company or Purchaser. The Company has not engaged in any unfair labor practices which could, in any individual case or in the aggregate, directly or indirectly result in a liability to the Company or any Affiliate. The Company is not presently, nor has it in the past, been a party to, or bound by, any collective bargaining agreement or union contract with respect to Employees and no collective bargaining agreement is being negotiated by the Company. (l) No Interference or Conflict. To the knowledge of Seller, no shareholder, officer, employee or consultant of the Company is or may be obligated under any contract or agreement, or subject to any judgement, decree or order of any court or administrative agency, that would interfere with such person's efforts to promote the interests of the Company or that would -23- 29 interfere with the Company's business. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business as presently conducted or proposed to be conducted nor any activity of such officers, directors, employees or consultants in connection with the carrying on of the Company's business as presently conducted or proposed to be conducted, will, to Seller's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract or agreement under which any of such officer's, directors, employees or consultants is now bound. 2.22 Insurance. Section 2.22 of the Disclosure Letter sets forth a list of all insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company. There is no claim by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid, and the Company is otherwise in compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). Seller has no knowledge of any threatened termination of, or premium increase with respect to, any of such policies. 2.23 Compliance with Laws. The Company has complied with, is not in violation of, and has not received any notices of violation with respect to, any foreign, federal, state or local statute, law or regulation, which would have a Material Adverse Effect. 2.24 Lawful Transfer. Seller will receive from Purchaser, and the Purchase Price constitutes, reasonably equivalent value in exchange for the transfer of the Shares pursuant hereto, and Seller is not insolvent, nor will it become insolvent as a result of the execution and delivery of this Agreement, the performance of its obligations hereunder, or the consummation of the transactions contemplated hereby. Seller is not engaged, nor is Seller about to engage, in a business or a transaction for which the assets of Seller remaining after the consummation of the transactions contemplated hereby are unreasonably small in relation to such business or transaction, and Seller does not intend to incur, or believe that it will incur, debts beyond its ability to pay as such debts become due. 2.25 Certain Business Practices. Seller, the Company and the officers, directors, employees, agents and other representatives of Seller and the Company, or any other person acting on behalf of Seller and/or the Company, have not given, agreed to give, or caused to be given, directly or indirectly, within the past five (5) years, any illegal gift or similar benefit to any customer, supplier, governmental employee or other person in connection with any actual or proposed transaction. 2.26 Warranties; Indemnities. The Company has not given any warranties or indemnities relating to products or technology sold or services rendered by the Company. -24- 30 2.27 Complete Copies of Materials. The Company has delivered or made available true and complete copies of each document that has been requested by Purchaser or its legal counsel. 2.28 Representations Complete. None of the representations or warranties made by Seller (as modified by the Disclosure Letter), nor any statement made in the Disclosure Letter or any certificate provided by Seller pursuant to this Agreement contains or will contain at the Closing, any untrue statement of a material fact, or omits or will omit at the Closing to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller, subject to such exceptions as are specifically disclosed in the disclosure letter of even date herewith relating to this Agreement and delivered by Purchaser to Seller herewith (the "Purchaser Disclosure Letter"), as follows 3.1 Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Purchaser has full corporate power and authority to own its properties and assets and to carry on its business as now being conducted and is duly qualified or licensed to do business as a foreign corporation in good standing in the jurisdictions in which the ownership of its property or the conduct of its business requires such qualification, except jurisdictions in which the failure to be so qualified or licensed would not have a material adverse effect on the business, operations or financial condition of Purchaser (hereinafter referred to as a "Purchaser Material Adverse Effect"). Purchaser has delivered to Seller complete and correct copies of the Amended and Restated Articles of Incorporation of Purchaser and all amendments thereto to the date hereof, and the Bylaws of Purchaser as presently in effect. 3.2 Capitalization. The authorized capital stock of Purchaser consists of thirty million (30,000,000) shares of common stock ("Purchaser Common Stock") and five million (5,000,000) shares of preferred stock ("Purchaser Preferred Stock"), of which 11,743,475 shares of Purchaser Common Stock and no shares of Purchaser Preferred Stock are issued and outstanding as of the date hereof. There are no subscriptions, options, warrants, calls, rights, contracts, commitments, understandings, restrictions, agreements or any other arrangements of any character (including any right of conversion or exchange under any outstanding securities or other instruments of the Company), whether written or oral, to which Purchaser is a party or by which any of its assets are or may be bound, pursuant to which Purchaser is or may be obligated (i) to issue, sell, transfer, deliver, repurchase or redeem, or cause to be issued, sold, transferred, delivered, repurchased or redeemed, any shares of capital stock of Purchaser, or (ii) to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such subscription, option, warrant, call, right, contract, commitment, understanding, restriction, agreement or other arrangement in respect of any shares of the capital stock of Purchaser. There are no outstanding or authorized stock -25- 31 appreciation, phantom stock, profit participation or other similar rights with respect to Purchaser. As a result of the transactions contemplated hereby, at the Closing Seller will be the record and beneficial owner of all of the Purchaser Shares and rights to acquire the Purchaser Shares. All of the Purchaser Shares have been duly authorized and, when issued and delivered in accordance with the terms and conditions hereof, will be validly issued, fully paid, nonassessable shares of Common Stock of the Company, free of any preemptive rights created by statute, the Amended and Restated Articles of Incorporation of Purchaser, the Bylaws of Purchaser, or any agreement to which Purchaser is a party or by which Purchaser may be bound, and have been issued in full compliance with all federal and state securities laws. 3.3 Authorization. Purchaser has full corporate power and authority to execute and deliver this Agreement and each of the Related Agreements, to perform its obligations hereunder and thereunder, and to carry out the transactions contemplated hereby and thereby. The Board of Directors of Purchaser has duly approved and authorized the execution and delivery of this Agreement and each of the Related Agreements, the performance by Purchaser of its obligations hereunder and thereunder, and the consummation by Purchaser of the transactions contemplated hereby and thereby, and no other corporate proceedings on the part of Purchaser are necessary to approve and authorize the execution and delivery by Purchaser of this Agreement and each of the Related Agreements, the performance by Purchaser of its obligations hereunder and thereunder, and the consummation by Purchaser of the transactions contemplated hereby and thereby. This Agreement has been, and each of the Related Agreements will be, duly and validly executed and delivered by Purchaser, and this Agreement constitutes, and each of the Related Agreements will constitute upon the execution and delivery thereof by Purchaser, a valid and binding agreement of Purchaser, enforceable against Purchaser in accordance with its respective terms, except that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses. 3.4 No Approvals or Conflicts. The execution and delivery by Purchaser of this Agreement does not, and the consummation by Purchaser of the transactions contemplated hereby will not (i) violate, conflict with or result in a breach of any provision of the Amended and Restated Articles of Incorporation or the Bylaws of Purchaser, (ii) violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, give rise to a right of termination, cancellation, modification or acceleration of any obligation or loss of benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties of Purchaser or on Purchaser's interest in the Purchaser Shares under, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement or other instrument to which Purchaser or any of its properties or assets are or may be bound, (iii) violate any order, injunction, judgment, ruling, law or regulation of any court or governmental authority applicable to Purchaser or any of its properties or assets, or (iv) except for applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder, require any consent, approval or authorization of, or notice to, or declaration, filing or registration with, any governmental or regulatory authority or other third party. -26- 32 3.5 SEC Reports; Financial Statements. Purchaser has filed each statement, annual, quarterly and other report, registration statement and definitive proxy statement (the "Purchaser SEC Documents") required to be filed (other than preliminary material) by Purchaser with the Securities and Exchange Commission (the "Commission") subsequent to February 6, 1996 (the effective date of Purchaser's registration statement on Form S-1 for its initial public offering of shares of its Common Stock). As of their respective filing dates, the Purchaser SEC Documents complied in all material respects with the requirements of the Exchange Act and none of the Purchaser SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected by any subsequently filed Purchaser SEC Document. Each of the balance sheets included in or incorporated by reference into the Purchaser SEC Documents (including the related notes and schedules) fairly presents in all material respects the financial position of Purchaser and its subsidiaries as of its date, and each of the statements of income and cash flows included in or incorporated by reference into the Purchaser SEC Documents (including any related notes and schedules) fairly presents in all material respects the results of operations, retained earnings and cash flows, as the case may be, of Purchaser and its subsidiaries for the periods set forth therein (in the case of unaudited statements, subject to normal year-end audit adjustments which will not be material in amount or effect), in each case in accordance with GAAP consistently applied during the periods reported, except as otherwise noted therein. 3.6 Absence of Certain Changes. Since the date of the most recent Purchaser SEC Document: (a) the business of Purchaser has been conducted only in the ordinary course of business and consistent with the past practices of Purchaser in all material respects; (b) there has been no direct or indirect redemption, purchase or other acquisition by Purchaser of any shares of its capital stock, or any declaration, setting aside or payment of any dividend or other distribution on or in respect of any shares capital stock of Purchaser; and (c) there has been no sale, assignment or transfer of any assets of Purchaser which is material, individually or in the aggregate, to Purchaser, other than sales, assignments or transfers of assets in the ordinary course of business and consistent with the past practices of Purchaser. 3.7 Compliance with Laws; Governmental Authorizations. Purchaser is not in violation of any order, injunction, judgment, ruling, law or regulation of any court or governmental authority applicable to the property or business of Purchaser which violation or violations in the aggregate would have a Purchaser Material Adverse Effect. To the knowledge of Purchaser, the licenses, permits and other governmental authorizations held by Purchaser are valid and sufficient for the conduct of its business as currently conducted, except where the failure to hold such licenses, permits and other governmental authorizations would not have a Purchaser Material Adverse Effect. -27- 33 3.8 Litigation. As of the date hereof, there are no claims, actions, proceedings or investigations pending or, to the knowledge of Purchaser, threatened against Purchaser, or the transactions contemplated hereby, before any court or governmental or regulatory authority or body which would have a material adverse effect on Purchaser's ability to consummate the transactions contemplated hereby. 3.9 No Brokers' or Other Fees. No broker, finder or investment banker is entitled to any fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Purchaser. Seller will not incur any liability for any brokerage or finders' fee or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.10 Financing. At the Closing, Purchaser will have sufficient funds available to deliver the Cash Consideration to Seller. ARTICLE IV CONDITIONS TO SELLER'S OBLIGATIONS The obligations of Seller to effect the Closing under this Agreement are subject to the satisfaction, at or prior to the Closing, of each of the following conditions, unless waived in writing by Seller. 4.1 Representations and Warranties. The representations and warranties made by Purchaser in this Agreement shall be true and correct in all material respects on the Closing Date as though such representations and warranties were made at and as of such date, except for changes expressly permitted or contemplated by this Agreement. 4.2 Performance. Purchaser shall have performed and complied in all material respects with all agreements, obligations and conditions required by this Agreement to be so performed or complied with by Purchaser prior to or at the Closing, including, but not limited to, the delivery of the Cash Consideration, the Purchaser Shares, the Purchaser Note and the New Baur Note. 4.3 Officer's Certificate. Seller shall have received a certificate, dated the Closing Date and executed by the President and Chief Executive Officer of Purchaser, certifying (i) that each of the representations and warranties of Purchaser set forth in Article III hereof was accurate in all respects as of the date hereof and is accurate in all respects as of the Closing Date as if made on and as of the Closing Date, and (ii) to the fulfillment of the conditions set forth in this Article IV. 4.4 Good Standing Certificate. Seller shall have received a certificate, dated as of the most recent practicable date prior to the Closing Date, issued by the Secretary of State of the State of California certifying to the effect that Purchaser is in good standing under the laws of the State of California. -28- 34 4.5 Secretary's Certificate. Seller shall have received a certificate, dated the Closing Date and executed by the Secretary of Purchaser, certifying the following matters: (i) the resolutions of the Board of Directors of Purchaser authorizing the execution and delivery of this Agreement and each of the Related Agreements by Purchaser, the performance by Purchaser of its obligations hereunder and thereunder, and the consummation by Purchaser of the transactions contemplated hereby and thereby; (ii) the Amended and Restated Articles of Incorporation of Purchaser; and (iii) the Bylaws of Purchaser. 4.6 Injunctions. On the Closing Date, (i) there shall be no preliminary or permanent injunction, writ, restraining order or other order of any nature issued and in effect by a court or governmental agency of competent jurisdiction directing that the transactions contemplated hereby not be consummated as provided herein; (ii) nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; (iii) nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the transactions contemplated hereby, which renders such transactions illegal. 4.7 Litigation. There shall be no bona fide action, suit, claim or proceeding of any nature pending, or overtly threatened, against Seller, the Company or Purchaser, their respective properties or any of their officers or directors, arising out of, or in any way connected with, the transactions contemplated hereby. 4.8 Governmental Approval. Approvals from all governmental and regulatory authorities, if any, deemed appropriate or necessary by any party hereto shall have been timely obtained. 4.9 Republic Bank Release. Seller shall have obtained a written instrument evidencing the consent of Republic Acceptance Corporation to a general release of Seller from all liability under the current loan agreement(s) between the Company and/or Seller and Republic Acceptance Corporation. 4.10 No Material Adverse Changes. There shall not have been a material adverse change in the business, assets, liabilities, financial condition or results of operations of the Purchaser since the date hereof. 4.11 Legal Opinion. Seller shall have received a legal opinion from Wilson Sonsini Goodrich & Rosati, Professional Corporation, legal counsel to Purchaser, in substantially the form set forth in Exhibit 4.11 hereof. 4.12 Registration Rights Agreement. Seller shall have received that certain Digital Generation Systems, Inc. Amendment and Restatement No.5 to Rights Agreement in the form attached as Exhibit 4.12 hereto (the "Rights Agreement"), duly executed and delivered by (i) -29- 35 Purchaser and (ii) the holders of a majority of the Registrable Securities pursuant to that certain Digital Generation Systems, Inc. Amendment and Restatement No.4 to Rights Agreement. 4.13 Cancellation of Old Baur Notes. Seller shall have received the Old Baur Notes, marked for cancellation as to payment by Seller. ARTICLE V CONDITIONS TO PURCHASER'S OBLIGATIONS The obligations of Purchaser to effect the Closing under this Agreement are subject to the satisfaction, at or prior to the Closing, of each of the following conditions, unless waived in writing by Purchaser. 5.1 Representations and Warranties. The representations and warranties made by Seller in this Agreement shall be true and correct in all material respects on the Closing Date as though such representations and warranties were made at and as of such date, except for changes expressly permitted or contemplated by the terms of this Agreement. 5.2 Performance. Seller shall have performed and complied in all material respects with all agreements, obligations and conditions required by this Agreement to be so performed or complied with by Seller prior to or at the Closing, including, but not limited to, delivery of a certificate or certificates evidencing the Shares. 5.3 Officer's Certificate. Purchaser shall have received a certificate, dated the Closing Date and executed by the Chief Financial Officer of Seller, certifying (i) that each of the representations and warranties of Seller set forth in Article II hereof was accurate in all respects as of the date hereof and is accurate in all respects on the Closing Date as of made on and as of the Closing Date, and (ii) to the fulfillment of the conditions set forth in this Article V. 5.4 Good Standing Certificate - Seller. Purchaser shall have received a certificate, dated as of the most recent practicable date prior to the Closing Date, issued by the Secretary of State of the State of Delaware certifying to the effect that Seller is in good standing under the laws of the State of Delaware. 5.5 Good Standing Certificate - Company. Purchaser shall have received a certificate, dated as of the most recent practicable date prior to the Closing Date, issued by the Secretary of State of the State of Delaware certifying to the effect that the Company is in good standing under the laws of the State of Delaware. 5.6 Secretary's Certificate. Purchaser shall have received a certificate, dated the Closing Date and executed by the Secretary of Seller, certifying the following matters: (i) the resolutions of the Board of Directors of Seller authorizing the execution and delivery of this Agreement and each of the Related Agreements by Seller, the performance by Seller of its obligations hereunder and -30- 36 thereunder, and the consummation by Seller of the transactions contemplated hereby and thereby; (ii) the Certificate of Incorporation of the Company; and (iii) the Bylaws of the Company. 5.7 No Material Adverse Changes. There shall not have been a material adverse change in the business, assets, liabilities, financial condition or results of operations of the Company since the date hereof. 5.8 Resignation of Directors. Purchaser shall have received a written resignation from all of the directors of the Company, except Thomas H. Baur, each effective as of the Closing Date. 5.9 Injunctions. On the Closing Date, (i) there shall be no preliminary or permanent injunction, writ, restraining order or other order of any nature issued and in effect by a court or governmental agency of competent jurisdiction directing that the transactions contemplated hereby not be consummated as provided herein; (ii) nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; (iii) nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the transactions contemplated hereby, which renders such transactions illegal. 5.10 Litigation. There shall be no bona fide action, suit, claim or proceeding of any nature pending, or overtly threatened, against Seller, the Company or Purchaser, their respective properties or any of their officers or directors, arising out of, or in any way connected with, the transactions contemplated hereby. 5.11 Governmental Approval. Approvals from all governmental and regulatory authorities, if any, deemed appropriate or necessary by any party hereto shall have been timely obtained. 5.12 Consents and Approvals. Seller shall have obtained all consents, waivers and approvals, and shall have given all notices, required to be obtained in connection with the consummation of the transactions contemplated hereby and as set forth in Section 2.5 of the Disclosure Schedule. 5.13 Consent of Lenders. Whether or not required by the terms and provisions of any agreement or agreements therewith, Seller shall have obtained a written consent from each of the lenders to the Company pursuant to which such lenders shall have consented to the transactions contemplated hereby. 5.14 Customer Continuity. Since the date of this Agreement, none of the customers or suppliers set forth in Exhibit 5.14 hereto shall have notified Seller, the Company or Purchaser, orally or in writing, of its intention to terminate or suspend its utilization of the Company's services, or otherwise modify its business relationship with the Company in a manner materially adverse the Company, after the Closing Date. -31- 37 5.15 Vender Obligations. The Company's existing extended payment terms with its venders shall not have been accelerated as a result of the transactions contemplated hereby. 5.16 Board Approval. The Board of Directors of Seller shall have adopted resolutions authorizing and ratifying the execution and delivery of this Agreement and each of the Related Agreements, the performance by Seller of its obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby. 5.17 State "Blue Sky" Compliance. Purchaser shall have received all state securities or "blue sky" permits and other authorizations necessary to issue the Purchaser Shares to Seller pursuant hereto. 5.18 Legal Opinion. Purchaser shall have received a legal opinion from Troy & Gould Professional Corporation, legal counsel to Seller, in substantially the form set forth in Exhibit 5.18 hereof. 5.19 Registration Rights Agreement. Purchaser shall have received the Rights Agreement, duly executed and delivered by (i) Seller and (ii) the holders of a majority of the Registrable Securities pursuant to that certain Digital Generation Systems, Inc. Amendment and Restatement No.4 to Rights Agreement. ARTICLE VI COVENANTS AND AGREEMENTS 6.1 Conduct of Business of the Company. During the period from the date hereof and continuing until the earlier of the Closing Date or the termination of this Agreement pursuant to the terms of Section 7.1 hereof, Seller hereby agrees to cause the Company to conduct its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay or cause to be paid the debts and Taxes of the Company when due, to pay or perform other obligations when due and, to the extent consistent with such business, use its reasonable best efforts consistent with past practice and policies to preserve intact the Company's present business organizations, keep available the services of the Company's present officers and key employees and preserve the Company's relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it, all with the goal of preserving unimpaired the Company's goodwill and ongoing businesses at the Closing Date. Seller shall promptly notify Purchaser of any event, occurrence or emergency not in the ordinary course of business of the Company, and any material event involving the Company. Except as expressly contemplated by this Agreement, Seller shall not permit the Company to, without the prior written consent of Purchaser: (a) enter into any commitment or transaction not in the ordinary course of business or any commitment or transaction of the type described in Section 2.7 hereof; -32- 38 (b) enter into any license agreement with respect to the Company Intellectual Property with any person or entity or with respect to the Intellectual Property of any person or entity; (c) transfer to any person or entity any rights to the Company Intellectual Property; (d) enter into or amend any Contract pursuant to which any other party is granted marketing, distribution or similar rights of any type or scope with respect to any products or technology of the Company; (e) amend or otherwise modify (or agree to do so), except in the ordinary course of business, or violate the terms of, any of the Contracts set forth or described in the Disclosure Letter; (f) commence or settle any litigation; (g) declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of the Company, or repurchase, redeem or otherwise acquire, directly or indirectly, any shares of the capital stock of the Company (or options, warrants or other rights exercisable therefor); (h) issue, grant, deliver or sell or authorize or propose the issuance, grant, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue or purchase any such shares or other convertible securities; (i) cause or permit any amendments to the Certificate of Incorporation or the Bylaws of the Company; (j) acquire or agree to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the Company's business; (k) sell, lease, license or otherwise dispose of any of its properties or assets, except in the ordinary course of business and consistent with past practices; (l) incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others; -33- 39 (m) grant any loans to others or purchase debt securities of others or amend the terms of any outstanding loan agreement, except in the ordinary course of business and consistent with past practices; (n) grant any severance or termination pay to any director or officer, or to any other employee except payments made pursuant to standard written agreements outstanding on the date hereof; (o) adopt or amend any employee benefit plan, or enter into any employment contract, pay or agree to pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates of its employees or accelerate the vesting of any outstanding options or other rights to purchase capital stock, or capital stock of the Company subject to vesting; (p) revalue any of its assets, including, without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; (q) pay, discharge or satisfy, in an amount in excess of $10,000 in any individual case, or $25,000 in the aggregate, any claim, liability or obligation, whether absolute, accrued, asserted or unasserted, contingent or otherwise, other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in the Audited Special-Purpose Balance Sheet; (r) make or change (or permit to be made or changed) any material election in respect of Taxes, adopt or change (or permit to be adopted or changed) any accounting method in respect of Taxes, enter into any closing agreement or settle any claim or assessment in respect of Taxes (or permit the same), or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes (or permit the same); (s) enter into any strategic alliance or joint marketing arrangement or agreement; (t) take, or agree in writing or otherwise to take, any of the actions described in Sections 6.1(a) through 6.1(s) hereof, or any other action that would prevent the Company from performing or cause the Company not to perform its covenants hereunder; or (u) fail to take, or cause to be taken, any action that is necessary or advisable to cause the representations and warranties of Seller set forth in Article II hereof to be accurate as of the Closing Date. 6.2 Tax Matters. (a) Liability of Seller for Taxable Periods Ending Before Closing Date. Seller shall be liable for, and shall indemnify and hold Purchaser harmless against, all income, franchise or similar Taxes of, or payable by, the Company for any taxable year or taxable period ending before -34- 40 the Closing Date (the "Pre-Closing Period"), and all other Taxes attributable to the Pre-Closing Period, except to the extent such Taxes have been reserved for on the Audited Special-Purpose Balance Sheet. Seller shall file all Tax Returns relating to the Company for the Pre-Closing Period. The amount of any liability for Taxes for the Pre-Closing Period shall be determined on the basis of the Company's permanent records and consistent with the past income tax accounting methods utilized in preparing its prior income tax returns. (b) Liability of Purchaser for Taxable Periods Commencing On or After Closing Date. Except as otherwise provided in Section 6.2(a) hereof, Purchaser and the Company shall be liable for, and shall indemnify and hold Seller and any of its affiliates harmless against, (i) any and all Taxes of, or payable by, the Company for any taxable year or taxable period commencing after the Closing Date, or (ii) any Taxes relating to operations, acts or omissions of Purchaser or the Company other than in the ordinary course of business that occur after the Closing on the Closing Date. Purchaser shall file all Tax Returns relating to the Company for any taxable period commencing after the Closing Date. (c) Taxable Period Commencing Before the Closing Date and Ending After the Closing Date. Purchaser shall cause the Company to pay all Taxes of the Company for any taxable year or taxable period commencing before and ending after the Closing Date (the "Closing Period") and shall file all Tax Returns relating to the Closing Period. Upon timely notice from the Purchaser, Seller shall pay to the Company prior to the date any payment for Taxes described in this Section 6.2(c) are due an amount equal to the excess, if any, of (i) the Taxes that would have been due if the Closing Period had ended at the Closing, over (ii) the Taxes which are described in this Section 6.2(c) and which have been reserved for on the Audited Special-Purpose Balance Sheet. (d) Refunds or Credits. Any refunds or credits of Taxes for which Seller is liable pursuant to Section 6.2(a) or 6.2(c) hereof shall inure to the benefit and be solely for the account of Seller and, to the extent that such refunds or credits are attributable to Taxes for which Purchaser is liable pursuant to Section 6.2(b) or 6.2(c) hereof (or which are reflected in the Audited Special-Purpose Balance Sheet), such refunds or credits shall inure to the benefit and be solely for the account of Purchaser. Purchaser shall cause the Company promptly to forward to Seller or to reimburse Seller for any such refunds or credits due Seller after receipt thereof by either Purchaser or the Company, and Seller shall promptly forward to the Company or reimburse the Company for any refunds or credits due the Company after receipt thereof by Seller of such refunds or credits that are for the account of the Company hereunder. (e) Mutual Cooperation. As soon as practicable, but in any event within thirty (30) days after Seller's or Purchaser's request, as the case may be, Purchaser shall or shall cause the Company to deliver to Seller, or Seller shall deliver to Purchaser, such information and other data in the possession of Seller, Purchaser or the Company, as the case may be, relating to the Tax Returns and Taxes of the Company, including such information and other data customarily required by Seller or Purchaser, as the case may be, to cause the payment of all Taxes or to permit the preparation of any Tax Returns for which it has responsibility or liability or to respond to audits by -35- 41 any taxing authorities with respect to any Tax Returns or Taxes for which it has any responsibility or liability hereunder or otherwise or to otherwise enable Seller or Purchaser, as the case may be, to satisfy its accounting or Tax requirements, and shall make available such knowledgeable employees of the Company or Seller, as the case may be, as Seller or Purchaser may reasonably request. For a period of seven (7) years after the Closing and, if at the expiration thereof any Tax audit or judicial proceeding is in progress or the applicable statute of limitations has been extended, for such longer period as such audit or judicial proceeding is in progress or such statutory period is extended, Purchaser shall, and shall cause the Company to, maintain and make available to Seller, on Seller's reasonable request, copies of any and all information, books and records referred to in this Section 6.2(e). After such period, Purchaser or the Company may dispose of such information, books and records, provided that prior to such disposition Purchaser shall give Seller a reasonable opportunity to take possession of such information, books and records. (f) Contests. Whenever any taxing authority asserts a claim, makes an assessment or otherwise disputes or affects the Tax reporting position of the Company for periods ending on or prior to the Closing Date or the amount of Taxes for which Seller is or may be liable hereunder, Purchaser shall, promptly upon receipt by Purchaser or the Company of notice thereof, inform Seller, and Seller shall have the right to control any resulting proceedings and to determine whether and when to settle any such claim, assessment or dispute, to the extent such proceedings or determinations affect the Tax reporting position of the Company for periods ending on or prior to the Closing Date or the amount of Taxes for which Seller is liable hereunder. Whenever any taxing authority asserts a claim, makes an assessment or otherwise disputes the amount of Taxes for which Purchaser is liable hereunder, Seller shall inform Purchaser promptly upon receiving notice thereof. Purchaser shall have the right to control any resulting proceedings and to determine whether and when to settle any such claim, assessment or dispute, but only to the extent such proceedings affect the amount of Taxes for which Purchaser is liable hereunder and otherwise Seller shall control such proceedings and settlements; provided, however, that Purchaser shall not, unless otherwise required by law, take any position on any Tax Return or in any contest or proceeding that is inconsistent with this Agreement or a position taken by Seller and its affiliates (including the Company) with respect to Taxes incurred on or prior to the Closing Date. (g) Resolution of Disagreements Between Seller and Purchaser. If Seller and Purchaser disagree as to the amount for which each is liable under this Section 6.2, Seller and Purchaser shall promptly consult with each other in an effort to resolve such dispute. If any such point of disagreement cannot be resolved within fifteen (15) days of the date of consultation, Seller and Purchaser shall jointly select a Neutral Auditor to act as an arbitrator to resolve all points of disagreement concerning Tax accounting matters with respect to this Agreement. If the parties cannot agree on the selection of a Neutral Auditor within fifteen (15) days, then such Neutral Auditor shall be selected in accordance with the procedures set forth in Section 1.4(d) hereof. 6.3 WARN Act. Purchaser and Seller agree that for purposes of the United States Worker Adjustment and Retraining Notification Act (the "WARN Act"), the Closing Date shall be the "effective date" as such term is used in the WARN Act. Purchaser acknowledges and represents that it has -36- 42 no present intent to engage in a "mass layoff" or "plant closing" with respect to the Company as defined in the WARN Act. Purchaser agrees that from and after the Closing Date it shall be responsible for any notification required under the WARN Act with respect to the Company and shall indemnify Seller and hold Seller harmless from and against all fines and other payments which may become due under the WARN Act with respect to the Company. 6.4 Supplements to Disclosure Schedule. From time to time prior to the Closing, Seller will promptly supplement or amend the sections of the Disclosure Letter relating to its representations and warranties set forth in Article II hereof with respect to any matter, condition or occurrence hereafter arising which, if existing or occurring at the date hereof, would have been required to be set forth or described in the Disclosure Letter. Except with respect to a supplement or amendment not objected to in writing by Purchaser within five (5) business days after receipt thereof, no supplement or amendment by Seller shall be deemed to cure any breach of any representation or warranty made in this Agreement by Seller or have any effect for the purpose of determining satisfaction by Seller of the conditions set forth in Article V hereof or the compliance by Seller with the covenant set forth in Section 6.1 hereof. 6.5 Reasonable Efforts. Subject to the terms and conditions set forth herein, each party hereto agrees to use all commercially reasonable efforts (i) to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to insure that the conditions set forth in Articles IV and V hereof are satisfied, insofar as such matters are within the control of such party, (ii) to obtain all necessary waivers, consents and approvals as may be required in connection with the transactions contemplated hereby so as to preserve all rights of, and benefits to, the Company thereunder after the consummation of the transactions contemplated hereby, (iii) to effect all necessary registrations and filings, if any, (iv) to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated hereby, and (v) to consummate the transactions contemplated hereby. 6.6 Access to Information. Seller shall afford Purchaser and its accountants, legal counsel and other representatives, reasonable access during normal business hours during the period prior to the Closing Date to (i) all of the Company's properties, books, contracts, commitments and records, (ii) all other information concerning the business, properties and personnel of the Company as Purchaser may reasonably request, and (iii) all key employees of the Company as identified by Purchaser. Seller agrees to provide to Purchaser and its accountants, legal counsel and other representatives copies of internal financial statements (including Tax Returns and supporting documentation) promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 6.6 shall affect or be deemed to modify any representations or warranties set forth herein or the conditions to the obligations of the parties to consummate the transactions contemplated hereby. 6.7 Publicity. Seller and Purchaser will consult with each other and will mutually agree upon any publication or press release of any nature with respect to this Agreement or the transactions -37- 43 contemplated hereby and shall not issue any such publication or press release prior to such consultation and agreement except as may be required by applicable law or by obligations pursuant to any listing agreement with any securities exchange or any securities exchange regulation, in which case the party proposing to issue such publication or press release shall use reasonable efforts to consult in good faith with the other party before issuing any such publication or press release. 6.8 Non-competition and Non-solicitation. As an inducement to Purchaser to enter into this Agreement and consummate the transactions contemplated hereby, Seller hereby agrees as follows: (a) During the period from the Closing Date to and including the fifth (5th) anniversary of the Closing Date (the "Non- Compete Period"), Seller shall not compete in the United States of America, directly or indirectly, nor have any affiliation (as defined below) with any person, corporation, partnership or other business entity or enterprise which engages in, the "dub and ship" business (whether manual, courier, electronic or any technological extension of the foregoing) as that phrase is generally used and understood in the radio, cable and television advertising distribution business. For purposes of this Section 6.8(a), the term "affiliation" shall mean any direct or indirect interest in such entity or enterprise, whether as an officer, director, employee, investor, partner, stockholder, sole proprietor, trustee, consultant, agent, representative, broker or promoter. (b) During the Non-Compete Period, Seller shall not, and shall not permit any of its officers, employees or subsidiaries to (i) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere with the relationship between the Company and any employee thereof, or (iii) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company to cease doing business with Purchaser or the Company or in any way interfere with the relationship between any such customer, supplier, licensee or business relation of the Company. (c) Notwithstanding anything in this Section 6.8 to the contrary, if at any time, in any judicial proceeding, any of the restrictions stated in this Section 6.8 are found by a final order of a court of competent jurisdiction to be unreasonable or otherwise unenforceable under circumstances then existing, Seller agrees that the period, scope or geographical area, as the case may be, shall be reduced to the extent necessary to enable the court to enforce the restrictions to the extent such provisions are allowable under law, giving effect to the agreement and intent of the parties that the restrictions contained herein shall be effective to the fullest extent permissible. (d) Seller acknowledges and agrees that money damages are an adequate remedy for any breach or threatened breach of the provisions of this Section 6.8, and therefore, that Purchaser or its successors or assigns may, in addition to any other rights and remedies existing in its favor, apply to any court of competent jurisdiction for specific performance, injunctive and/or other relief in order to enforce or prevent any violations of the provisions of this Section 6.8 (including the extension of the Non-Compete Period application to Seller by a period equal to the length of court proceedings necessary to stop such violation); provided, however, that Seller is found -38- 44 to have been in violation of the provisions of this Section 6.8. Any injunction shall be available without the posting of any bond or other security. In the event of an alleged breach or violation by Seller of any of the provisions of this Section 6.8, the Non-Compete Period will be tolled until such alleged breach or violation is resolved; provided, however, that if Seller is found to have not violated the provisions of this Section 6.8, then the Non-Compete Period will not be deemed to have been tolled. Seller agrees that the restrictions set forth in this Section 6.8 are reasonable in all respects. 6.9 Transfer Restrictions. (a) Restrictions on Transfer. Without limiting the representations set forth herein, Seller hereby further agrees not to sell, assign, transfer, convey, dispose of, pledge or otherwise encumber (each, a "Transfer") all or any portion of the Purchaser Shares unless and until: (i) there is a registration statement filed by Purchaser with, and declared or ordered effective by, the Commission under the Securities Act covering such proposed Transfer of Purchaser Shares and such Transfer is made in accordance with such registration statement; (ii) the Transfer is effected in compliance with Rule 144 promulgated by the Commission under the Securities Act; or (iii) Seller shall have (i) notified Purchaser in writing of its intention to effect such proposed Transfer of Purchaser Shares, (ii) furnished Purchaser with a statement in reasonable detail of the manner and circumstances of such proposed Transfer, (iii) caused the proposed transferee of such Purchaser Shares to agree in advance to take and hold such Purchaser Shares on the terms set forth in this Section 6.9, and (iv) if requested by Purchaser, furnished Purchaser with an unqualified written opinion of legal counsel (which counsel shall be reasonably satisfactory to Purchaser), in form and substance reasonably satisfactory to Purchaser, opining that such proposed Transfer may be effected without registration thereof under the Securities Act; provided, however, that this Section 6.9(a)(ii) shall not apply to any proposed Transfer of Purchaser Shares (A) not involving a change in the beneficial ownership of such Purchaser Shares, or (B) effected under and in compliance with Rule 144 promulgated by the Commission under the Securities Act. (b) Restrictive Legends. (i) Unless otherwise permitted under the terms of this Section 6.9, each certificate or instrument representing Purchaser Shares, and any other securities issued on or in respect of the Purchaser Shares in connection with (A) any stock split, stock dividend, subdivision, combination, consolidation, reclassification or other similar event, or (B) any merger, consolidation, reorganization or other similar event, shall be stamped or otherwise imprinted with a legend, in addition to any other legends required under the laws of the State of California or other applicable state "blue sky" securities laws, in substantially the following form: -39- 45 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE SECURITIES ACT. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE DISTRIBUTED EXCEPT (I) PURSUANT TO A REGISTRATION STATEMENT DECLARED OR ORDERED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT COVERING SUCH SECURITIES, OR (II) IN COMPLIANCE WITH RULE 144, OR (III) PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF SUCH SECURITIES THAT SUCH REGISTRATION OR RULE 144 COMPLIANCE IS NOT REQUIRED UNDER THE SECURITIES ACT AS TO SUCH SALE, OFFER OF SALE, PLEDGE, HYPOTHECATION OR OTHER DISTRIBUTION. THIS CERTIFICATE MUST BE SURRENDERED TO THE ISSUER HEREOF OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE TRANSFER OF ANY INTEREST IN THE SECURITIES REPRESENTED HEREBY. (c) Seller Consent. Purchaser shall not be required to register any Transfer of Purchaser Shares, and may instruct its transfer agent to disregard any attempted Transfer of Purchaser Shares, unless the conditions set forth in this Section 6.9 are satisfied to the extent applicable to any such Transfer. Seller hereby consents to (i) the entry of a notation on the records of Purchaser, and (ii) the delivery of instructions to the transfer agent of the Purchaser Shares which Purchaser may deem necessary or advisable in order to effectuate and implement the restrictions on transfer of Purchaser Shares set forth in this Section 6.9. 6.10 IndeNet Trademarks. Purchaser shall not, and shall not permit any of its subsidiaries or affiliates to, use, exploit, or otherwise hold out to the public in any manner, any of the following trademarks of, or names used by, Seller: "The IndeNet;" "IndeNet;" or "The IndeNet Digital Broadcast Network." 6.11 Debt Guarantees. Purchaser shall indemnify, defend and hold Seller harmless from and against any and claims, costs, expenses and losses that Seller may incur after the Closing arising out of any guarantee or other similar agreement that Seller may have executed in connection with obligations that Seller may have incurred (to the extent that such guarantees have been disclosed to Purchaser) under (i) that certain loan agreement with Republic Acceptance Corporation, (ii) the equipment leases of the Company, and (iii) all bonds posted by the Company as set forth in the Disclosure Letter (collectively, the "Guarantees"). In addition, after the Closing, at no cost to Seller, Purchaser shall use commercially reasonable efforts to promptly cause all of the Guarantees to be cancelled and to cause Seller to be relieved from any and all obligations under the Guarantees. In connection with the release of Seller under the Guarantees, Purchaser shall, if and to the extent required, execute its own guarantees to replace the Guarantees. -40- 46 6.12 Cooperation. Seller shall at all times fully and promptly cooperate with Purchaser to carry out the purposes of this Agreement and to provide, at no cost to Purchaser, such assistance and information as Purchaser shall reasonably require (i) to prepare, within forty five (45) days after the Closing Date, the Company's audited financial statements for the fiscal years ended March 31, 1996 and March 31, 1997, which financial statements shall be in a form appropriate for filing with Purchaser's report on Form 8-K to be filed with the Commission to report the transactions contemplated hereby, and (ii) to complete any filings and reports relating to the Pre-Closing Period required to be filed by the Company with the United States Internal Revenue Service. 6.13 State Qualification. Seller shall promptly pay all costs, fees, charges, taxes and other expenses (including, without limitation, attorneys' fees and expenses) (collectively, "Qualification Costs") incurred by the Company and/or Purchaser after the Closing in connection with efforts to qualify the Company to conduct business as a foreign corporation in good standing under the laws of the States of Illinois and Kentucky. This covenant to pay such Qualification Costs shall be in addition to any indemnification or other promise to pay such Qualification Costs by Seller, and shall not be affected by any disclosure to Purchaser (or Purchaser's knowledge) of the existence of such potential payments for such Qualification Costs. ARTICLE VII TERMINATION 7.1 Termination. (a) This Agreement may be terminated and abandoned at any time prior to the Closing: (i) by the mutual consent of Seller and Purchaser; (ii) by either Seller or Purchaser in the event the Closing has not occurred on or before August 30, 1997 (the "Cut-Off Date"), unless the failure of such consummation shall be due to the failure of the party seeking to terminate this Agreement to comply in all material respects with the agreements and covenants set forth herein to be performed by such party on or before the Cut-Off Date; and (iii) by either Seller or Purchaser in the event any court or governmental or regulatory agency of competent jurisdiction shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated hereby and such order, decree or ruling or other action shall have become final and nonappealable. 7.2 Procedure and Effect of Termination. In the event of the termination and abandonment of this Agreement by Seller or Purchaser pursuant to Section 7.1 hereof, written notice thereof shall forthwith be given to the other party. If the transactions contemplated by this Agreement are terminated as provided herein: -41- 47 (a) Each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same; (b) All confidential information received by any party hereto with respect to the business of any other party or its subsidiaries shall be treated in accordance with the provisions of the Confidentiality Agreement, dated as of April 17, 1997, between Purchaser and Seller (the "Confidentiality Agreement"), which shall survive the termination of this Agreement; and (c) No party to this Agreement shall have any liability to the other party hereto under this Agreement except (i) as stated in subparagraphs (a) and (b) of this Section 7.2, (ii) for any willful breach of any provision of this Agreement, and (iii) as provided in the Confidentiality Agreement. ARTICLE VIII INDEMNIFICATION 8.1 Indemnification. None of the provisions of this Section 8.1 shall apply to the claims, obligations, liabilities, covenants and representations regarding Taxes, which shall be governed solely by the terms of Section 6.2 hereof. (a) Indemnification by Seller. Subject to the limits set forth in Section 7.2(c) and in this Section 8.1, Seller hereby agrees to indemnify, defend and hold Purchaser, its officers, directors, agents and affiliates, harmless from and against any and all losses, damages, costs and reasonable expenses, including, without limitation, reasonable expenses of investigation and defense fees and disbursements of legal counsel and other professionals (collectively, "Losses"), that they may incur (i) arising out of or due to any inaccuracy of any representation or the breach of any warranty, covenant, undertaking or other agreement of Seller set forth herein or the Disclosure Letter; provided, however, that Seller shall have no liability to Purchaser as a result of any inaccuracy of any representation or warranty to the extent that Purchaser had written information prior to the Closing Date clearly indicating that such representation or warranty was untrue or incorrect. (b) Indemnification by Purchaser. Subject to the limits set forth in this Section 8.1, Purchaser agrees to indemnify, defend and hold Seller, its officers, directors, agents and affiliates, harmless from and against any and all Losses that they may incur (i) arising out of or due to any inaccuracy of any representation or the breach of any warranty, covenant, undertaking or other agreement of Purchaser set forth herein, or (ii) arising out of any and all actions, suits, claims and administrative or other proceedings of every kind and nature instituted against Seller at any time to the extent that such Losses (A) relate to or arise out of or in connection with the assets, businesses, operations, conduct, products and/or employees (including former employees) of the Company, (B) relate to or arise out of or in connection with events or omissions occurring after the Closing Date, -42- 48 and (C) do not arise out of any inaccuracy of Seller's representations and warranties in, or a default in the performance of any of Seller's covenants under, this Agreement; provided, however, that Purchaser shall have no liability to Seller as a result of the breach of any representation or warranty to the extent that Seller had written information prior to the Closing Date clearly indicating that such representation or warranty was untrue or incorrect. (c) Survival of Representations and Warranties. The several representations and warranties of the parties set forth herein or in any instrument delivered pursuant hereto shall survive the Closing Date and shall remain in full force and effect thereafter (i) for a period of five (5) years from the Closing Date with respect to claims under Section 2.19 hereof, and (ii) for a period of one (1) year from the Closing Date with respect to any other claims; provided, however, that such representations or warranties shall survive (if at all) beyond such period with respect to any inaccuracy therein or breach thereof, notice of which shall have been duly given within such applicable period in accordance with Section 8.1(d) hereof. Anything to the contrary set forth herein notwithstanding, neither party hereto shall be entitled to recover from the other unless and until the total of all claims of such party for indemnity or damages with respect to any inaccuracy or breach of any such representations or warranties or breach of any covenants, undertakings or other agreements, whether such claims are brought under this Section 8.1 or otherwise, shall exceed $300,000; provided, however, that in the event such claims of a party hereto against the other for indemnity or damages exceed such amount, such party may recover the total amount of such claims. (d) Notice and Opportunity to Defend. If there occurs an event which a party asserts is an indemnifiable event pursuant to Section 8.1(a) or 8.1(b) hereof, the party seeking indemnification shall promptly notify the other party obligated to provide indemnification pursuant hereto (the "Indemnifying Party"). If such event involves any claim or the commencement of any action or proceeding by a third person, the party seeking indemnification will give such Indemnifying Party prompt written notice of such claim or the commencement of such action or proceeding; provided, however, that the failure to provide prompt notice as provided herein will relieve the Indemnifying Party of its obligations hereunder only to the extent that such failure prejudices the Indemnifying Party hereunder. In case any such action shall be brought against any party seeking indemnification and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof and, after notice from the Indemnifying Party to such party seeking indemnification of such election so to assume the defense thereof, the Indemnifying Party shall not be liable to the party seeking indemnification hereunder for any legal expenses of other legal counsel or any other expenses subsequently incurred by such party in connection with the defense thereof. The party seeking indemnification agrees to cooperate fully with the Indemnifying Party and its counsel in the defense against any such asserted liability. The party seeking indemnification shall have the right to participate at its own expense in the defense of such asserted liability. In no event shall an Indemnifying Party be liable for any settlement effected without its prior written consent. -43- 49 (e) Adjustment for Insurance and Taxes. The amount which an Indemnifying Party is required to pay to, for or on behalf of any other party (hereinafter referred to as an "Indemnitee") pursuant to this Section 8.1 shall be adjusted (including, without limitation, retroactively) (i) by any insurance proceeds actually recovered by or on behalf of such Indemnitee in reduction of the related indemnifiable loss (the "Indemnifiable Loss"), and (ii) to take account of any tax benefit actually realized as a result of any Indemnifiable Loss. Amounts required to be paid, as so reduced, are hereafter sometimes called an "Indemnity Payment." If an Indemnitee shall have received or shall have had paid on its behalf an Indemnity Payment in respect of an Indemnifiable Loss and shall subsequently receive insurance proceeds in respect of such Indemnifiable Loss, or actually realize any tax benefit as a result of such Indemnifiable Loss, then the Indemnitee shall pay to the Indemnifying Party the amount of such insurance proceeds or tax benefit or, if lesser, the amount of the Indemnity Payment. 8.2 Arbitration Procedure (a) Purchaser and Seller agree that the arbitration procedure set forth below shall be the sole and exclusive method for resolving and remedying claims for money damages arising out of the provisions of Section 8.1 hereof (the "Disputes"). Nothing in this Section 8.2 shall prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined below) or availing itself of the other remedies set forth in Section 8.3 hereof. The parties hereto hereby agree and acknowledge that, except as otherwise provided in this Section 8.2 or in the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time, the arbitration procedures and any Final Determination hereunder shall be governed by, and shall be enforced pursuant to the Uniform Arbitration Act and applicable provisions of California law. (b) In the event that any party hereto asserts that there exists a Dispute, such party shall deliver a written notice to the other party hereto specifying the nature of the asserted Dispute and requesting a meeting to attempt to resolve the same. If no such resolution is reached within fifteen (15) days after such delivery of such notice, the party delivering such notice of Dispute (the "Disputing Person") may, within forty five (45) business days after delivery of such notice, commence arbitration hereunder by delivering to such other party a notice of arbitration (a "Notice of Arbitration") and by filing a copy of such Notice of Arbitration with the Los Angeles office of the American Arbitration Association. Such Notice of Arbitration shall specify the matters as to which arbitration is sought, the nature of any Dispute, the claims of each party to the arbitration and shall specify the amount and nature of any damages, if any, sought to be recovered as a result of any alleged claim, and any other matters required by the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time to be included therein, if any. (c) Purchaser and Seller each shall select one independent arbitrator expert in the subject matter of the Dispute (the arbitrators so selected shall be referred to herein as "Seller's Arbitrator" and "Buyer's Arbitrator," respectively). In the event that either party fails to select an independent arbitrator as set forth herein twenty (20) days from delivery of a Notice of Arbitration, -44- 50 then the matter shall be resolved by the arbitrator selected by the other party. Seller's Arbitrator and Buyer's Arbitrator shall select a third independent arbitrator expert in the subject matter of the dispute, and the three arbitrators so selected shall resolve the matter according to the procedures set forth in this Section 8.2. If Seller's Arbitrator and Buyer's Arbitrator are unable to agree on a third arbitrator within twenty (20) days after their selection, Seller's Arbitrator and Buyer's Arbitrator shall each prepare a list of three independent arbitrators. Seller's Arbitrator and Buyer's Arbitrator shall each have the opportunity to designate as objectionable and eliminate one arbitrator from the other arbitrator's list within ten days after submission thereof, and the third arbitrator shall then be selected by lot from the arbitrators remaining on the lists submitted by Seller's Arbitrator and Buyer's Arbitrator. (d) The arbitrator(s) selected pursuant to Section 8.2(c) hereof will determine the allocation of the costs and expenses of arbitration based upon the percentage which the portion of the contested amount not awarded to each party bears to the amount actually contested by such party. For example, if Purchaser submits a claim for $1,000, and if the Seller contests only $500 of the amount claimed by Purchaser, and if the arbitrator(s) ultimately resolves the dispute by awarding Purchaser $300 of the $500 contested, then the costs and expenses of arbitration will be allocated 60% (i.e., $300 / $500) to the Seller and 40% (i.e., $200 / $500) to Purchaser. (e) The arbitration shall be conducted from the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time, except as otherwise set forth herein or as modified by the agreement of all of the parties to this Agreement. The arbitrator(s) shall so conduct the arbitration that a final result, determination, finding, judgment and/or award (the "Final Determination") is made or rendered as soon as practicable, but in no event later than ninety (90) days after the delivery of the Notice of Arbitration nor later than ten days following completion of the arbitration. The Final Determination must be agreed upon and signed by the sole arbitrator or by at least two of the three arbitrators (as the case may be). The Final Determination shall be final and binding on all parties and there shall be no appeal from or reexamination of the Final Determination, except for fraud, perjury, evident partiality or misconduct by an arbitrator prejudicing the rights of any party and to correct manifest clerical errors. (f) Purchaser and Seller may enforce any Final Determination in any state or federal court having jurisdiction over the dispute. For the purpose of any action or proceeding instituted with respect to any Final Determination, each party hereto hereby irrevocably submits to the jurisdiction of such courts, irrevocably consents to the service of process by registered mail or personal service and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may have or hereafter have as to personal jurisdiction, the laying of the venue of any such action or proceeding brought in any such court and any claim that any such action or proceeding brought in such court has been brought in an inconvenient forum. (g) If any party shall fail to pay the amount of any damages, if any, assessed against it within ten days of the delivery to such party of such Final Determination, the unpaid amount shall bear interest from the date of such delivery at the lesser of (i) the prime rate of interest -45- 51 announced by Bank of America NT&SA from time to time (which rate shall be adjusted on the effective date of each change in such prime rate) plus 3.00% and (ii) the maximum rate permitted by applicable usury laws. Interest on any such unpaid amount shall be compounded semi-annually, computed on the basis of a 360-day year consisting of twelve 30-day months and shall be payable on demand. In addition, such party shall promptly reimburse the other party for any and all costs or expenses of any nature or kind whatsoever (including but not limited to all attorneys' fees) incurred in seeking to collect such damages or to enforce any Final Determination. 8.3 Remedies. Except as provided in Section 8.2 hereof, Purchaser and Seller each have and will retain all other rights and remedies existing in their favor at law or equity, including, without limitation, any actions for specific performance and/or injunctive or other equitable relief (including, without limitation, the remedy of rescission) to enforce or prevent any violations of the provisions of this Agreement. ARTICLE IX MISCELLANEOUS 9.1 Fees and Expenses. Seller shall bear its own expenses and Purchaser shall bear its own expenses in connection with the negotiation and consummation of the transactions contemplated hereby, including the fees and expenses of any broker or finder retained by the respective party in connection with the transactions contemplated herein; provided, however, that Seller and Purchaser shall each bear an equal portion of any costs and expenses associated with the preparation and filing of additional audit material in respect of the Company requested by the Securities and Exchange Commission in connection with or resulting from the transactions contemplated hereby. 9.2 Governing Law. This Agreement shall be construed under and governed by the laws of the State of California without regard to the principles of conflicts of laws. 9.3 Amendment. This Agreement may not be amended, modified or supplemented except upon the execution and delivery of a written agreement executed by each of the parties hereto. 9.4 No Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party hereto. 9.5 Waiver. Any of the terms or conditions hereof which may be lawfully waived may be waived in writing at any time by each party which is entitled to the benefits thereof. Any waiver of any of the provisions hereof by any party hereto shall be binding only if set forth in an written instrument signed on behalf of such party. No failure to enforce any provision hereof shall be deemed to or shall constitute a waiver of such provision and no waiver of any of the provisions hereof shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. -46- 52 9.6 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and given by (i) physical delivery (effective upon receipt thereof), (ii) by telecopier (effective upon receipt thereof provided an original is received within one (1) business day of such receipt), or (iii) by first class mail (registered or certified mail, postage prepaid, return receipt requested) (effective upon receipt thereof) to the respective parties hereto as follows: If to Purchaser: Digital Generation Systems, Inc. 875 Battery Street San Francisco, CA 94111 (415) 276-6601 (telecopier) (415) 276-6601 (telephone) Attention: President with a copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California (415) 493-6811 (telecopier) (415) 493-9300 (telephone) Attention: John B. Goodrich, Esq. If to Seller: IndeNet, Inc. 16000 Ventura Boulevard Suite 700 Encino, CA 91436 (818) 461-8531 (telecopier) (818) 461-8525 (telephone) Attention: President with a copy to: Troy & Gould Professional Corporation 1801 Century Park East l6th Floor Los Angeles, CA 90067-2367 (310) 201-4746 (telecopier) (310) 553-4441 (telephone) Attention: Istvan Benko, Esq. or to such other address as any party hereto may, from time to time, designate in a written notice given in like manner. 9.7 Complete Agreement. This Agreement and the other documents and writings referred to herein or delivered pursuant hereto contain the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, both -47- 53 written and oral, between the parties with respect to the subject matter hereof and thereof. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 9.8 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered an original, but all of which together shall constitute one and the same instrument. 9.9 Headings. The headings set forth herein are for convenience of reference only and shall not affect in any way the meaning or interpretation of the terms and provisions hereof. 9.10 Severability. Any provision of this Agreement which is determined to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering such or any other provision of this Agreement invalid, illegal or unenforceable in any other jurisdiction. 9.11 Third Parties. Except as specifically set forth or referred to herein, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person or corporation, other than the parties hereto and their permitted successors or assigns, any rights or remedies under or by reason of this Agreement. -48- EX-2.2 3 PREFERRED STOCK PURCHASE AGREEMENT DATED 7/14/97 1 EXHIBIT 2.2 PREFERRED STOCK PURCHASE AGREEMENT by and among DIGITAL GENERATION SYSTEMS, INC., PEQUOT PRIVATE EQUITY FUND, L.P., PEQUOT PARTNERS FUND, L.P. PEQUOT OFFSHORE PRIVATE EQUITY FUND, INC. PEQUOT INTERNATIONAL FUND, INC. and GE CAPITAL INFORMATION TECHNOLOGY SOLUTIONS dated as of July 14, 1997 2 TABLE OF CONTENTS
PAGE ---- SECTION 1. Issuance and Sale of Series A Preferred Stock...................1 1.1. The Purchase.....................................................1 1.2. The Closing......................................................2 1.3. Conditions to Closing............................................3 1.4. Purchase Price Adjustment........................................5 SECTION 2. Representations and Warranties of the Company...................6 2.1. Organization and Good Standing; Power and Authority; Qualifications.................................................6 2.2. Authorization of the Documents...................................6 2.3. Capitalization...................................................6 2.4. Authorization and Issuance of Capital Stock......................7 2.5. SEC Reports......................................................7 2.6. Financial Statements.............................................8 2.7. Absence of Undisclosed Liabilities...............................8 2.8. Absence of Material Changes......................................8 2.9. No Conflict.....................................................10 2.10. Agreements.....................................................10 2.11. Intellectual Property Rights...................................11 2.12. Equity Investments; Subsidiaries...............................13 2.13. Title to Assets and Properties; Insurance......................13 2.14. Employee Benefit Plans.........................................13 2.15. Labor Relations; Employees.....................................15 2.16. Litigation; Orders.............................................15 2.17. Compliance with Laws; Permits..................................15 2.18. Offering Exemption.............................................16 2.19. Disclosure.....................................................16 2.20. Taxes..........................................................16 2.21. Environmental Matters..........................................17 2.22. Consents.......................................................18 2.23. Brokers........................................................19 2.24. Suppliers and Customers........................................19 2.25. Use of Proceeds................................................19 2.26. Holding Company Act and Investment Company Act.................19 SECTION 3. Representations and Warranties of the Purchasers...............19 SECTION 4. Certain Covenants..............................................21 4.1. Access to Records...............................................21
-i- 3 4.2. Affirmative Covenants...........................................21 4.3. Insurance.......................................................22 4.4. Merger, etc.....................................................23 4.5. Transactions with Affiliates....................................23 4.6. Notice of Breach................................................23 4.7. Matters Related to Directors....................................23 4.8. Rights of First Offer...........................................25 4.9. Completion of Certain Matters...................................25 4.10. Subsidiary Stock...............................................26 SECTION 5. Transfer Taxes.................................................26 SECTION 6. Survival of Representations, Warranties, Agreements and Covenants, etc............................................26 SECTION 7. Expenses.......................................................26 SECTION 8. Indemnification................................................27 8.1. General Indemnification.........................................27 8.2. Indemnification Principles......................................27 8.3. Claim Notice....................................................28 SECTION 9. Remedies.......................................................28 SECTION 10. Further Assurances............................................28 SECTION 11. Successors and Assigns........................................28 SECTION 12. Entire Agreement..............................................29 SECTION 13. Notices.......................................................29 SECTION 14. Amendments....................................................30 SECTION 15. Counterparts..................................................30 SECTION 16. Headings......................................................30 SECTION 17. Nouns and Pronouns............................................30 SECTION 18. Governing Law.................................................30 SECTION 19. Publicity.....................................................31 SECTION 20. Severability..................................................31
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EXHIBITS SECTION REFERENCE -------- ----------------- Exhibit A Schedule of Purchasers Preamble Exhibit B Terms of Escrow Agreement 1.1(a) Exhibit C Stock Purchase Agreement for 1.3(b) IndeNet, Inc. Exhibit D Form of Registration Rights 1.3(b) Agreement Exhibit E Certificates of Designation 1.3(b) Exhibit F Form of Opinion of Counsel to the 1.3(b) Company
-iii- 5 Schedules - --------- Schedule 2.1 Foreign Qualification Schedule 2.3 Common Stock Equivalents Schedule 2.6 Financial Statements Schedule 2.7 Undisclosed Liabilities Schedule 2.8 Absence of Changes Schedule 2.10 Contracts Schedule 2.11(b) Payments for Intellectual Property Schedule 2.11(c) Third Party Intellectual Property Rights Schedule 2.12 Equity Investments Schedule 2.13(b) Insurance Schedule 2.14 Employee Benefit Plans and Employment Agreements Schedule 2.15 Employees Schedule 2.16 Litigation Schedule 2.17 Permits Schedule 2.21 Environmental Laws Schedule 2.22 Consents and Approvals Schedule 2.23 Brokers -iv- 6 INDEX OF DEFINED TERMS
TERM SECTION - ---- ------- Accredited Investor 3(e) Acquisition Recitals Acquisition Consideration 1.3(b) Additional Purchasers 1.1(c) Additional Shares 1.3(b) Ancillary Documents 1.3(b) Articles of Incorporation 1.3(b) Balance Sheet 2.6 Benefit Plan 2.14(a) Capital Stock 2.3 Certificate of Designation 1.3(b) Claim Notice 8.3 Closing 1.2(a) Closing Date 1.2(a) Code 2.14(a) Common Stock 2.3 Company Preamble Contract 2.10(a) Conversion Shares 2.4 Deductible 8.1 DSCM 1.3(b) Employee 2.14(a) Employee Agreement 2.14(a) Encumbrances 2.13(a) Environmental Laws 2.21(f) Environmental Liability 2.21(f) ERISA 2.14(a) Escrow Account 1.1(a) Escrow Agent 1.1(a) Escrow Agreement 1.1(a) Escrow Amount 1.1(a) Exchange Act 2.5 Hazardous Material 2.21(f) IndeNet Purchase Agreement 1.3(b) Initial Purchasers 7(b) Intellectual Property 2.11(e) Litigation 2.16 Losses 8.2
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TERM SECTION - ---- ------- Maintenance Amount 4.8 Material Adverse Change 2.6 Material Adverse Effect 2.1 Non-Competition Agreements 1.3(b) Non-voting Observer 4.7(a) Notice 4.8 Pequot Entities 1.3(b) Permits 2.17 Permitted Encumbrances 2.8 Proposed Securities 4.8 Public Authority 2.21(f) Purchase 1.1(a) Purchase Price 1.1(a) Purchaser Entity 8.1 Purchasers Preamble Purchasers' Designee 4.7(a) Registration Rights Agreement 1.3(b) SEC Reports 2.5 Section 16(b) 4.7(a) Securities Act 2.18 Series A Preferred Stock Recitals Software 2.11(f) Subsidiary 2.1 Taxes 2.20 Third Party Software 2.11(g)
-vi- 8 PREFERRED STOCK PURCHASE AGREEMENT AGREEMENT, dated as of July 14, 1997, by and among DIGITAL GENERATION SYSTEMS, INC. (the "Company"), and the parties listed on the Schedule of Purchasers attached to this Agreement as Exhibit A (each hereinafter referred to as a "Purchaser" and collectively referred to as the "Purchasers"). W I T N E S S E T H : WHEREAS, the Company wishes to sell to the Purchasers and the Purchasers wish to purchase from the Company shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock"), each such share convertible into one share of the Common Stock (as defined herein). WHEREAS, the business currently conducted by the Company is the operation of a nationwide multi-media network designed to provide electronic delivery and related services to the broadcast industry by linking providers to broadcast stations. WHEREAS, the Company shall use the proceeds arising from the transaction contemplated hereby solely to finance a portion of the purchase price of the acquisition of Mediatech, Inc., a Delaware corporation and a wholly-owned subsidiary of IndeNet, Inc. (the "Acquisition"). ACCORDINGLY, the parties hereto hereby agree as follows: SECTION 1. Issuance and Sale of Series A Preferred Stock 1.1. The Purchase. (a) At the Closing (as defined in Section 1.2(a)), each Purchaser shall, severally and not jointly, purchase from the Company and the Company shall sell to each Purchaser, the number of shares of Series A Preferred Stock set forth opposite such Purchaser's name on Exhibit A (collectively, the "Purchase") at the purchase price set forth opposite such name on Exhibit A. Subject to Section 1.1(b), the aggregate purchase price to be paid by the Purchasers for the Series A Preferred Stock purchased by them hereunder is as set forth on Exhibit A as Total Purchase Price (the "Purchase Price"), of which (i) the Purchase Price less 14% shall be paid to an account or accounts designated by the Company not less than three business days prior to the Closing and (ii) 14% of the Purchase Price (the "Escrow Amount") shall be paid to an escrow agent (the "Escrow Agent") mutually acceptable to the Company and the Pequot Entities (as defined below) to be held in a Escrow Account (the "Escrow Account") and disbursed by the Escrow Agent pursuant to Section 1.4 hereto and the terms of an escrow agreement in a form mutually satisfactory to the Company, the Pequot Entities and the Escrow Agent (the "Escrow Agreement") and including the terms set forth in Exhibit B. 9 (b) In the event that the Company shall sell Additional Shares (as defined in 1.3(b)(xiv)), the Pequot Entities shall have the right to purchase that portion of the Additional Shares that maintains the Pequot Entities' combined percentage ownership of the Series A Preferred Stock at an ownership level of 51% or more. Upon determination that such sales of Additional Shares will be made (but in no event later than three business days prior to the Closing), the Company shall provide the Pequot Entities with a written notice describing the amount of total Additional Shares to be sold and the amount to be offered to the Pequot Entities in order to maintain the Pequot Entities' 51% ownership level. The Pequot Entities shall, within 24 hours of receipt of such notice, confirm its intention to purchase such shares. The purchase of such Additional Shares shall be on the same terms and conditions as the shares purchased under the Purchase and shall be treated, in all respects, as shares purchased under the Purchase, including, without limitation, the contribution of 14% of the Purchase Price to the Escrow Agent. (c) Subject to Section 1.1(b) above, the Company and the purchasers of the Additional Shares ("Additional Purchasers") described above may, at any time before the Closing (as defined below), execute counterpart signature pages to this Agreement, and such Additional Purchasers will, upon delivery to the Company of such signature pages, become parties to, and bound by, this Agreement, each to the same extent as if they had executed the original agreement. Exhibit A to this Agreement will be amended by the Company to list the Additional Purchasers purchasing shares of Series A Preferred Stock under this Agreement. Upon execution of the above mentioned signature pages, each Additional Purchaser shall be deemed to be a "Purchaser" for all purposes of this Agreement and the Escrow Agreement, and a Holder for purposes of the Registration Rights Agreement. 1.2. The Closing. (a) The closing of the Purchase (the "Closing") shall take place at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, NY 10004 at 9:00 a.m. on July 21, 1997 or on such other date as shall be mutually agreed by the Company and the Purchasers (the "Closing Date"); provided, however, that the closing of the Purchase shall be held simultaneously with the closing of the Acquisition. (b) At the Closing, the Company shall deliver to each Purchaser a certificate or certificates representing the shares of Series A Preferred Stock purchased by such Purchaser, registered in the name of such Purchaser or its nominee. Delivery of such certificates to a Purchaser shall be made against receipt at the Closing by the Company from such Purchaser of the purchase price therefor, which shall be paid by wire transfer to an account designated at least one business day prior to the Closing by the Company. -2- 10 1.3. Conditions to Closing. (a) The obligations of the Company and the Purchasers to consummate the transactions contemplated hereby at the Closing are subject to the satisfaction of the following conditions: no temporary restraining order, preliminary or permanent injunction or other order or decree which prevents the consummation of the transactions contemplated hereby shall have been issued and remain in effect, and no statutes, rule or regulation shall have been enacted by any governmental authority (of the United States or otherwise) which prevents the consummation of the transactions contemplated hereby; provided, however, that the parties shall use their reasonable best efforts to cause any such decree, ruling, injunction or other order to be vacated or lifted. (b) The obligations of the Purchasers to consummate the transactions contemplated hereby at the Closing is subject to the satisfaction or waiver of the following conditions: (i) the representations and warranties of the Company set forth in Section 2 of this Agreement shall be true and correct in all material respects as of the date when made and (unless made as of a specified date) as of the Closing Date; and the Company shall have performed in all material respects its covenants set forth in this Agreement to be performed prior to the Closing Date and shall not have taken any action which (if any shares of Series A Preferred Stock were outstanding) would violate any provision of the Articles of Incorporation (including the Certificate of Designation) or this Agreement, as the case may be (and at the Closing the Company shall deliver to the Purchasers an officer's certificate certifying as to the Company's compliance with the conditions set forth in this clause (i)); (ii) The Company shall contemporaneously close the transactions contemplated by the Acquisition in a form not materially different from the draft Stock Purchase Agreement ("IndeNet Purchase Agreement"), attached hereto as Exhibit C (such materiality to be determined by the Purchasers in their sole discretion), at a total purchase price of less than $29,000,000 and shall not have waived any conditions in the IndeNet Stock Purchase Agreement without the prior written consent of the Purchasers. (iii) The Company and the Purchasers shall have entered into the Registration Rights Agreement in the form of Exhibit D hereto (the "Registration Rights Agreement" and all other contracts, agreements, schedules, certificates and other documents (including, but not limited to, the Certificate of Designation (as defined below) and the Escrow Agreement) being delivered pursuant to or in connection with this Agreement by any party hereto at or prior to the Closing, the "Ancillary Documents"). -3- 11 (iv) The Company shall have delivered to the Purchasers certificates of good standing from California with respect to the Company and New York with respect to the Subsidiary (as defined below) dated as of a date no earlier than ten days prior to the Closing. (v) The Amended and Restated Articles of Incorporation of the Company, as amended, shall have been amended and supplemented by a Certificate of Designation substantially in the form of Exhibit E hereto setting forth the rights and preferences of the Series A Preferred Stock (the "Certificate of Designation"), and the Certificate of Designation shall have been filed with the Secretary of the State of California (the Amended and Restated Articles of Incorporation, as amended, including such Certificate of Designation, the "Articles of Incorporation"); (vi) The Common Stock to be issued upon conversion of the Series A Preferred Stock shall have been approved for quotation on The NASDAQ Stock Market, subject to official notice of issuance; (vii) The Company shall have delivered to the Purchasers a certificate executed by its Secretary certifying (x) a copy of its organizational documents including the Articles of Incorporation and the By-Laws, (y) resolutions authorizing the transaction and (z) incumbency matters. (viii) The Purchasers shall receive from Wilson, Sonsini, Goodrich & Rosati P.C., counsel for the Company, an opinion addressed to the Purchasers, dated as of the Closing, satisfactory in form and substance to the Purchasers, which shall be in the form of the opinions set forth in Exhibit F attached hereto. (ix) In the event that the Purchasers shall designate a person to serve on the board of directors (who, if such person is not an employee of Dawson Samberg Capital Management, Inc. ("DSCM"), the investment manager for each of the Pequot entities listed on Exhibit A (DSCM and such entities referred to as the "Pequot Entities"), shall be reasonably acceptable to the Company) such designee shall have been elected to the board of directors of the Company effective, without any further action, as of the Closing Date. (x) The Company shall have entered into non-competition agreements (the "Non-Competition Agreements"), in a form mutually acceptable to the Company and the Purchasers, with Henry W. Donaldson. (xi) The Company shall have obtained, with financially sound and reputable insurers, directors' and officers' liability insurance in an amount not less -4- 12 than $5,000,000 or a binder with respect to such insurance in form satisfactory to the Purchasers. (xii) The Company shall have performed and satisfied all covenants and agreements required by this Agreement to be performed or satisfied by it at or prior to the Closing. (xiii) Without limiting the generality of Section 1.3(b)(i), no Material Adverse Effect shall have occurred, nor shall any event or events have occurred which would reasonably likely to have a Material Adverse Effect. (xiv) The Company shall not have sold additional shares ("Additional Shares") of Series A Preferred Stock to any persons other than the Purchasers unless (x) the terms and conditions are the same as those set forth herein and (y)(A) if the cash portion of the consideration in the Acquisition ("Acquisition Consideration") is less than $13 million the total purchase price of such Additional Shares shall not exceed $4 million or (B) if the Acquisition Consideration is more than $13 million, the total purchase price of such Additional Shares shall not exceed the sum of (1) $4 million plus (2) the amount by which the cash portion of the Acquisition Consideration exceeds $13 million (up to a maximum of $2 million). Pursuant to the procedures set forth in Section 1.1(b), the Pequot Entities shall, at their option, in the aggregate, after considering the sales of the Additional Shares and the sale to GE Capital Information Technology Solutions, own 51% or more of the outstanding shares of Series A Preferred Stock. (xv) The Company shall have entered into the Escrow Agreement. 1.4. Purchase Price Adjustment. In the event the Company (a) shall have less than $17.8 million in total revenue for fiscal third and fourth quarter, 1997 combined (based on the audited financial statements for the year ended December 31, 1997) or (b) insofar as it is possible to support a tape interface with an MPEG disk-based system, the Sony RS 422 Standard Video Transmission Interface shall not be completed and available for customer use by December 31, 1997 (as determined by the Purchasers in their sole reasonable discretion), then the Purchasers shall be entitled to instruct the Escrow Agent to pay one-eighth (1/8) of the Deposit Amount to the Purchasers, payable beginning March 31, 1998 and continuing on a quarterly basis until the earlier of such time as the (x) Deposit Amount has been fully distributed or (y) anytime after the public announcement by the Company of the fourth quarter, 1997, earnings results, the Market Price (as defined in the Certificate of Designation) per share of the Common Stock shall exceed the Conversion Price (as defined in the Certificate of Designation) multiplied by 2 for at least 25 days out of 40 consecutive Trading Days (as defined in the Certificate of Designation). -5- 13 SECTION 2. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchasers follows: 2.1. Organization and Good Standing; Power and Authority; Qualifications. Each of the Company and its subsidiary, PDR Productions, Inc., a New York corporation (the "Subsidiary") (a) are duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and (b) has all requisite power and authority to own, lease and operate its properties and to carry on its business as presently conducted and as proposed to be conducted. The Company has all requisite power and authority to enter into and carry out the transactions contemplated by this Agreement and the Ancillary Documents to which it is a party. Each of the Company and its Subsidiary is qualified to transact business as a foreign corporation in, and is in good standing under the laws of, those jurisdictions listed on Schedule 2.1 under its name, which jurisdictions constitute all of the jurisdictions wherein the character of the property owned or leased or the nature of the activities conducted by it makes such qualification necessary and where failure to so qualify would individually or in the aggregate have a material adverse effect on properties, business, prospects, operations, earnings, assets, liabilities or the condition (financial or otherwise) of the Company and its Subsidiary taken as a whole, whether or not in the ordinary course of business (a "Material Adverse Effect"). 2.2. Authorization of the Documents. The execution, delivery and performance by the Company of this Agreement and each of the Ancillary Documents to which it is a party has been duly authorized by all requisite corporate action on the part of the Company (and do not or will not require the approval or consent of the shareholders of the Company), and this Agreement and each of the Ancillary Documents constitutes a legal, valid and binding obligation of the Company which is a party thereto, enforceable against the Company in accordance with its terms except to the extent that enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally and except to the extent that the remedy of specific performance and injunction and other forms of equitable relief may be subject to equitable defenses. 2.3. Capitalization. The authorized capitalization of the Company immediately prior to the date of the Closing consists of: (a) 5,000,000 shares of Preferred Stock, of which (i) the shares to be sold pursuant to the Purchase and the Additional Shares to be issued as permitted herein have been designated Series A Preferred Stock and (ii) no shares of Series A Preferred Stock are issued and outstanding and all such outstanding shares are validly issued, fully paid and nonassessable and free and clear of all Encumbrances; and (b) 30,000,000 shares of Common Stock, no par value per share ("Common Stock"), of which 11,739,617 shares are issued and outstanding and all such outstanding shares are validly issued, fully paid and nonassessable and free and clear of all Encumbrances (as defined below). No class of capital stock ("Capital Stock") of the Company is entitled to preemptive rights. Except as listed on Schedule 2.3 hereto, there -6- 14 are no outstanding options, warrants, subscription rights, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of any class of Capital Stock of the Company, or Contracts, by which the Company or its subsidiary is or may become bound to issue additional shares of its Capital Stock or options, warrants or other rights to purchase or acquire any shares of its Capital Stock. Between the date hereof and the Closing Date, the Company will not have changed the amount of its authorized Capital Stock, or have subdivided or otherwise changed any shares of any class of its Capital Stock, whether by way of reclassification, stock split or otherwise, or have issued any additional shares of Capital Stock other than pursuant to the exercise of securities outstanding on the date hereof and set forth in Schedule 2.3 hereto and will not have granted any options, warrants or other rights to purchase or acquire shares of the Company's Capital Stock. Except as set forth in Schedule 2.3 hereto, the Company has not declared or paid any dividend or made any other distribution of cash, stock or other property to its shareholders. 2.4. Authorization and Issuance of Capital Stock. The authorization, issuance, sale and delivery of the Series A Preferred Stock pursuant to this Agreement and the authorization, reservation, issuance, sale and delivery of the shares of Series A Preferred Stock and the Conversion Shares (as defined below) have been duly authorized by all requisite corporate action on the part of the Company, and when issued, sold and delivered in accordance with this Agreement, the Series A Preferred Stock and the Conversion Shares will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof, free and clear of any Encumbrances, other than Encumbrances, if any, arising as a result of actions taken by the Purchasers, and not subject to preemptive or similar rights of the shareholders of the Company or others. The terms, designations, powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of any series of Preferred Stock of the Company are as stated in the Company's Articles of Incorporation. No shareholder approval is required to consummate the transaction contemplated hereunder. The Company has reserved a sufficient number of shares of Series A Preferred Stock for issuance to the Purchasers on the date hereof in accordance with this Agreement and (ii) Common Stock for issuance upon conversion or exercise of all other common stock equivalents outstanding on the date hereof. The shares of Common Stock issuable upon the conversion of the Series A Preferred Stock issued or issuable to the Purchasers hereunder shall be referred to collectively as the "Conversion Shares." 2.5. SEC Reports. The Company has filed all proxy statements, reports and other documents required to be filed by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act") from and after February 6, 1996; and the Company has furnished the Purchasers true and complete copies of all annual reports, quarterly reports, proxy statements and other reports under the Exchange Act filed by the Company from -7- 15 and after such date, each as filed with the Securities and Exchange Commission (collectively, the "SEC Reports"). Each SEC Report was in compliance in all material respects with the requirements of its respective report form and did not on the date of filing contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and as of the date hereof there is no fact or facts not disclosed in the SEC Reports which relate specifically to the Company and which individually or in the aggregate may have a Material Adverse Effect. 2.6. Financial Statements. The financial statements (including any related schedules and/or notes) included in the SEC Reports have been prepared in accordance with generally accepted accounting principles consistently followed (except as indicated in the notes thereto) throughout the periods involved and fairly present in all material respects the consolidated financial condition, results of operations and changes in shareholders' equity of the Company as of the respective dates thereof and for the respective periods then ended (in each case subject, as to interim statements, to changes resulting from year-end adjustments, none of which were material in amount or effect). Except as set forth in Schedule 2.6, the Company has no liabilities or obligations, contingent or otherwise, except (i) liabilities and obligations in the respective amounts reflected or reserved against in the Company's balance sheet (the "Balance Sheet") as of March 31, 1997 included in the SEC Reports or (ii) liabilities and obligations incurred in the ordinary course of business since March 31, 1997 which individually or in the aggregate do not have a Material Adverse Effect. Since March 31, 1997, the Company has operated its business only in the ordinary course and there has not been individually or in the aggregate any change that would have a Material Adverse Effect (a "Material Adverse Change") other than changes disclosed in the SEC Reports or otherwise set forth in Schedule 2.6 hereto. The financial forecasts furnished by the Company to the Purchasers have been reasonably prepared and reflect the best currently available estimates and judgment of the Company's management as to the expected future financial performance of the Company and its Subsidiary. 2.7. Absence of Undisclosed Liabilities. Except as set forth on Schedule 2.7, the Company has no liabilities or obligations (whether accrued, absolute, contingent, unliquidated or otherwise, whether or not known, whether due or to become due and regardless of when asserted) other than (i) liabilities or obligations reserved against or otherwise disclosed in the Balance Sheet or the footnotes thereto, (ii) liabilities or obligations incurred after March 31, 1997 in the ordinary course of business consistent (in amount and kind) with past practice (none of which is a liability resulting from breach of contract, breach of warranty, tort, infringement, claim or lawsuit) and that do not exceed $75,000 in a single transaction. 2.8. Absence of Material Changes. Except as set forth on Schedule 2.8 and -8- 16 except as otherwise expressly contemplated by this Agreement, since March 31, 1997, the business of the Company and its Subsidiary has been conducted in the ordinary course, consistent with past practice and there has not been (a) any Material Adverse Change, nor has any event or change occurred which could reasonably result in a Material Adverse Change, in the condition (financial or otherwise), results of operations, business, assets, liabilities or prospects of the Company or its Subsidiary or any event or condition which could reasonably be expected to have such a Material Adverse Change, (b) any waiver or cancellation of any valuable right of the Company or its Subsidiary, or the cancellation of any material debt or claim held by the Company or its Subsidiary, (c) any payment, discharge or satisfaction of any claim, liability or obligation of the Company or its Subsidiary other than in the ordinary course of business except where such payment, discharge or satisfaction would not, individually or in the aggregate, have a Material Adverse Effect, (d) any Encumbrance upon the assets of the Company or its Subsidiary other than any Permitted Encumbrance, (e) any declaration or payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any securities of the Company, (f) any issuance of any stock, bonds or other securities of the Company or its Subsidiary, (g) any sale, assignment or transfer of any tangible or intangible assets of the Company or its Subsidiary except in the ordinary course of business, (h) any loan by the Company or its Subsidiary to any officer, director, employee, consultant or shareholder of the Company or its Subsidiary (other than advances to such persons in the ordinary course of business in connection with travel and travel related expenses), (i) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property, condition (financial or otherwise), results of operations or prospects of the Company or its Subsidiary, (j) any increase, direct or indirect, in the compensation paid or payable to any officer or director of the Company or its Subsidiary, other than in the ordinary course of business, to any other employee, consultant or agent of the Company or its Subsidiary, (k) any change in the accounting methods, practices or policies of the Company or its Subsidiary, (l) any indebtedness incurred for borrowed money by the Company or its Subsidiary other than in the ordinary course of business, (m) any amendment to or termination of any material agreement to which the Company or its Subsidiary is a party other than the expiration of any such agreement in accordance with its terms, (n) any change in the laws or regulations governing the Company or its Subsidiary, (o) any Material Adverse Change in the manner of business or operations of the Company or its Subsidiary (including, without limitation, any accelerations or deferral of the payment of accounts payable or other current liabilities or deferral of the collection of accounts or notes receivable), (p) any capital expenditures or commitments therefor by the Company or its Subsidiary other than in the ordinary course of business and pursuant to an annual budget as approved by the Board of Directors that aggregate in excess of $50,000, (q) any amendment of the articles of incorporation, Bylaws or other organizational documents of the Company or its Subsidiary, (r) any transaction entered into by the Company or its Subsidiary other than in -9- 17 the ordinary course of business or any other material transactions entered into by the Company or its Subsidiary whether or not in the ordinary course of business, or (s) any agreement or commitment (contingent or otherwise) by the Company or its Subsidiary to do any of the foregoing. For purposes of this Agreement, "Permitted Encumbrances" shall mean (i) those consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of such property or irregularities in title thereto which, individually and in the aggregate, do not materially impair the use of such property, (ii) warehousemen's, mechanics', carriers', landlords', repairmen's or other similar Encumbrances arising in the ordinary course of business and securing obligations not yet due and payable, and (iii) other Encumbrances which arise in the ordinary course of business and which individually and in the aggregate do not materially impair its use of such property or its ability to obtain financing by using such asset as collateral. 2.9. No Conflict. The execution and delivery by the Company of the Agreement and the Ancillary Documents to which it is a party and the consummation by the Company of the transactions contemplated hereby and thereby and its compliance with the provisions hereof and thereof (including, without limitation, the issuance, sale and delivery by the Company of the Series A Preferred Stock and the Conversion Shares) will not (a) violate any provision of any domestic (federal, state or local) or foreign law, statute, rule or regulation, or any ruling, writ, injunction, order, judgment or decree of any court, administrative agency or other governmental body applicable to it, or any of its properties or assets except where such violation would not, individually or in the aggregate, have a Material Adverse Effect, (b) conflict with, or result in any violation or breach of, or constitute (with due notice or lapse of time, or both) a default or loss of a benefit under, or cause or permit the acceleration under, the terms, conditions or provisions of any Contract to which it is a party or its properties or assets is subject, except for defaults which would not, individually or in the aggregate, have a Material Adverse Effect (c) result in the creation or imposition of any Encumbrance upon any of its properties or assets, except for Encumbrances which would not individually or in the aggregate have a Material Adverse Effect or (d) violate its organizational documents. 2.10. Agreements. (a) Except as set forth on Schedule 2.10, the Company or its Subsidiary are not a party to, and are not bound or subject to, any indenture, mortgage, guaranty, lease, license or other contract, agreement or understanding, written or oral (a "Contract"), other than any Contract which (i) pursuant to its terms, has expired, been terminated or fully performed by the parties, and in each case, under which the Company and its Subsidiary have no liability, contingent or otherwise, or (ii) involves monthly payments to or from the Company and/or its Subsidiary (as opposed to an indemnity agreement or similar contract under which a party is not required to make fixed monthly payments) which monthly payments do not aggregate on an annual basis to $50,000 or more, and in each case, is not material to the business, condition (financial or otherwise), operations or prospects of the Company or its Subsidiary. -10- 18 (b) Each of such Contracts is, as of the date hereof, and will continue after the Closing to be, legal, valid, binding and in full force and effect and enforceable in accordance with its terms. There is no breach, violation or default by the Company (or, to the best knowledge of the Company, any other party) under any such Contract except where such breach, violation or default would not, individually or in the aggregate, have a Material Adverse Effect, and no event (including, without limitation, the consummation of the transactions contemplated by this agreement) which, with notice or lapse of time or both, would (A) constitute a breach, violation or default by the Company (or, to the best knowledge of the Company, any other party) under any such Contract except where such breach, violation or default would not, individually or in the aggregate, have a Material Adverse Effect, or (B) give rise to any lien or right of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration against the Company under any such Contract. Except as set forth on Schedule 2.10, the Company is not or, to the knowledge of the Company, no other party to any of such Contracts (i) is in arrears in respect of the performance or satisfaction of the terms and conditions on its part to be performed or satisfied under any of such Contracts or (ii) has granted or has been granted any waiver or indulgence under any of such Contracts or has repudiated any provision thereof. 2.11. Intellectual Property Rights. (a) Except as disclosed on Schedule 2.11 hereto, (i) the Company owns or has the right to use pursuant to license, sub-license, agreement or permission all of its Intellectual Property (as defined below), except where the absence of any thereof would not individually or in the aggregate have a Material Adverse Effect; (ii) the Company has not interfered with, infringed upon or misappropriated any Intellectual Property rights of third parties, except for interferences, infringements and misappropriations which would not individually or in the aggregate have a Material Adverse Effect, and the Company has not received any claim, demand or notice alleging any such interference, infringement or misappropriation (including any claim that it must license or refrain from using any Intellectual Property rights of any third party). To the Company's knowledge no third party has interfered with, infringed upon or misappropriated any Intellectual Property rights of the Company, except for interferences, infringements and misappropriations which would not individually or in the aggregate have a Material Adverse Effect. (b) Except as set forth on Schedule 2.11(b), neither the Company nor the Subsidiary is obligated to pay any amount, whether as royalty, license fee or other payment, to any person in order to make, use, or sell any Intellectual Property. (c) Except as set forth on Schedule 2.11(c), the operation of the Company and its Subsidiary as presently operated does not need to use or rely upon any Intellectual Property rights of third parties. -11- 19 (d) All royalties due under said licenses have been paid and there exists no default by the Company and its Subsidiary or by any other party under the terms of said licenses, and no event has occurred which, upon the passage of time or the giving of notice, or both, would result in any default by the Company and its Subsidiary, or by any other party to the license or prevent the Company from exercising and obtaining the benefits of any options contained therein except where such default would not, individually or in the aggregate, have a Material Adverse Effect. (e) As used in this Agreement, "Intellectual Property" means all intellectual property owned, leased, licensed, and used by the Company or its Subsidiary, including without limitation, (i) all world wide inventions and discoveries (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations thereof, (ii) all trademarks, service marks, trade dress, logos, trade names and corporate names, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all applications, registrations, renewals and derivatives in connection therewith, (ii) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith, (iv) all mask works and all applications, registrations and renewals in connection therewith, (v) all know-how, trade secrets and confidential business information, whether patentable or unpatentable and whether or not reduced to practice (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, addresses, phone numbers, pricing and cost information, and business and marketing plans and proposals), (vi) all Software, (vii) all other proprietary rights of any type of description (regardless of whether the same have been formally registered), (viii) all copies and tangible embodiments thereof (in whatever form or medium) and (ix) all licenses and agreements in connection with the foregoing. (f) As used in this Agreement, "Software" means any and all versions, releases, and predecessors of the software and computer programs of the Company or its Subsidiary, including all such software and computer programs in machine readable source code forms and in machine executable object code forms and all related specifications (including, without limitation, all logic architectures, algorithms and logic flows and all physical, functional, operating and design parameters), any data used by or related to Software, work in progress relating to corrections, modifications or enhancements, operating systems and procedures (including development methodology), designs, design revisions, related applications, work benches, software in any language, concepts, ideas, processes, techniques, software designs and test tools, third party -12- 20 software interfaces written by them and all methods of implementation and packaging, together with all associated know-how and show-how. (g) As used in this Agreement, "Third Party Software" means software or computer programs used in the operation of the Company and its Subsidiary (specifically, in connection with servicing clients) as presently conducted or currently anticipated to be conducted and that are not owned by the Company. 2.12. Equity Investments; Subsidiaries. Except as set forth on Schedule 2.12, the Company has never had, nor does it presently have, any subsidiaries, nor has it owned, nor does it presently own, whether directly or indirectly owned, any capital stock or other proprietary interest, directly or indirectly, in any corporation, association, trust, partnership, joint venture or other entity. 2.13. Title to Assets and Properties; Insurance. (a) The Company has good and marketable title, or a valid leasehold interest in or contractual right to use, all of its assets (including Third Party Software) and properties, free and clear of any mortgages, judgments, claims, liens, security interests, pledges, escrows, charges or other encumbrances of any kind or character whatsoever ("Encumbrances") except in each case for such defects in title and such other liens and Encumbrances which do not individually or in the aggregate materially detract from the value to the Company of the properties and assets of the Company and its Subsidiary taken as a whole. (b) The Company and its Subsidiary maintain insurance in such amounts (to the extent available in the public market), including self-insurance, retainage and deductible arrangements, and of such a character as is reasonable for companies engaged in the same or similar business and for companies located in San Francisco. Schedule 2.13(b) sets forth a list of all insurance coverage carried by the business and/or the Company, the carrier and terms and amount of coverage. 2.14. Employee Benefit Plans. (a) Schedule 2.14 hereto contains a true and complete list of (i) each written plan, program, policy, payroll practice, contract, agreement or other arrangement, or commitment therefore, providing for compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other employee benefits of any kind, funded or unfunded, which is now or previously has been sponsored, maintained, contributed to or required to be contributed to by the Company or pursuant to which the Company has any liability, contingent or otherwise, including, but not limited to, any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (each, a "Benefit Plan"); and (ii) each management, employment, bonus, option, equity (or equity related), severance, consulting, non compete, confidentiality or similar agreement or contract (each, an "Employee Agreement"), pursuant to which the -13- 21 Company has any liability, contingent or otherwise, between the Company and any current, former or retired employee, officer, consultant, independent contractor, agent or director of the Company (an "Employee"). Except as identified on Schedule 2.14, the Company does not currently sponsor, maintain, contribute to, nor is it required to contribute to, nor has the Company ever sponsored, maintained, contributed to or been required to contribute to, or incurred any liability to, (i) any "defined benefit plan" (as defined in ERISA Section 3(35)); (ii) any "multiemployer plan" (as defined in ERISA Section 3(37)) or (iii) any Benefit Plan which provides, or has any liability to provide, life insurance, medical, severance or other employee welfare benefits to any Employee upon his or her retirement or termination of employment, except as required by Section 4980B of the Internal Revenue Code (the "Code"). (b) Except with respect to its wholly-owned Subsidiary as disclosed herein, the Company is not nor has ever been (i) a member of a "controlled group of corporations," under "common control" or an "affiliated service group" within the meaning of Sections 414(b), (c) or (m) of the Code, (ii) required to be aggregated under Section 414(o) of the Code, or (iii) under "common control," within the meaning of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of the foregoing Sections, in each case with any other entity. (c) The Company has previously provided to the Purchasers current, accurate and complete copies of all documents embodying or relating to each Benefit Plan and each Employee Agreement, including all amendments thereto, trust or funding agreements relating thereto (if any), the two most recent annual reports (Series 5500 and related schedules) required under ERISA (if any), the most recent determination letter (if any) received from the Internal Revenue Service, the most recent summary plan description (with all material modifications) (if any), and all material communications to any Employee or Employees relating to any Benefit Plan or Employee Agreement. (d) Each Benefit Plan has been established and maintained in accordance with its terms and in compliance with all applicable, laws, statutes, orders, rules and regulations, including but not limited to ERISA and the Code; and each Benefit Plan intended to qualify under Section 401 of the Code is, and since its inception has been, so qualified. (e) The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Benefit Plan or Employee Agreement that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligations to fund benefits with respect to any Employee. -14- 22 2.15. Labor Relations; Employees. Schedule 2.15 hereto lists all employees of the Company with an annual salary in excess of $100,000. Except as set forth on Schedule 2.15 hereto, (i) the Company is not delinquent in payments to any of its employees, for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by the date hereof or amounts required to be reimbursed by them to the date hereof, (ii) the Company is in compliance with all applicable federal, state and local laws, rules and regulations respecting employment, employment practices, labor, terms and conditions of employment and wages and hours except where failure to comply would not, individually or in the aggregate, have a Material Adverse Effect, (iii) the Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, commitment or arrangement with any labor union, and no labor union has requested or, to the best knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company, (iv) there is no labor strike, dispute, slowdown or stoppage actually pending, or, to the best knowledge of the Company, threatened against or involving the Company, (v) to the best knowledge of the Company, no salaried key employee has any plans to terminate his or her employment with the Company. Each of the officers of the Company, each key employee and each other employee of the Company who has or had access to confidential information of the Company and its Subsidiary has executed a confidentiality agreement, and such agreements are in full force and effect. 2.16. Litigation; Orders. Except as set forth on Schedule 2.16, there is no civil, criminal or administrative action, suit, claim, notice, hearing, inquiry, proceeding or investigation at law or in equity by or before any court, arbitrator or similar panel, governmental instrumentality or other agency now pending or, to the best knowledge of the Company, threatened against the Company or its Subsidiary or the assets (including the Intellectual Property) or the Company or its Subsidiary (a "Litigation"). Except as set forth in Schedule 2.16, neither the Company nor its Subsidiary is subject to any order, writ, injunction or decree of any court of any federal, state, municipal or other domestic or foreign governmental department, commission, board, bureau, agency or instrumentality. 2.17. Compliance with Laws; Permits. Except as provided in Schedule 2.17, the Company and its Subsidiary are in compliance, and have been conducted in compliance with, all federal, state, local and foreign laws, rules, ordinances, codes, consents, authorizations, registrations, regulations, decrees, directives, judgments and orders applicable to it except where the failure to comply would not individually or in the aggregate have a Material Adverse Effect. The Company has all federal, state, local and foreign governmental licenses, permits, qualifications and authorizations ("Permits") necessary in the conduct of its business as currently conducted. All such Permits are in full force and effect, and no violations have been recorded in respect of any such Permits; -15- 23 no proceeding is pending or, to the best knowledge of the Company, threatened to revoke or limit any such Permit; and no such Permit will be suspended, cancelled or adversely modified as a result of the execution and delivery of this Agreement or the Ancillary Documents and the consummation of the transactions contemplated hereby or thereby, except where failure to have such Permit would not individually or in the aggregate have a Material Adverse Effect. 2.18. Offering Exemption. Assuming the accuracy of the representations and warranties contained in Section 3 hereof, the offer and sale of the Series A Preferred Stock as contemplated hereby and the issuance and delivery of the Conversion Shares to the Purchasers upon the conversion of the Series A Preferred Stock are each exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") and under applicable state securities and "blue sky" laws, as currently in effect. 2.19. Disclosure. Neither this Agreement nor any certificate, instrument or written statement furnished or made to the Purchasers by or on behalf of the Company in connection with this Agreement or the Ancillary Documents contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact which the Company has not disclosed to the Purchasers or their counsel in writing and of which the Company is aware which materially and adversely affects or which could reasonably be expected to materially and adversely affect the Company or its Subsidiary or the business, financial condition, operations, property, affairs or prospects of the Company or its Subsidiary or the ability of the Company or its Subsidiary to perform its obligations under the Agreement or any of the Ancillary Documents. 2.20. Taxes. The Company and its Subsidiary have filed or caused to be filed all income tax returns which are required to be filed and have paid or caused to be paid all Taxes that have become due, except Taxes the validity or amount of which is being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside. "Taxes," for purposes of this Agreement, means any taxes, assessments, duties, fees, levies, imposts, deductions, withholdings, including, without limitation, income, gross receipts, ad valorem, value added, excise, real or personal property, asset, sales, use, license, payroll, transaction, capital, net worth and franchise taxes, estimated taxes, withholding, employment, social security, workers compensation, utility, severance, production, unemployment compensation, occupation, premium, windfall profits, transfer and gains taxes, or other governmental charges of any nature whatsoever imposed by any government or taxing authority of any country or political subdivision of any country and any liabilities with respect thereto, including any penalties, additions to tax, fines or interest thereon, and includes any liability of the Company and its Subsidiary arising under any tax sharing agreement to which it is or has been a party. -16- 24 2.21. Environmental Matters. Except as listed in Schedule 2.21: (a) There are, with respect to the Company and its Subsidiary, or any predecessor of the foregoing, no past or present violations of Environmental Law (as defined below), nor any actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any liability pursuant to any Environmental Law and neither the Company nor its Subsidiary has received any notice with respect to any of the foregoing nor is any Litigation pending or threatened in connection with any of the foregoing. (b) To the knowledge of the Company, no Hazardous Materials are present on or about any real property currently owned, leased or used by the Company or its Subsidiary and no Hazardous Materials were present on or about any real property previously owned, leased or used by the Company or its subsidiary during the period the property was owned, leased or used by the Company or its Subsidiary, except in the normal course of the Company's or such Subsidiary's business. (c) To the knowledge of the Company, no Hazardous Materials have been released on or about, or where they may pose a threat of migration to, any real property currently owned, leased or used by the Company or its Subsidiary and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company or its Subsidiary during the period the property was owned, leased or used by the Company or its Subsidiary, except as may be required in the normal course of business and in material compliance with applicable Environmental Law. (d) To the knowledge of the Company, no asbestos-containing materials or PCBs are present on or about any property currently owned, leased or used by the Company or its Subsidiary. (e) To the knowledge of the Company, there are not now, nor have there ever been, any underground storage tanks or similar facilities of any kind on or under any real property currently or previously owned, leased or used by the Company or its Subsidiary. (f) For purposes of this Section 2.21, capitalized terms used herein shall have the following meanings: "Environmental Laws" shall mean, at any date, all provisions of federal, state, local or foreign law (including applicable principles of common and civil law), statutes, ordinances, rules, regulations, published standards and directives that have the force and effect of Laws, permits, licenses, judgments, writs, injunctions, decrees and orders enacted, promulgated or issued by any Public Authority, and all indemnity -17- 25 agreements and other contractual obligations, as in effect at such date, relating to (i) the protection of the environment, including the air, surface and subsurface soils, surface waters, groundwaters and natural resources, and (ii) occupational health and safety and exposure of persons to Hazardous Materials. Environmental Laws shall include the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. SectionSection9601 et seq., and any other laws imposing or creating liability with respect to Hazardous Materials. "Environmental Liability" shall mean any liabilities, obligations, costs, losses, payments or damages, including compensatory and punitive damages, incurred (i) to contain, remove, clean up, assess, abate or otherwise remedy any actual or alleged release or threatened release of Hazardous Materials, any actual or alleged contamination (by Hazardous Materials) of air, surface or subsurface soil, groundwater or surface water, or any personal injury or damage to natural resources or property resulting from any such release or contamination, pursuant to the requirements of any Environmental Law or in response to any claim by any Public Authority or other third party under any Environmental Law; (ii) to modify facilities or processes or take any other remedial action in response to any claim by any Public Authority of non-compliance with any Environmental Law; (iii) as a result of the imposition of any civil or criminal fine or penalty by any Public Authority for the violation or alleged violation of any Environmental Law; or (iv) as a result of any action, suit, proceeding or claim by any third party under any Environmental Law. The term "Environmental Liability" shall include: (i) reasonable fees of counsel and consultants (but not any corporate allocation for management time or for the use of similar in-house services or facilities) and (ii) the costs and expenses of any investigation undertaken to ascertain the existence or extent of any potential or actual Environmental Liability. "Hazardous Material" shall mean any substance regulated by any Environmental Law or which may now or in the future form the basis for any Environmental Liability. "Public Authority" shall mean any supranational, national, regional, state or local government court, governmental agency, authority, board, bureau, instrumentality or regulatory body. 2.22. Consents. Except as set forth on Schedule 2.22, no permit, authorization, consent or approval of or by, or any notification of or filing with, any person (governmental or private) is required by the Company in connection with the execution, delivery and performance of the Agreement and the Ancillary Documents to which it is a party, the consummation by the Company of the transactions contemplated hereby or thereby, or the issuance, sale or delivery of the Series A Preferred Stock or the -18- 26 Conversion Shares (other than such notifications or filings required under applicable federal or state securities laws, if any, which shall be made on a timely basis). 2.23. Brokers. Except as listed on Schedule 2.23, neither the Company nor any of its officers, directors, employees or shareholders has employed any broker or finder in connection with the transactions contemplated by this Agreement or the Ancillary Documents. 2.24. Suppliers and Customers. The Company does not have any knowledge of any termination, cancellation or threatened termination or cancellation or limitation of, or any material modification or change in, or expressed material dissatisfaction with the business relationship between the Company or its Subsidiary and any supplier or vendor or customer or client of the Company or its Subsidiary, in each case, of materials or services in an amount in excess of $50,000 per year. 2.25. Use of Proceeds. The Company shall use the proceeds arising from the transactions contemplated hereby to finance a portion of the Acquisition. 2.26. Holding Company Act and Investment Company Act. Neither the Company nor its Subsidiary is: (i) a "public utility company" or a "holding company," or an "affiliate" or a "subsidiary company" of a "holding company," or an "affiliate" of such a "subsidiary company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, or (ii) a "public utility," as defined in the Federal Power Act, as amended, or (iii) an "investment company" or an "affiliated person" thereof or an "affiliated person" of any such "affiliated person," as such terms are defined in the Investment Company Act of 1940, as amended. SECTION 3. Representations and Warranties of the Purchasers. Each of the Purchasers represents and warrants to the Company as of the date hereof as follows: (a) Such Purchaser is acquiring the Series A Preferred Stock for its own account, for investment and not with a view to the distribution thereof within the meaning of the Securities Act. (b) Such Purchaser understands that (i) the Series A Preferred Stock has not been, and that the Conversion Shares will not be, registered under the Securities Act or any state securities laws, by reason of their issuance by the Company in a transaction exempt from the registration requirements thereof and (ii) the Series A Preferred Stock and the Conversion Shares may not be sold unless such disposition is registered under the Securities Act and applicable state securities laws or is exempt from registration thereunder. -19- 27 (c) Such Purchaser further understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to such Purchaser) promulgated under the Securities Act depends on the satisfaction of various conditions, and that, if applicable, Rule 144 may afford the basis for sales only in limited amounts. (d) Such Purchaser has not employed any broker or finder in connection with the transactions contemplated by this Agreement. (e) Such Purchaser is an "Accredited Investor" (as defined in Rule 501(a) under the Securities Act). (f) Such Purchaser is duly organized and validly existing under the laws of the state of its organization and has all power and authority to enter into and consummate the transactions contemplated by the Agreement and the Ancillary Documents. Each of this Agreement and the Ancillary Documents to which it is a party has been duly authorized by all necessary action on the part of such Purchaser. Each of this Agreement and the Ancillary Documents to which it is a party constitutes a valid and binding agreement of such Purchaser enforceable against such Purchaser in accordance with its terms except to the extent that enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally. (g) The execution, delivery and performance by such Purchaser of this Agreement and each of the Ancillary Documents to which it is a party and the consummation by such Purchaser of the transactions contemplated hereby and thereby will not (a) violate any provision of law, statute, rule or regulation, or any ruling, writ, injunction, order, judgment or decree of any court, administrative agency or other governmental body applicable to it, or any of its properties or assets or (b) violate its organizational documents (if any). (h) No permit, authorization, consent or approval of or by, or any notification of or filing (including any filing under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended) with, any person (governmental or private) is required in connection with the execution, delivery and performance by such Purchaser of the Agreement and the Ancillary Documents to which it is a party, or the consummation by such Purchaser of the transactions contemplated thereby. (i) Such Purchasers, in making this investment, have not relied upon any information or representations and warranties of Hambrecht & Quist LLC, including, without limitation, representations and warranties regarding the Company, its officers, financial condition, business and prospects, or the terms of the purchase of the Series A Preferred Stock. -20- 28 SECTION 4. Certain Covenants. 4.1. Access to Records. Subject to appropriate agreements of confidentiality and limitations of interference, the Company shall afford the Purchasers and their employees, counsel and other authorized representatives full access, during normal business hours, upon reasonable advance notice, with due regard to its ongoing operations, to the assets, properties, offices and other facilities, Contracts and books and records of the Company and of its Subsidiary, and to the outside auditors of the Company and their work papers relating thereto, in each case, as the Purchasers may from time to time reasonably request. The parties hereto agree that no investigation by the Purchasers or their representatives shall affect or limit the scope of the representations and warranties of the Company contained herein or in any Ancillary Document delivered pursuant hereto or limit liability for breach of any such representation or warranty. 4.2. Affirmative Covenants. (a) System of Accounting. The books of account and other financial and corporate records of the Company and its subsidiary shall be maintained in accordance with good business and accounting practices and the financial condition of the Company and its Subsidiary shall be accurately reflected in the SEC Reports. (b) Maintenance of Corporate Existence, etc. The Company shall, and shall cause its Subsidiary to, maintain in full force and effect its corporate existence, rights, governmental approvals and franchises and all licenses and other rights to use patents, processes, trademarks, trade names or copyrights owned or possessed by it and deemed by it to be material to the conduct of its business. The Company shall, and shall cause its Subsidiary to, use its commercially reasonable efforts to preserve its favorable business relationships with the clients, lenders, suppliers, customers, licensors and licensees and others having business dealings with the Company and its Subsidiary and to preserve the goodwill and ongoing operations of the Company and its Subsidiary. (c) Compliance with Laws. The Company shall, and shall cause its Subsidiary to, comply with all applicable laws, rules regulations and orders except where failure to comply would not, individually or in the aggregate, have a Material Adverse Effect. (d) Maintenance of Properties and Leases. The Company shall, and shall cause its subsidiary to, keep their properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all reasonably needful and proper, or legally required, repairs, renewals, replacements, additions and improvements thereto. So long as it is in the best interest of the Company, the Company shall, and shall cause its Subsidiary to, comply at all times with each provision of all -21- 29 leases to which any of them is a party or under which any of them occupies, or has possession, of, property. (e) Insurance. The Company shall, and shall cause its subsidiary to, keep its assets which are of an insurable character, if any, insured by financially sound and reputable insurers against loss or damage by fire, extended coverage and other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated and located in San Francisco, California. (f) Licenses and Permits. The Company shall, and shall cause its subsidiary to, use its best efforts to obtain all federal, state, local and foreign governmental licenses, permits and qualifications material to and necessary in the conduct of its business as proposed to be conducted. (g) Intellectual Property. The Company shall, and shall cause its subsidiary to, use its reasonable best efforts to cause all Intellectual Property, including, but not limited to, technological developments, inventions, discoveries or improvements made by its employees to be fully documented in accordance with the prevailing industrial professional standards, and, where possible and appropriate, file and prosecute United States and foreign patent applications relating to and protecting such developments. In addition, the Company shall, and shall cause its subsidiary to, use its commercially reasonable efforts to cause all Intellectual Property, including, but not limited to, all technological developments, inventions, discoveries or improvements made by any of its employees or any employees of its subsidiaries to be owned by it and, where possible and appropriate, obtain reasonable legal protections for the its benefit with respect to such property. (h) Compliance with Contracts. So long as it is in the best interest of the Company, the Company shall, and shall cause its subsidiary to, comply with all material obligations which it incurs pursuant to any contract or agreement, whether oral or written, express or implied, as such obligations become due, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves (as determined in accordance with generally accepted accounting principles, consistently applied) have been established on its books with respect thereto. 4.3. Insurance. The Company shall maintain after the Closing the directors' and officers' liability insurance. The Company and the Board of Directors will evaluate the appropriateness of obtaining "key man" life insurance to be owned by the Company and with the Company named as the payee of all benefits thereunder. -22- 30 4.4. Merger, etc. The Company will not merge with or into or consolidate with, or sell all or substantially all of its assets to, any other person unless (a) either (i) in the case of merger or consolidation, the Company will be the surviving entity or (ii) in the case of a merger or consolidation where the Company is not the surviving entity and in the case of a sale of all or substantially all of its assets, the entity formed by such consolidation or into which the Company is merged or the entity which acquires all of substantially all of the assets of the Company shall have assumed in writing all of the obligations of the Company under each of this Agreement and the Ancillary Documents, and (b) immediately after the consummation of such merger or consolidation the surviving entity would not be in violation of any of the provisions applicable to the Company contained in this Agreement and the Ancillary Documents. 4.5. Transactions with Affiliates. The Company will not, and will not permit its subsidiary to, engage in any transaction or group of related transactions (including, without limitation, the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any affiliate (other than the Company), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such subsidiary than would be obtainable in a comparable arm's-length transaction with a person not an Affiliate (as defined in the Securities Act). 4.6. Notice of Breach. As promptly as practicable, and in any event not later than five Business Days after senior management of the Company becomes aware thereof, the Company shall provide the Purchasers with written notice of any breach by the Company of any provision of this Agreement, including, without limitation, this Article 4, specifying the nature of such breach and any actions proposed to be taken by the Company to cure such breach. 4.7. Matters Related to Directors. (a) Subject to Article 3(b) of the Certificate of Designation, in the event that the Purchasers shall designate a person to serve on the Board of Directors prior to the Closing, the Company will have taken all necessary action for such designee (the "Purchasers' Designee") to be elected to the Board of Directors of the Company. Thereafter, so long as the Purchasers own 10% of the total outstanding stock of the Company (as such calculation is made pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended ("Section 16(b)") in connection with any annual meeting of shareholders at which the term of a Purchasers' Designee is to expire, the Company will take all necessary action to cause a Purchasers' Designee, which Purchasers' Designee, if not an employee of a Entity affiliate, shall be reasonably acceptable to the Company, to be nominated and use its best efforts -23- 31 to cause such Purchasers' Designee to be elected to the Board of Directors of the Company. In the event of any vacancy arising by reason of the resignation, death, removal or inability to serve of any of the Purchasers' Designees, the Company shall use reasonable best efforts to cause a replacement designee of the Purchasers to be elected successor to fill such vacancy. Notwithstanding anything to the contrary, in the event the Purchasers choose to propose a director who is not an employee of a Pequot Entity, then the Purchasers shall also be entitled to designate a non-voting observer (which observer, if not an employee of a Pequot Entity, shall be reasonably acceptable to the Company) other than a voting member of the Board to attend and participate in (but not to vote at) all meetings of the Board of Directors of the Company and any committee of the Board (the "Non-voting Observer"); provided, however, that the Purchasers shall only have the right to designate a Non-voting Observer so long as the Purchasers hold in the aggregate more than 10% of the total Common Stock outstanding on an as converted basis (as such calculation is made pursuant to Section 16(b)). Subject to the execution of appropriate confidentiality agreements, the Non-voting Observer shall have the same access and limitations to information concerning the business and operations of the Company as directors of the Company, and shall be entitled to participate in discussions and consult with the Board of Directors of the Company without voting; provided, further, that, in the event the Board of Directors, upon a written determination of counsel to the Company, concludes that the presence of the Non-voting Observer would violate the Company's attorney-client privilege in a manner that would be materially detrimental to the Company's legal position, such Non-voting Observer shall be excluded from the portion of the meeting to which such privilege relates. Such Non-voting Observer (and his or her affiliates) shall be subject to the same securities trading restrictions as the outside directors of the Company and have liability of an insider for any violations of federal and state securities laws. (b) In addition to any requirements specified in the By-Laws of the Company, the Company shall notify the Purchasers, the Purchasers' Designee or the Non-voting Observer, as the case may be, by telecopy, of (a) every meeting (or action by written consent) of the Board of Directors of the Company and (b) every meeting (or action by written consent) of the board of directors of its subsidiary and of any committee of the Board of Directors of the Company or its subsidiary, to the extent, in the case of clause (b), that a Purchasers' Designee is on the board of directors of such subsidiary or is on such committee of the Board of Directors of the Company or its subsidiary, at least three days in advance of such meeting (or distribution of written consents), or, if such notice under the circumstances is not practicable, as soon before the meeting (or distribution) as is practicable. (c) The Company shall, upon request therefor, promptly reimburse the Purchasers' Designee and the Non-voting Observer, as the case may be, for all reasonable expenses incurred by them in connection with their attendance at meetings of the Board of Directors or of committees of the Board of Directors and any other activities undertaken by them in their capacity as directors of the Company or its subsidiary or observer, as applicable. The foregoing shall be in addition to, and not in lieu of (or in -24- 32 duplication of), any indemnification or reimbursement obligations of the Company under the Articles of Incorporation or Bylaws of the Company or by law. The Non-voting Observer shall be entitled to indemnification from the Company to the maximum extent permitted by law as though he or she were a director of the Company. (d) Without the approval of the Board of Directors of the Company that includes the affirmative vote of the Purchasers' Designee, the Company shall not amend, supplement, modify or repeal any provision of the Articles of Incorporation or Bylaws of the Company or take any other action, including, without limitation, the adoption of a shareholders' rights plan or similar plan, which would materially and adversely affect the rights or benefits of the Purchasers under any of this Agreement or the Ancillary Documents, including, without limitation, the conversion rights of the holders of the Series A Preferred Stock hereunder. 4.8. Rights of First Offer. Prior to seeking financing from any third party consisting of a privately offered issuance of equity securities (the "Proposed Securities") by the Company on or after the date of the Closing (other than with respect to the securities being sold contemporaneously herewith), the Company shall notify the Purchasers of a description in reasonable detail of the Proposed Securities, the amount proposed to be issued and the consideration the Company desires to receive therefor (the "Notice"), which Notice shall constitute an offer to the Purchasers to purchase a portion (a "Maintenance Amount") of such Proposed Securities on a pari passu basis in order to maintain the Purchasers' percentage level of ownership (i) of the total Common Stock outstanding (on a fully diluted basis) and (ii) of the total outstanding Series A Preferred Stock. The Purchasers shall have not less than 20 days after receipt of the Notice (unless the Purchasers earlier indicate that they have no interest in purchasing the Proposed Securities) to purchase the above-mentioned Maintenance Amount on the terms set forth in the Notice or such other terms as are mutually acceptable to the Company and the Purchasers). In the event that the Purchasers do not purchase their Maintenance Amount, the Company shall be permitted to sell the entire amount of the Proposed Securities; provided, that the closing of such sale occurs within 90 days from the date of the Notice and provided that the sale of the Proposed Securities is on terms no more favorable than those terms set forth in the Notice. No privately offered equity securities shall be issued by the Company to any Person unless the Company has first offered such portion of the equity securities to the Purchasers in accordance with this Section 4.8. 4.9. Completion of Certain Matters. (a) The Company shall, prior to September 1, 1997, demonstrate to the Purchasers in a manner satisfactory to the Purchasers the viability of its current radio transmission technology to support bi-directional transmission capabilities. -25- 33 4.10. Subsidiary Stock. (a) The Company shall not, without the prior written consent of the holders of a majority of the shares of Series A Preferred Stock, (a) create, designate, or authorize the issuance of, any series of stock of its Subsidiary or Mediatech, Inc. or (b) spin off the assets or the shares of the Common Stock of its Subsidiary or Mediatech, Inc. SECTION 5. Transfer Taxes. The Company agrees that it will pay, and will hold each Purchaser harmless from any and all liability with respect to any stamp or similar Taxes which may be determined to be payable in connection with the execution and delivery and performance of this Agreement, and that it will similarly pay and hold each Purchaser harmless from all Taxes in respect of the issuance of the Series A Preferred Stock and the Conversion Shares to such Purchaser. SECTION 6. Survival of Representations, Warranties, Agreements and Covenants, etc. All representations and warranties in this Agreement and in the Ancillary Documents shall survive the Closing until the second anniversary of the date hereof (except to the extent a Claim Notice (as defined in Section 8.3) shall have been given prior to such date with respect to a breach of a representation and warranty, in which case such representation and warranty shall survive until such claim is resolved) and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of any Purchaser provided, however, the representations and warranties set forth in Sections 2.2, 2.3, 2.4 and 2.6 (to the extent related to Taxes) shall survive the Closing indefinitely; provided, further, however, that the representations and warranties set forth in Section 2.20 shall survive until the end of the applicable statute of limitations. All agreements contained herein shall survive the Closing until, by their respective terms, they are no longer operative. SECTION 7. Expenses. (a) Except as set forth in Section 7(b), the Company and each Purchaser shall pay all the costs and expenses incurred by it or on its behalf in connection with this Agreement and the consummation of the transactions contemplated hereby. (b) Within 10 days from the receipt of a billing statement from the Pequot Entities (the Pequot Entities, together with GE Capital Information Technology Solutions, the "Initial Purchasers"), the Company shall pay and shall reimburse the Initial Purchasers for all of their reasonable documented out-of-pocket costs and expenses incurred in connection with this transaction (but excluding travel expenses of the Initial Purchasers) (including, without limitation, the reasonably documented reasonable fees and expenses of counsel retained by Pequot Private Equity Fund, L.P. in connection with the negotiation and preparation of this Agreement and the Ancillary Documents and the consummation of the transactions contemplated hereby and thereby; provided, however, in no event shall the liability of the Company under this Section 7(b) in the aggregate -26- 34 exceed $50,000. In addition, the Company shall pay, and hold the Initial Purchasers harmless against liability for the payment of stamp and other Taxes which may be payable in respect of the execution and delivery of this Agreement or the issuance, delivery or acquisition of any shares of Series A Preferred Stock or Conversion Shares. SECTION 8. Indemnification. 8.1. General Indemnification. The Company shall indemnify, defend and hold each Purchaser, its affiliates, their respective officers, directors, partners, employees, agents, representatives, successors and assigns (each a "Purchaser Entity") harmless from and against all Losses (as defined below) incurred or suffered by a Purchaser Entity (whether incurred or suffered directly or indirectly through ownership of capital stock of the Company) arising from the breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in any Ancillary Document. Each Purchaser, severally and not jointly, shall indemnify, defend and hold the Company, its affiliates, their respective officers, directors, employees, agents, representatives, successors and assigns harmless against all Losses arising from the breach of any of its representations, warranties, covenants or agreements in this Agreement or in any Ancillary Documents. Notwithstanding anything to the contrary in this Agreement, no indemnification payment by the Company pursuant to this Section 8 with respect to any Losses otherwise payable hereunder as a result of a breach of the representations and warranties of the Company (other than any Losses resulting from breaches of the representation and warranty in Section 2.3 which shall not be subject to the Deductible (as defined below)) shall be payable until the time as such Losses shall aggregate for all Purchaser Entities to more than $50,000 (the "Deductible"), and then only to the extent that such Losses, in the aggregate for all Purchaser Entities, exceed the Deductible. 8.2. Indemnification Principles. For purposes of this Section 8, (i) "Losses" shall mean each and all of the following items: claims, losses, (including, without limitation, losses of earnings) liabilities, obligations, payments, damages (actual, punitive or consequential), charges, judgments, fines, penalties, amounts paid in settlement, costs and expenses (including, without limitation, interest which may be imposed in connection therewith, costs and expenses of investigation, actions, suits, proceedings, demands, assessments and fees, expenses and disbursements of counsel, consultants and other experts); and (ii) solely with respect to Claims by third parties against a Purchaser Entity, each of the representations and warranties made by any party in this Agreement and in the Ancillary Documents (other than the representation and warranty made in subclause (a) of Section 2.8 and in Section 2.19 and 2.24 of this Agreement) shall be deemed to have been made without the inclusion of limitations or qualifications as to materiality, such as the words "Material Adverse Effect," "immaterial," "material" and "in all material respects" or words of similar import. Any payment (or deemed payment) by the Company to a Purchaser pursuant to this Section 8, shall be treated for federal income tax purposes as an -27- 35 adjustment to the price paid by such Purchaser for the Series A Preferred Stock pursuant to this Agreement. 8.3. Claim Notice. A party seeking indemnification under this Section 8 shall, promptly upon becoming aware of the facts indicating that a claim for indemnification may be warranted, give to the party from whom indemnification is being sought a claim notice relating to such Loss (a "Claim Notice"). Each Claim Notice shall specify the nature of the claim, the applicable provision(s) of this Agreement or other instrument under which the claim for indemnity arises, and, if possible, the amount or the estimated amount thereof. No failure or delay in giving a Claim Notice (so long as the same is given prior to expiration of the representation or warranty upon which the claim is based) and no failure to include any specific information relating to the claim (such as the amount or estimated amount thereof) or any reference to any provision of this Agreement or other instrument under which the claim arises shall affect the obligation of the party from whom indemnity is sought. SECTION 9. Remedies. In case any one or more of the covenants and/or agreements set forth in this Agreement shall have been breached by any party hereto, each Purchaser, with respect to a breach by the Company, with respect to a breach by a Purchaser, may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Agreement. SECTION 10. Further Assurances. At any time or from time to time after the Closing, the Company, on the one hand, and the Purchasers, on the other hand, agree to cooperate with each other, and at the request of the other party, to execute and deliver any further instruments or documents and to take all such further action as the other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby relating to the Purchase and to otherwise carry out the intent of the parties hereunder. SECTION 11. Successors and Assigns. This Agreement shall bind and inure to the benefit of the Company and the Purchasers and the respective successors, permitted assigns, heirs and personal representatives of the Company and the Purchasers except that the Company may not assign its rights and obligations under this Agreement to any person without the prior written consent of the Purchasers. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for each of the Purchaser's benefit as a purchaser or holder of Series A Preferred Stock are also for the benefit of, and enforceable by, any subsequent holder of such Series A Preferred Stock and/or Conversion Shares. -28- 36 SECTION 12. Entire Agreement. This Agreement and the other writings referred to herein or delivered pursuant hereto which form a part hereof contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. SECTION 13. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or sent by telecopy, nationally recognized overnight courier or first class registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth below or such other address as may hereafter be designated in writing by such party to the other parties: (i) if to the Company, to: Digital Generation Systems, Inc. 875 Battery Street San Francisco, CA 94111 Telecopy: (415) 276-6601 Attention: Henry Donaldson with a copy to: Wilson, Sonsini, Goodrich & Rosati, Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 Telecopy: (415) 496-6811 Attention: John B. Goodrich, Esq. (ii) if to the Purchasers, to the address listed on Exhibit A. with a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Telecopy: (212) 859-8587 Attention: Robert C. Schwenkel, Esq. All such notices, requests, consents and other communications shall be deemed to have been given when received. -29- 37 SECTION 14. Amendments. The terms and provisions of this Agreement may be modified or amended, or any of the provisions hereof waived, temporarily or permanently, pursuant to the written consent of the Company and the Purchasers holding a majority of the shares purchased pursuant to the Purchase. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar). No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. SECTION 15. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 16. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. SECTION 17. Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of names and pronouns shall include the plural and vice versa. SECTION 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of New York and of the United States of America, in each case located in the County of New York, for any Litigation arising out of or relating to this Agreement and the Ancillary Documents and the transactions contemplated hereby and thereby (and agrees not to commence any Litigation relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in this Agreement shall be effective service of process for any Litigation brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any Litigation arising out of this Agreement or the transactions contemplated hereby in the courts of the State of New York or the United States of America, in each case located in the County of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such Litigation brought in any such court has been brought in an inconvenient forum. -30- 38 SECTION 19. Publicity. Each of the parties hereto agrees that it will make no public statement regarding the transactions contemplated hereby unless the language and timing of such statement has been approved by the Company and the Pequot Entities. Notwithstanding the foregoing, each of the parties hereto may, in documents required to be filed by it with the Commission or other regulatory bodies, make such statements with respect to the transactions contemplated hereby as each may be advised is legally necessary upon advice of its counsel; provided, however, that the party making such determination shall immediately notify the other party that it intends to make a public announcement and the parties hereto shall, in good faith, attempt to agree on any public announcements or publicity statements with respect thereto. SECTION 20. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid, but if any provision of this Agreement is held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not render invalid or unenforceable any other provision of this Agreement. -31- 39 IN WITNESS WHEREOF, the parties hereto have duly executed this Series A Preferred Stock Purchase Agreement as of the date first above written. THE COMPANY: DIGITAL GENERATION SYSTEMS, INC. By:__________________________________ Name: Title: PURCHASERS: PEQUOT PRIVATE EQUITY FUND, L.P. By:__________________________________ Name: Title: PEQUOT PARTNERS FUND, L.P. By:__________________________________ Name: Title: PEQUOT OFFSHORE PRIVATE EQUITY FUND, INC. By:__________________________________ Name: Title: PEQUOT INTERNATIONAL FUND, INC. By:__________________________________ Name: Title: -32- 40 GE CAPITAL INFORMATION TECHNOLOGY SOLUTIONS By:__________________________________ Name: Title: TECHNOLOGY CROSSOVER VENTURES, L.P. By:______________________________________ Name: Title: TECHNOLOGY CROSSOVER VENTURES, C.V. By:______________________________________ Name: Title: TCV II, V.O.F. By:______________________________________ Name: Title: TECHNOLOGY CROSSOVER VENTURES II, L.P. By:______________________________________ Name: Title: TCV II (Q), L.P. By:______________________________________ Name: Title: TCV II STRATEGIC PARTNERS, L.P. By:______________________________________ Name: Title: TECHNOLOGY CROSSOVER VENTURES II, C.V. By:______________________________________ Name: Title: INTEGRAL CAPITAL PARTNERS III, L.P. By:______________________________________ Name: Title: INTEGRAL CAPITAL PARTNERS INTERNATIONAL III, L.P. By:______________________________________ Name: Title: -33- EX-2.3 4 AMENDMENT TO PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 2.3 AMENDMENT TO PREFERRED STOCK PURCHASE AGREEMENT THIS AMENDMENT, dated July 23, 1997 (the "Amendment") to the Preferred Stock Purchase Agreement, dated July 14, 1997 (the "Agreement"), by and among Digital Generation Systems, Inc. (the "Company") and the purchasers listed on Exhibit A thereto (the "Purchasers"), is entered into by and among the Company and the Purchasers (capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Agreement). W I T N E S S E T H : WHEREAS, in order to comply with rules of the NASDAQ Stock Market in connection with the issuance of more than 20% of the outstanding shares of the Company, the Company may need to obtain shareholder approval at a meeting of the shareholders of the Company ("Shareholders' Approval") in order to issue 100% of the shares of Common Stock and Series A Preferred Stock necessary to consummate the Acquisition and the transactions contemplated by the Agreement; and WHEREAS, the Company and the Purchasers desire to amend the Agreement to allow for a two-step closing of the Purchase: first, the sale of that number of shares permitted under the NASDAQ Stock Market rules; second, the sale of the remaining shares after the Shareholders' Approval, if such Shareholders' Approval is necessary. NOW, THEREFORE, in consideration of the good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchaser hereby agree as follow: 1. Amendment to the Agreement. Acting in accordance with Section 14 of the Agreement, the undersigned hereby consent to the following amendments to the Agreement. (a) Clause (a) of Section 1.1 is deleted in its entirety and the following is inserted in lieu thereof: "1.1. The Purchase. (a) At the Initial Closing and the Subsequent Closing (as both terms are defined in Section 1.2(a)), each Purchaser shall, severally and not jointly, purchase from the Company and the Company shall sell to each Purchaser, the number of shares of Series A Preferred Stock set forth opposite such Purchaser's name on Exhibit A -1 and Exhibit A-2, respectively (collectively, the "Purchases") at the purchase 2 price set forth opposite such name on each exhibit. Subject to Section 1.1(b), the aggregate purchase price to be paid by the Purchasers for the Series A Preferred Stock purchased by them hereunder is as set forth on Exhibit A-1 and A-2, as the case may be, as Total Purchase Price (the "Purchase Price"), of which (i) the Purchase Price less 14% shall be paid to an account or accounts designated by the Company not less than three business days prior to the Initial Closing or the Subsequent Closing, as the case may be, and (ii) 14% of the Purchase Price (the "Escrow Amount") shall be paid to an escrow agent (the "Escrow Agent") mutually acceptable to the Company and the Pequot Entities (as defined below) to be held in a Escrow Account (the "Escrow Account") and disbursed by the Escrow Agent pursuant to Section 1.4 hereto and the terms of an escrow agreement in a form mutually satisfactory to the Company, the Pequot Entities and the Escrow Agent (the "Escrow Agreement") and including the terms set forth in Exhibit B." (b) The parenthetical in the second sentence of Section 1.1(b) is deleted and the third sentence of Section 1.1(b) is deleted. (c) References to "the Closing" in clause (b) of Section 1.1 is deleted and "the Initial Closing or the Subsequent Closing, as the case may be," is inserted in lieu thereof. (d) References to "Exhibit A" in clause (c) of Section 1.1 is deleted and "Exhibit A-1 or Exhibit A-2, as the case may be," inserted in lieu thereof. (e) Section 1.2 is deleted in its entirety and the following is inserted in lieu thereof: "1.2. The Closing. (a) (i) The closing of the purchase of the shares of Series A Preferred Stock identified on Exhibit A-1 (the "Initial Closing") shall take place at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, NY 10004 at 9:00 a.m. on July 21, 1997 or on such other date as shall be mutually agreed by the Company and the Purchasers (the "Initial Closing Date"); provided, however, that the Initial closing shall be held simultaneously with or subsequent to the closing of the Acquisition and simultaneously with the repayment of the bridge loans provided by Pequot Partners Fund, L.P. and Kleiner, Perkins, Caufield & Byers (the "Lenders") in the amounts of $3,000,000 and $3,000,000, respectively, (the "Notes") (by wire transfer to an account designated by each of the Lenders) and (ii) the closing of the purchase of the shares of Series A Preferred Stock identified on Exhibit A-2 (the "Subsequent Closing") shall take place at the location referred to in (i) above one day after the Shareholders' Approval or until such time as the parties hereto mutually agree such Shareholders' Approval is not necessary (the "Subsequent Closing Date"). -2- 3 (b) At each of the Initial Closing and the Subsequent Closing, the Company shall deliver to each Purchaser a certificate or certificates representing the shares of Series A Preferred Stock purchased by such Purchaser, registered in the name of such Purchaser or its nominee. Delivery of such certificates to a Purchaser shall be made against receipt at the Initial Closing or the Subsequent Closing, as the case may be, by the Company from such Purchaser of the purchase price therefor, which shall be paid by wire transfer to an account designated at least one business day prior to the Initial Closing or the Subsequent Closing, as the case may be, by the Company." (f) Reference to "the Closing" in clause (a) to Section 1.3 is deleted and "the Initial Closing or the Subsequent Closing, as the case may be," is inserted in lieu thereof. (g) References to "Closing" or "Closing Date" in clauses (b)(i), (iv), (viii), (ix) and (xii) of Section 1.3 shall be immediately preceded by the word "Initial." (h) Reference to "contemporaneously close" in clause (b) (ii) of Section 1.3 is deleted and "have closed" is inserted in lieu thereof. (i) Clause (b) (iii) is deleted in its entirety and the following is inserted in lieu thereof: (iii) The Company and the Purchasers shall have entered into the Registration Rights Agreement in the form of Exhibit D hereto (the "Registration Rights Agreement" and all other contracts, agreements, schedules, certificates and other documents (including, but not limited to, the Certificate of Designation (as defined below), the Escrow Agreement, the Voting Agreement and the Amendment) being delivered pursuant to or in connection with this Agreement by any party hereto at or prior to the Initial Closing, the "Ancillary Documents"). (j) The following shall be inserted immediately after Section 1.3(b): "(c) The obligations of the Purchasers to consummate the transactions contemplated hereby at the Subsequent Closing is subject to the satisfaction or waiver of the following conditions: (i) The Initial Closing shall have occurred. (ii) The Shareholders' Approval, if necessary, shall have taken place. -3- 4 (iii) The Common Stock to be issued upon conversion of the Series A Preferred Stock sold in the Subsequent Closing shall have been approved for quotation in the NASDAQ Stock Market, subject to official notice of issuance. (k) References in Sections 2, 4.3, 4.7 and 4.8 to "Closing or Closing Date" shall be immediately preceded by the word "Initial." (l) The following is inserted immediately after Section 4.10: "4.11 Proxy Statement. (a) If the NASDAQ Stock Market so requires, as promptly as practicable after the execution of this Amendment, the Company shall prepare and file with the Securities and Exchange Commission (the "SEC") a proxy statement relating to the meeting of the Company's stockholders to be held in connection with the Shareholders' Approval, if necessary (together with any amendments thereof or supplements thereto, the "Proxy Statement") and shall mail the Proxy Statement to its stockholders as promptly as practicable. The Proxy Statement shall include the recommendation of the Board of Directors and the Company in favor of the Transactions; provided, however that if an alternative method of shareholder approval is approved by the NASDAQ Stock Market, the Company shall use the same diligence referred to above in fulfilling its reporting obligations. The Company shall promptly prepare and submit to the NASDAQ Stock Market a listing application covering the shares of Common Stock issuable in the Transaction, and shall use its reasonable best efforts to obtain approval for the listing of such Common Stock before the closing. (b) The information in the Proxy Statement shall not, at (i) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of the Company, and at (ii) the time of each of the Stockholders' Meeting (as hereinafter defined), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. If at any time prior to the Stockholders' Meeting any event or circumstance relating to Company or its Subsidiary, or their respective officers or directors, should be discovered by Company which should be set forth in an amendment or a supplement of the Proxy Statement, the Company shall promptly transmit such amendment or supplement to the stockholders. All documents that the Company is responsible for filing with the SEC in connection with the Transactions contemplated herein will comply as to form and substance in all material respects with the applicable requirements of the Securities Act and the rules and regulations thereunder and the Exchange Act and the rules and regulations thereunder. -4- 5 4.12 Stockholders' Meeting. If the NASDAQ Stock Market so requires, the Company shall call and hold a meeting of its stockholders (the "Stockholders' Meeting") as promptly as practicable for the purpose of voting upon the approval of the issuance of the shares underlying the Transactions and the Company shall use its best efforts to hold the Stockholders' Meeting as soon as practicable; provided, however, that if such meeting is not required by the NASDAQ Stock Market in order to list the shares on the NASDAQ Stock Market, such Stockholders' Meeting need not be held. The Company shall use its reasonable best efforts to solicit from its stockholders proxies in favor of the approval of the Transactions, and shall take all other action necessary or advisable to secure the vote or consent of stockholders required by California law, to obtain such approvals, unless otherwise necessary under the applicable fiduciary duties of the respective directors of the Company, as determined by such directors in good faith after consultation with independent legal counsel (who may be such party's regularly engaged independent legal counsel)." (m) Reference to "Closing" in Sections 6 and 10 is immediately preceded by "Initial." (n) The dollar amount of $50,000 in the proviso in clause (b) of Section 7 is deleted and $75,000 is inserted in lieu thereof. (o) Exhibit A is deleted in its entirety and Exhibits A-1 and A-2 (attached hereto) are inserted in lieu thereof. (p) The representations and warranties set forth in Section 2 shall be considered without reference to the effect of the closing of the Acquisition. 2. Entire Agreement. The Agreement, as amended by this Amendment, sets forth the entire understanding of the parties with respect to the transactions contemplated hereby. 3. Effect of Amendment. Upon effectiveness of this Amendment, on or after the date hereof, each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, and each reference in any other documents entered into in connection with the Agreement, shall mean and be a reference to the Agreement, as amended hereby. Except as specifically amended above, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. 4. Governing Law. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of New York. -5- 6 5. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -6- 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. THE COMPANY: DIGITAL GENERATION SYSTEMS, INC. By:______________________________________ Name: Title: PURCHASERS: PEQUOT PRIVATE EQUITY FUND, L.P. By:______________________________________ Name: Title: PEQUOT PARTNERS FUND, L.P. By:______________________________________ Name: Title: PEQUOT OFFSHORE PRIVATE EQUITY FUND, INC. By:______________________________________ Name: Title: PEQUOT INTERNATIONAL FUND, INC. By:______________________________________ Name: Title: -7- 8 GE CAPITAL INFORMATION TECHNOLOGY SOLUTIONS By:______________________________________ Name: Title: TECHNOLOGY CROSSOVER VENTURES, L.P. By:______________________________________ Name: Title: TECHNOLOGY CROSSOVER VENTURES, C.V. By:______________________________________ Name: Title: TCV II, V.O.F. By:______________________________________ Name: Title: TECHNOLOGY CROSSOVER VENTURES II, L.P. By:______________________________________ Name: Title: -8- 9 TCV II (Q), L.P. By:______________________________________ Name: Title: TCV II STRATEGIC PARTNERS, L.P. By:______________________________________ Name: Title: TECHNOLOGY CROSSOVER VENTURES II, C.V. By:______________________________________ Name: Title: INTEGRAL CAPITAL PARTNERS III, L.P. By:______________________________________ Name: Title: INTEGRAL CAPITAL PARTNERS INTERNATIONAL III, L.P. By:______________________________________ Name: Title: -9- EX-2.4 5 CERTIFICATE OF DETERMINATION OF RIGHTS OF SERIES A 1 EXHIBIT 2.4 CERTIFICATE OF DETERMINATION OF RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK OF DIGITAL GENERATION SYSTEMS, INC. We, Kenneth Cheng, and Thomas P. Shanahan, the Vice President and the Assistant Secretary, respectively, of Digital Generation Systems, Inc., a corporation organized and existing under the laws of the State of California (the "Corporation"), do hereby certify as follows: A. Pursuant to the authority conferred upon the Board of Directors of the Corporation (the "Board of Directors") by the Amended and Restated Articles of Incorporation of the Corporation (the "Articles of Incorporation"), on July 12, 1997 the Board of Directors adopted the following resolution creating a series of Preferred Stock designated as "Series A Preferred Stock": RESOLVED, that pursuant to the authority vested in the Board of Directors of Digital Generation Systems, Inc., a California corporation (the "Corporation"), in accordance with the provisions of the Corporation's Amended and Restated Articles of Incorporation, a series of Preferred Stock of the Corporation be, and hereby is, created and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: 1. Designation and Number. There is hereby designated a series of Preferred Stock to be known as "Series A Preferred Stock." The number of shares constituting the Series A Preferred Stock shall be 5,000,000 shares. 2. Dividends. No dividend or distribution in cash, shares of stock or other property on the Common Stock of the Corporation shall be declared or paid or set apart for payment unless, at the same time, the same dividend or distribution is declared or paid, or set apart, as the case may be, on the Series A Preferred Stock, at the rate per share of Series A Preferred Stock based upon the number of shares of Common Stock into which such shares of Series A Preferred Stock could be converted pursuant to the provisions of Section 6 of this Certificate of Determination, at the record date for the determination of shareholders entitled to such dividend or distribution on the Common Stock; provided, however, that in the event that (a) the Corporation shall have less than $17.8 million in total revenue for fiscal third and fourth quarter, 1997 combined (based on the audited financial statements for the year ended December 31, 1997), or (b) insofar as it is possible to support a tape interface with an MPEG disk-based system, the Sony RS 422 Standard Video Transmission Interface shall not be completed and available for customer use by December 31, 1997 (as determined by the holders of a majority of the outstanding shares of Series A Preferred Stock in their sole discretion), then the holders of the Series A Preferred Stock, in preference to the holders of Common Stock and of any shares of other capital stock of the Corporation ranking junior to the Series A Preferred Stock as to payment of dividends, shall be entitled to receive, out of assets or profits of the Corporation 2 legally available therefor, cumulative cash dividends (the "Preferred Dividends"), payable quarterly, in arrears on March 31, June 30, September 30 and December 31 in each year, or, if not a Business Day, on the next Business Day, at an annual rate of 7% of the Conversion Price, from January 1, 2000, provided further, however, that in the event that any time after the public announcement by the Corporation of the fourth quarter, 1997, earnings results, the Market Price per share of the Common Stock shall exceed the Conversion Price multiplied by 2 for at least 25 days out of 40 consecutive Trading Days, then the holders of the Series A Preferred Stock shall no longer be entitled to receive the Preferred Dividends. 3. Voting Rights. (a) In addition to any voting rights provided by law and the special voting rights provided in Section 9 below, the holder of each share of Series A Preferred Stock shall be entitled to vote upon all matters upon which holders of the Common Stock have the right to vote, and the shares of Series A Preferred Stock held by each such holder shall be entitled to the number of votes equal to the largest number of full shares of Common Stock into which such shares of Series A Preferred Stock could be converted pursuant to the provisions of Section 6 of this Certificate of Determination at the record date for the determination of the shareholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited. Except as required by law or as otherwise set forth in this Certificate of Determination, the holders of shares of Series A Preferred Stock and Common Stock shall vote together as a single class and not as separate classes. (b) The holders of the Series A Preferred Stock shall have, in addition to the other voting rights set forth herein, the exclusive right, voting separately as a single class, to elect one director of the Corporation, with the remaining directors to be elected by the other classes of stock entitled to vote therefor at each meeting of shareholders held for the purpose of electing directors (the "Series A Preferred Director"). The right of the holders of Series A Preferred Stock to vote for the election of directors may be exercised at any annual meeting or at any special meeting called for such purpose or at any adjournment thereof, or by the unanimous written consent, delivered to the Secretary of the Corporation, of the holders of all of the shares of Series A Preferred Stock outstanding as of the record date of such written consent. As promptly as practicable after the date of issuance of the Series A Preferred Stock, the board of directors of the Corporation shall call for a special meeting or written consent of the holders of shares of Series A Preferred to elect the Series A Preferred Director. Each director, and any subsequent director elected pursuant to this paragraph, shall serve, as a director until his successor is elected and qualified. In the event of a vacancy in respect of any directorship elected by the holders of shares of Series A Preferred Stock pursuant to this Section 3(b), the Corporation agrees to call a special meeting of the holders of shares of Series A Preferred Stock at the request of the majority of the holders of outstanding Series A Preferred Stock, in order that the holders of the Series A Preferred Stock may elect a successor director, and at which meeting the holders of -2- 3 Series A Preferred Stock shall be entitled to the same voting rights as provided in the first sentence of the prior paragraph of this Section 3(b). 4. Reacquired Shares. Shares of Series A Preferred Stock converted, purchased, or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the conversion, purchase or acquisition thereof. None of such shares of Series A Preferred Stock shall be reissued by the Corporation. 5. Liquidation, Dissolution or Winding Up. (a) In the event of any voluntary or involuntary liquidation, distribution of assets (other than the payment of dividends), dissolution or winding up of the Corporation (each, a "Liquidation"), the holders of the shares of the Series A Preferred Stock shall be entitled to receive and to be paid out of the assets of the Corporation available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Stock, the Preferred Amount Per Share (as defined below) with respect to each outstanding share of Series A Preferred Stock; provided, however, that if the amount which would have been paid upon any such Liquidation in respect of the aggregate number of shares of Common Stock into which the Preferred Stock is then convertible, divided by the number of shares of Series A Preferred Stock issued by the Corporation and then outstanding, is greater than the Preferred Amount Per Share (without giving effect to any liquidation preference in favor of the holders of Series A Preferred Stock), then the holders of Series A Preferred Stock shall be entitled to receive in such Liquidation such greater amount for each share of Series A Preferred Stock then issued and outstanding. (b) If, upon any such Liquidation, whether voluntary or involuntary, the assets to be distributed to the holders of the Series A Preferred Stock shall be insufficient to permit payment of the full amount of the Preferred Amount Per Share with respect to each share of Series A Preferred Stock, then the entire assets of the Corporation to be distributed among the holders of the Series A Preferred Stock shall be distributed ratably among such holders. (c) After the payment to the holders of shares of the Series A Preferred Stock of the full amount of any liquidating distribution to which they are entitled under this Section 5, the holders of the Series A Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (d) Neither the consolidation, merger or other business combination of the Corporation with or into any other Person (as defined in Section 10 hereof) or Persons nor the sale of all or substantially all the assets of the Corporation shall be deemed to be a Liquidation for purposes of this Certificate of Determination. (e) "Preferred Amount Per Share" shall mean, with respect to each share of Series A Preferred Stock, $3.535. -3- 4 6. Conversion. (a) Each share of Series A Preferred Stock shall automatically be converted into a number of shares of Common Stock, equal to the quotient of the Preferred Amount Per Share divided by the Conversion Price (as defined in Section 10 hereof) (such quotient being referred to herein as the "Conversion Ratio"), (i) on the date of and upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offering and sale of the Corporation's Common Stock for the account of the Corporation in which the aggregate gross proceeds received by the Corporation equal or exceed $15,000,000 and the price per share of which exceeds $9.50 per share (as adjusted for any stock dividend, split, subdivision, reclassification or combination occurring after the Issue Date) or (ii) at the close of business on the Trading Day which is the 10th consecutive Trading Day in which the closing bid price for the Common Stock on NASDAQ (or any exchange on which the Common Stock is then being traded) shall have exceeded $12.00 per share (as adjusted for any stock dividend, split, subdivision, reclassification or combination occurring after the Issue Date) or (iii) in the event of an acquisition by a Person of more than 50% of the Corporation's Common Stock at a price greater than $6.00 per share (as adjusted for any stock dividend, split, subdivision, reclassification or combination occurring after the Issue Date) (each of the events described in clause (i), (ii) and (iii) of this Section 6(a) shall be referred to herein as an "Automatic Conversion Event"). In addition, at the option of the holder of any shares of Series A Preferred Stock, such holder shall have the right, at any time and from time to time, by written notice to the Corporation, to convert any share of Series A Preferred Stock owned by such holder into a number of shares of Common Stock, at the then effective Conversion Ratio. (b) The Corporation shall at all times reserve and keep available for issuance upon the conversion of the Series A Preferred Stock, free from any preemptive rights, such number of its authorized but unissued shares of Common Stock as will from time to time be necessary to permit the conversion of all outstanding shares of Series A Preferred Stock into shares of Common Stock, and shall take a action required to increase the authorized number of shares of Common Stock if necessary to permit the conversion of all outstanding shares of Series A Preferred Stock. (c) The Conversion Price shall be subject to adjustment from time to time as follows: (i) In case the Corporation shall at any time or from time to time after the date hereof (A) pay any dividend, or make any distribution, on the outstanding shares of Common Stock in shares of Common Stock, (B) subdivide the outstanding shares of Common Stock, (C) combine the outstanding shares of Common Stock into a smaller number of shares or (D) issue by reclassification of the shares of Common Stock any shares of capital stock of the Corporation, then, and in each such case, the Conversion Price in effect on the record date therefor, if applicable, or the effective date thereof, whichever is earlier, shall be adjusted so that the holder of any shares of Series A Preferred Stock thereafter convertible into Common Stock pursuant to this of this Certificate of Determination shall be entitled to receive the number and type of shares of Common -4- 5 Stock or other securities of the Corporation which such holder would have owned or have been entitled to receive after the happening of any of the events described above, had such shares of Series A Preferred Stock been converted into Common Stock immediately prior to the happening of such event or the record date therefor, as applicable. An adjustment made pursuant to this clause (i) shall become effective (x) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, or (y) in the case of such subdivision, reclassification or combination, at the close of business on the day upon which such corporate action becomes effective. (ii) Except with respect to Excluded Securities (as defined below), in case the Corporation shall issue or sell any shares of Common Stock (or Common Stock Equivalents) after the date hereof (the "Issue Date") at a price per share (or having a conversion or exercise price per share) less than the Conversion Price then in effect, in each such case, the Conversion Price shall be appropriately reduced to a price (calculated to the nearest cent) determined by multiplying the Conversion Price then in effect by a fraction (x) the numerator of which is the sum of (A) the number of shares of Common Stock outstanding (calculated as set forth in Section 6(c)(iii) hereof) immediately prior to such issuance or sale plus (B) the number of shares of Common Stock Equivalents which the aggregate consideration received in respect of such issuance or sale would purchase at such Conversion Price and (y) the denominator of which is the total number of shares of Common Stock outstanding (calculated as set forth in Section 6(c)(iii) hereof) after giving effect to such issuance or sale; provided, however, that such fraction will in no event be greater than one (1). An adjustment made pursuant to this clause (ii) shall be made on the next Business Day following the date on which any such issuance is made and shall be effective retroactively to the close of business on the date of such issuance. For purposes of this clause (ii), the consideration receivable by the Corporation in connection with the issuance of additional shares of Common Stock or of Common Stock Equivalents since the Issue Date shall be deemed to be equal to the sum of the aggregate offering price (before deduction of underwriting discounts or commissions and expenses payable to third parties, if any) of all such Common Stock and/or Common Stock Equivalents plus the minimum aggregate amount, if any, payable upon conversion, exchange or exercise of any such Common Stock Equivalents. The issuance or reissuance of any shares of Common Stock (whether treasury shares or newly issued shares) pursuant to a dividend or distribution on, or subdivision, combination or reclassification of, the outstanding shares of Common Stock requiring an adjustment in the Conversion Price pursuant to clause (i) of this paragraph (c) of this Section 6 of this Certificate of Determination, shall not be deemed to constitute an issuance of Common Stock or Common Stock Equivalents by the Corporation to which this clause (ii) applies. "Excluded Securities" shall mean (i) shares of Common Stock and/or Common Stock Equivalents issuable or issued to employees, outside directors or consultants of the Corporation directly or pursuant to the Corporation's existing stock option plan or any future stock option plan approved by the Board of Directors of the Corporation and (ii) shares of Common Stock and/or Common Stock Equivalents issued or issuable as direct consideration for the acquisition by the Corporation of capital stock or assets of another business entity or in connection with a merger or consolidation to the extent such issuances are -5- 6 approved by a majority of the members of the Board of Directors of the Corporation that are not employees ("Outside Directors"). (iii) For purposes of this Section 6(c), the number of shares of Common Stock at any time outstanding shall mean the aggregate of all shares of Common Stock then outstanding (other than any shares of Common Stock then owned or held by or for the account of the Corporation) treating for purposes of this calculation all Common Stock Equivalents then outstanding as having been converted, exchanged or exercised. (iv) If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution and shall thereafter, and before such dividend or distribution is paid or delivered to shareholders entitled thereto, legally abandon its plan to pay or deliver such dividend or distribution, then no adjustment in the Conversion Price then in effect shall be made by reason of the taking of such record, and any such adjustment previously made as a result of the taking of such record shall be reversed. (d) The issuance of certificates for shares of Common stock upon conversion of the Series A Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series A Preferred Stock which is being converted. (e) The Corporation will at no time close its transfer books against the transfer of any Series A Preferred Stock, or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series A Preferred Stock in any manner which interferes with the timely conversion of such Series A Preferred Stock, except as may otherwise be required to comply with applicable securities laws. (f) As used in this Section 6, the term "Common Stock" shall mean and include the Corporation's authorized Common Stock, as constituted on the date of filing of this Certificate of Determination, and shall also include any capital stock of any class of the Corporation thereafter authorized which shall neither be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends nor be entitled to a preference in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, provided that the shares of Common Stock receivable upon conversion of shares of Series A Preferred Stock shall include only shares designated as Common Stock of the Corporation on the date of filing of this instrument, or in case of any reorganization or reclassification of the outstanding shares thereof, the stock, securities or assets to be issued in exchange for such Common Stock pursuant thereto. (g) Notwithstanding Section 6(a)(iii) hereof, in the case of a Sale of the Corporation (as defined in Section 10 hereof) or a proposed reorganization of the Corporation or a proposed reclassification or recapitalization of the capital stock of the Corporation (except a transaction for which provision for adjustment is otherwise made in this Section 6), each share of -6- 7 Series A Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series A Preferred Stock would have been entitled upon such Sale of the Corporation, reorganization, reclassification or recapitalization; and, in any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Series A Preferred Stock. The Corporation shall not effect any such Sale of the Corporation unless prior to or simultaneously with the consummation thereof the successor corporation or purchaser, as the case may be, shall assume by written instrument the obligation to deliver to the holders of the Series A Preferred Stock such shares of stock, securities or assets as, in accordance with the foregoing provisions, each such holder is entitled to receive. (h) The Corporation will not, by amendment of the Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment. (i) Upon the occurrence of an Automatic Conversion Event, the outstanding shares of Series A Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue to any such holder certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Series A Preferred Stock are either delivered to the Corporation or any transfer agent of the Corporation. The holder of any shares of Series A Preferred Stock may exercise the optional conversion right specified in paragraph 6(a) as to any part thereof by surrendering to the Corporation or any transfer agent of the Corporation the certificate or certificates for the shares to be converted, accompanied by written notice stating that the holder elects to convert all or a specified portion of the shares represented thereby. Conversion shall be deemed to have been effected (A) in the case of an Automatic Conversion Event, on the date of the occurrence of such event, or (B) in any other case, on the date when delivery of notice of an election to convert and certificates for shares is made, and any such date is referred to herein as the "Conversion Date." As promptly as practicable thereafter (and after surrender of the certificate or certificates representing shares of Series A Preferred Stock to the Corporation), the Corporation shall issue and deliver to or upon the written order of such holder a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check or cash with respect to any fractional interest in a share of Common Stock. The Person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a holder of record of such Common Stock on the applicable Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Series A Preferred Stock surrendered for conversion, the Corporation shall -7- 8 issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Series A Preferred Stock representing the unconverted portion of the certificate so surrendered. (j) No fractional share of Common Stock or scrip shall be issued upon conversion of shares of Series A Preferred Stock. If more than one share of Series A Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series A Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to that fractional interest of the then Current Market Price (as hereinafter defined). 7. Reports as to Adjustment. Upon any adjustment of the Conversion Price pursuant to the provisions of Section 6 hereof, then, and in each such case, the Corporation shall promptly deliver to the Transfer Agent of the Series A Preferred Stock and the Common Stock and to each of the holders of the Series A Preferred Stock and the Common Stock, a certificate signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation setting forth in reasonable detail the event requiring the adjustment, the method by which such adjustment was calculated and the Conversion Price in effect following such adjustment. Where appropriate, such notice to holders of the Series A Preferred Stock may be given in advance. 8. Certain Covenants. Any registered holder of Series A Preferred Stock may proceed to protect and enforce its rights and the rights of any other holders of Series A Preferred Stock with any and all remedies available at law or in equity. 9. Protective Provisions. So long as shares of Series A Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock: (a) alter or change the rights, preference or privileges of the shares of Series A Preferred Stock or otherwise amend this Certificate of Determination or the Amended and Restated Articles of Incorporation of the Corporation so as to affect adversely the shares of Series A Preferred Stock; or (b) increase the authorized number of shares of Series A Preferred Stock or issue additional shares of Series A Preferred Stock (except pursuant to Article 6 hereof); (c) create or designate, or authorize the issuance of, any new class or series of stock (i) ranking senior or having a preference over, or being on a parity with, the Series A Preferred Stock with respect to dividends or upon liquidation, (ii) having rights similar to any rights of the -8- 9 Series A Preferred Stock under Section 3 hereof, or (iii) convertible into any such class or series of stock; or (d) change the authorized number of directors of the Corporation. 10. Definitions. In addition to any other terms defined herein, for purposes of this Certificate of Determination, the following terms shall have the meanings indicated: "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close. "Commission" shall mean the Securities and Exchange Commission, and any successor agency. "Common Stock Equivalent" shall mean securities convertible into, or exchangeable or exercisable for, shares of Common Stock. "Conversion Price," determined as of any date, shall initially equal $3.535, and shall be subject to adjustment as provided in Section 6(c) of this Certificate of Determination. "Current Market Price" shall mean the average of the daily closing prices per share of Common Stock for the 30 consecutive trading days ending on the day in question. The closing price for each day shall be the last reported sales price regular way or, in the case no such reported sales take place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if not listed or admitted to trading on any national securities exchange, the average of the highest bid and the lowest asked prices quoted on the National Association of Securities Dealers Automated Quotation System or, if not so quoted, as reported by the National Quotation Bureau, Inc. The term "distribution" shall include the transfer of cash or property to the holders of a class of capital stock of the Corporation, without consideration, whether by way of dividend or otherwise (except a dividend in shares of such class of stock), or the purchase or redemption of shares of the Corporation, for cash or property, including such transfer, purchase or redemption by a subsidiary of the Corporation. The time of any distribution by way of dividends shall be the date of declaration thereof, and the time of any distribution by purchase or redemption of shares shall be the date on which cash or property is transferred by the Corporation, whether or not pursuant to a contract of an earlier date; provided, however, that, where a debt security is issued in exchange for shares, the time of the distribution is the date when the Corporation acquires the shares for such exchange. "Filing Date" shall mean the date of filing of this Certificate of Determination. -9- 10 "Junior Stock" shall mean any capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Preferred Stock. "Market Price" shall mean the average of the highest bid and lowest asked prices quoted on the NASDAQ. "Person" shall mean any individual, firm, corporation, partnership or other entity, and shall include any successor (by merger or otherwise) of such entity. "Sale of the Corporation" shall mean consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of the Corporation. "Securities Act" shall mean the Securities Act of 1993, as amended. "Trading Day" means a Business Day or, if the Common Stock is listed or admitted to trading on any national securities exchange or the NASDAQ, a day on which such exchange is open for the transaction of business. B. The number of shares of Series A Preferred Stock is 5,000,000, none of which have been issued. -10- 11 The undersigned hereby declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed in San Francisco and Palo Alto, California on July 15, 1997. ------------------------------------ Kenneth Cheng Vice President ------------------------------------ Thomas P. Shanahan Assistant Secretary -11- -----END PRIVACY-ENHANCED MESSAGE-----