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Separation and Distribution Agreement

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Sectors: Retail
Governing Law: California , View California State Laws
Effective Date: December 07, 1998
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EXHIBIT 10.1


SEPARATION AND


DISTRIBUTION AGREEMENT


BY AND BETWEEN


CREATIVE COMPUTERS, INC.


AND


uBID, INC.


(AS AMENDED)


DATED AS OF


DECEMBER 7, 1998


SEPARATION AND DISTRIBUTION AGREEMENT
-------------------------------------


(AS AMENDED)


THIS SEPARATION AND DISTRIBUTION AGREEMENT, dated as of December 7, 1998, is by and between Creative Computers, Inc. ("CCI") and uBid, Inc. ("uBid"). Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Article I hereof.


WHEREAS, the Board of Directors of CCI has determined that it is appropriate and desirable, on the terms and conditions contemplated hereby, to cause uBid to offer and sell for its own account in the IPO (as defined below) a limited number of shares of uBid Common Stock, and subsequently for CCI to distribute to holders of shares of CCI Common Stock the outstanding shares of uBid Common Stock owned directly or indirectly by CCI;


WHEREAS, the Distribution (as defined below) is intended to qualify as a tax-free spin-off under Section 355 of the Code (as defined below);


WHEREAS, CCI has provided various services to uBid on an informal basis and in connection with the separation of CCI and uBid the parties desire to formalize certain relationships which will continue on a transitional basis; and


WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions required to effect the separation, the IPO and the Distribution and certain other agreements that will govern certain matters relating to the IPO and the Distribution and the relationship of CCI and uBid following the IPO and the Distribution.


NOW, THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, agree as follows:


ARTICLE I
DEFINITIONS


For the purpose of this Agreement the following terms shall have the following meanings:


1.1. ACTION means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal.


1.2. AFFILIATE of any Person means a Person that controls, is controlled by, or is under common control with such Person. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise.


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1.3. AGENT means the distribution agent to be appointed by CCI to distribute to the stockholders of CCI pursuant to the Distribution the shares of uBid Common Stock held by CCI.


1.4. AGREEMENT means this Separation and Distribution Agreement, including all of the Schedules hereto.


1.5. ANCILLARY AGREEMENTS means the Services Agreement, Internet/Telecommunications Agreement, the Joint Marketing Agreement and Assignment and License Agreement each in the form set forth in Schedule 1.5.


1.6. APPLICABLE DEADLINE has the meaning set forth in Section 8.3(b).


1.7. ARBITRATION ACT means the United States Arbitration Act, 9 U.S.C. 1- 14, as the same may be amended from time to time.


1.8. ARBITRATION DEMAND DATE has the meaning set forth in Section 8.3(a).


1.9. ARBITRATION DEMAND NOTICE has the meaning set forth in Section 8.3(a).


1.10. CCI COMMON STOCK means the Common Stock, $.01 par value per share, of CCI.


1.11. CCI GROUP means CCI and each Person (other than any member of the uBid Group) that is an Affiliate of CCI immediately after the Closing Date.


1.12. CCI INDEMNITEES has the meaning set forth in Section 5.2.


1.13. CHANGE OF CONTROL of any Person means any of the following: (a) the consummation of a merger, consolidation, or similar business combination involving such Person, or a sale or other disposition of all or substantially all of the assets of such Person; (b) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under such Act) of 40% or more of either (i) the then outstanding shares of common stock of such Person, or (ii) the combined voting power of the then outstanding voting securities of such Person entitled to vote generally in the election of directors; or (c) individuals who, as of the Distribution Date, constitute the Board of Directors of such Person (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, however, that any
-------- ------- individual becoming a director subsequent to the Distribution Date (other than any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board) whose election or nomination for election by the stockholders of such Person was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board.


1.14. CLOSING means the receipt by uBid of the net proceeds of the IPO in accordance with the terms of the Underwriting Agreement.


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1.15. CLOSING DATE means the first time at which any shares of uBid Common Stock are sold to the Underwriters pursuant to the IPO in accordance with the terms of the Underwriting Agreement.


1.16. CODE means the Internal Revenue Code of 1986, as amended.


1.17. COMMISSION means the United States Securities and Exchange Commission.


1.18. CONSENTS means any consent, waiver or approval from, or notification requirements to, any third party.


1.19. CPR means the Center for Public Resources.


1.20. DISTRIBUTION means the distribution by CCI on a pro rata basis to holders of CCI Common Stock of all of the outstanding shares of uBid Common Stock owned by CCI on the Distribution Date as set forth in Article IV.


1.21. DISTRIBUTION DATE means the date determined pursuant to Section 3.1 on which the Distribution occurs.


1.22. EFFECTIVE IPO DATE means the date on which the IPO Registration Statement is declared effective by the Commission.


1.23. EFFECTIVE TIME means 5:00 p.m., Eastern Standard Time or Eastern Daylight Time (whichever shall be then in effect), on the Distribution Date.


1.24. ENVIRONMENTAL LAW means any federal, state, local, foreign or international statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, common law (including tort and environmental nuisance law), legal doctrine, order, judgment, decree, injunction, requirement or agreement with any Governmental Authority, now or hereafter in effect relating to health, safety, pollution or the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or to emissions, discharges, releases or threatened releases of any substance currently or at any time hereafter listed, defined, designated or classified as hazardous, toxic waste, radioactive or dangerous, or otherwise regulated, under any of the foregoing, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any such substances, including the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendments and Reauthorization Act and the Resource Conservation and Recovery Act and comparable provisions in state, local, foreign or international law.


1.25. ENVIRONMENTAL LIABILITIES means all Liabilities relating to, arising out of or resulting from any Environmental Law or contract or agreement relating to environmental, health or safety matters (including all removal, remediation or cleanup costs, investigatory costs, governmental response costs, natural resources damages, property damages, personal injury damages, costs of compliance with any settlement, judgment or other determination of Liability and indemnity, contribution or similar obligations) and all costs and expenses, interest, fines, penalties or other monetary sanctions in connection therewith.


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1.26. ESCALATION NOTICE has the meaning set forth in Section 8.2.


1.27. EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.


1.28. GOVERNMENTAL APPROVAL means any notice, report or other filing to be made, or any consent, registration, approval, permit or authorization to be obtained from, any Governmental Authority.


1.29. GOVERNMENTAL AUTHORITY shall mean any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority.


1.30. INDEMNIFYING PARTY has the meaning set forth in Section 5.4(a).


1.31. INDEMNITEE has the meaning set forth in Section 5.4(a).


1.32. INDEMNITY PAYMENT has the meaning set forth in Section 5.4(a).


1.33. INFORMATION means information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), and other technical, financial, employee or business information or data.


1.34. INSURANCE POLICIES means the insurance policies written by insurance carriers unaffiliated with CCI pursuant to which uBid (or their respective officers or directors) will be insured parties after the Closing Date.


1.35. INSURANCE PROCEEDS means those monies:


(a) received by an insured from an insurance carrier; or


(b) paid by an insurance carrier on behalf of the insured;


in any such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments) and net of any costs or expenses incurred in the collection thereof.


1.36. IPO means the initial public offering by uBid of shares of uBid Common Stock pursuant to the IPO Registration Statement.


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1.37. IPO REGISTRATION STATEMENT means the registration statement on Form S-1 (No. 333-58447) filed under the Securities Act, pursuant to which the uBid Common Stock to be issued in the IPO will be registered, together with all amendments thereto.


1.38. LIABILITIES means any and all losses, claims, charges, debts, demands, actions, causes of action, suits, damages, obligations, payments, costs and expenses, sums of money, accounts, reckonings, bonds, specialties, indemnities and similar obligations, exonerations, covenants, contracts, controversies, agreements, promises, doings, omissions, variances, guarantees, make whole agreements and similar obligations, and other liabilities, including all contractual obligations, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and including those arising under any law, rule, regulation, Action, threatened or contemplated Action (including the costs and expenses of demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all costs and expenses, whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened or contemplated Actions), order or consent decree of any Governmental Authority or any award of any arbitrator or mediator of any kind, and those arising under any contract, commitment or undertaking, including those arising under this Agreement or any Ancillary Agreement, in each case, whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person.


1.39. PERSON means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority.


1.40. PRIME RATE means the rate which Chase Manhattan Bank (or any successor thereto or other major money center commercial bank agreed to by the parties hereto) announces from time to time as its prime lending rate, as in effect from time to time.


1.41. PROSPECTUS means each preliminary, final or supplemental prospectus forming a part of the IPO Registration Statement.


1.42. RECORD DATE means the close of business on the date to be determined by the CCI Board of Directors as the record date for determining stockholders of CCI entitled to receive shares of uBid Common Stock in the Distribution.


1.43. REGISTRATION RIGHTS AGREEMENT means the Registration Rights Agreements, set forth as Exhibits A and B hereto, by and among CCI and uBid, on the one hand, and Frank Khulusi, Sam Khulusi and uBid on the other.


1.44. SECURITIES ACT means the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder.


1.45. SECURITY INTEREST means any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever.


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1.46. SUBSIDIARY OF ANY PERSON means any corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided,
-------- however, that no Person that is not directly or indirectly wholly owned by any ------- other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person.


1.47. TAX INDEMNIFICATION AND ALLOCATION AGREEMENT means the Tax Indemnification and Allocation Agreement, dated as of the date hereof, by and among CCI and uBid.


1.48. TAXES has the meaning set forth in the Tax Indemnification and Allocation Agreement.


1.49. THIRD PARTY CLAIM has the meaning set forth in Section 5.5(a).


1.50. uBID BUSINESS means the business of uBid as presently conducted.


1.51. uBID COMMON STOCK means Common Stock, $.001 par value per share, of uBid.


1.52. uBID GROUP means uBid, each Subsidiary of uBid and each other Person that is either controlled directly or indirectly by uBid immediately after the Closing Date or that is contemplated to be controlled by uBid.


1.53. uBID INDEMNITEES has the meaning set forth in Section 5.3(a).


1.54. UNDERWRITERS means the managing underwriters for the IPO.


1.55. UNDERWRITING AGREEMENT means the underwriting agreement to be entered into among uBid and the Underwriters with respect to the IPO.


ARTICLE II
THE IPO AND ACTIONS PENDING THE IPO


2.1. TRANSACTIONS PRIOR TO THE IPO. (a) Subject to the conditions specified in Section 2.6, CCI and uBid shall use their reasonable best efforts to consummate the IPO. Such actions shall include, but not necessarily be limited to, those specified in this Section 2.1.


(b) uBid shall file the IPO Registration Statement, and such amendments or supplements thereto, as may be necessary in order to cause the same to become and remain effective as required by law or by the Underwriters, including, but not limited to, filing such amendments to the IPO Registration Statement as may be required by the Underwriting Agreement, the Commission or federal, state or foreign securities laws. CCI and uBid shall also


6


cooperate in preparing, filing with the Commission and causing to become effective a registration statement registering the uBid Common Stock under the Exchange Act, and any registration statements or amendments thereof which are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the IPO, the Distribution or the other transactions contemplated by this Agreement and the Ancillary Agreements.


(c) uBid and CCI shall enter into the Underwriting Agreement, in form and substance reasonably satisfactory to uBid and CCI and shall comply with its respective obligations thereunder.


(d) CCI and uBid shall consult with each other and the Underwriters regarding the timing, pricing and other material matters with respect to the IPO.


(e) uBid shall use its reasonable best efforts to take all such action as may be necessary or appropriate under state securities and blue sky laws of the United States (and any comparable laws under any foreign jurisdictions) in connection with the IPO.


(f) uBid shall prepare, file and use reasonable best efforts to seek to make effective, an application for listing of the uBid Common Stock issued in the IPO on the NASDAQ Stock Market, subject to official notice of issuance.


(g) uBid shall participate in the preparation of materials and presentations as the Underwriters shall deem necessary or desirable.


(h) uBid shall pay all third party costs, fees and expenses relating to the IPO, all of the reimbursable expenses of the Underwriters pursuant to the Underwriting Agreement, all of the costs of producing, printing, mailing and otherwise distributing the Prospectus, as well as the Underwriters' discount as provided in the Underwriting Agreement.


2.2. PROCEEDS OF THE IPO. The IPO will be a primary offering of uBid Common Stock and the net proceeds of the IPO will be retained by uBid.


2.3. CONDITIONS PRECEDENT TO CONSUMMATION OF THE IPO. As soon as practicable after the date of this Agreement, the parties hereto shall use their reasonable best efforts to satisfy the following conditions to the consummation of the IPO. The obligations of the parties to consummate the IPO shall be conditioned on the satisfaction, or waiver by CCI, of the following conditions:


(a) The IPO Registration Statement shall have been filed and declared effective by the Commission, and there shall be no stop order in effect with respect thereto.


(b) The actions and filings with regard to state securities and blue sky laws of the United States (and any comparable laws under any foreign jurisdictions) described in Section 2.1 shall have been taken and, where applicable, have become effective or been accepted.


(c) The uBid Common Stock to be issued in the IPO shall have been accepted for listing on the NASDAQ Stock Market, on official notice of issuance.


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(d) uBid shall have entered into the Underwriting Agreement and all conditions to the obligations of uBid and the Underwriters shall have been satisfied or waived.


(e) CCI shall be satisfied in its sole discretion that it will own at least 80.1% of the voting rights attached to the outstanding uBid Common Stock following the IPO, and all other conditions to permit the Distribution to qualify as a tax-free distribution to CCI's stockholders and CCI shall, to the extent applicable as of the time of the IPO, be satisfied and there shall be no event or condition that is likely to cause any of such conditions not to be satisfied as of the time of the Distribution or thereafter.


(f) No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the IPO or any of the other transactions contemplated by this Agreement or any Ancillary Agreement shall be in effect.


(g) Such other actions as the parties hereto may, based upon the advice of counsel, reasonably request to be taken prior to the IPO in order to assure the successful completion of the IPO and the other transactions contemplated by this Agreement shall have been taken.


(h) This Agreement shall not have been terminated.


ARTICLE III
THE DISTRIBUTION


3.1. THE DISTRIBUTION. (a) Subject to Section 3.3 hereof, on or prior to the Distribution Date, CCI will deliver to the Agent for the benefit of holders of record of CCI Common Stock on the Record Date, a single stock certificate, endorsed by CCI in blank, representing all of the outstanding shares of uBid Common Stock then owned by CCI, and shall cause the transfer agent for the shares of CCI Common Stock to instruct the Agent to distribute on the Distribution Date the appropriate number of such shares of uBid Common Stock to each such holder or designated transferee or transferees of such holder.


(b) Subject to Section 3.4, each holder of CCI Common Stock on the Record Date (or such holder's designated transferee or transferees) will be entitled to receive in the Distribution a number of shares of uBid Common Stock equal to the number of shares of CCI Common Stock held by such holder on the Record Date multiplied by a fraction the numerator of which is the number of shares of uBid Common Stock beneficially owned by CCI, on the Record Date and the denominator of which is the number of shares of CCI Common Stock outstanding on the Record Date.


(c) uBid and CCI, as the case may be, will provide to the Agent all share certificates and any information required in order to complete the Distribution on the basis specified above.


3.2. ACTIONS PRIOR TO THE DISTRIBUTION. (a) CCI and uBid shall prepare and mail, prior to the Distribution Date, to the holders of CCI Common Stock, such information


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concerning uBid, its business, operations and management, the Distribution and such other matters as CCI shall reasonably determine and as may be required by law. CCI and uBid will prepare, and uBid will, to the extent required under applicable law, file with the Commission any such documentation and any requisite no action letters which CCI determines are necessary or desirable to effectuate the Distribution and CCI and uBid shall each use its reasonable best efforts to obtain all necessary approvals from the Commission with respect thereto as soon as practicable.


(b) CCI and uBid shall take all such action as may be necessary or appropriate under the securities or blue sky laws of the United States (and any comparable laws under any foreign jurisdiction) in connection with the Distribution.


(c) CCI and uBid shall take all reasonable steps necessary and appropriate to cause the conditions set forth in Section 3.3 (subject to Sections 3.3(d)) to be satisfied and to effect the Distribution on the Distribution Date.


(d) uBid shall prepare and file, and shall use its reasonable best efforts to have approved, an application for the listing on the NASDAQ Stock Market, subject to official notice of distribution of the uBid Common Stock to be distributed in the Distribution, and the shares of uBid Common Stock covered by uBid Options to be granted under Section 3.6 below.


3.3. CONDITIONS TO DISTRIBUTION. The CCI Board currently intends to effect the Distribution at any time commencing 180 days after the Closing Date and ending on or prior to December 31, 1999. Subject to any restrictions contained in the Underwriting Agreement, the CCI Board shall have the sole discretion to determine the date of consummation of the Distribution at any time commencing 180 days after the Closing Date and ending on or prior to December 31, 1999. CCI shall be obligated to consummate the Distribution on or before December 31, 1999, subject to the satisfaction, or waiver by the CCI Board in its sole discretion, of the conditions set forth below. In the event that any such condition shall not have been satisfied or waived on or before December 31, 1999, CCI shall consummate the Distribution as promptly as practicable following the satisfaction or waiver by CCI of all such conditions.


(a) an opinion letter from PricewaterhouseCoopers LLP (the "PWC Opinion") shall have been obtained in form and substance satisfactory to CCI in its sole discretion, and shall be confirmed at the Distribution Date, to the effect that, among other things, the Distribution will qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Code and the Distribution by CCI of the uBid Common Stock to stockholders of CCI will not result in recognition of any income, gain or loss for federal income tax purposes to CCI or CCI's stockholders;


(b) if CCI, in its sole discretion, decides to seek a private letter ruling from the Internal Revenue Service to the same effect as the PWC Opinion (the "Letter Ruling"), the Letter Ruling shall have been obtained in form and substance satisfactory to CCI, and shall continue in effect, consistent with the conclusions reached in the PWC Opinion.


(c) any material Governmental Approvals and Consents necessary to consummate the Distribution shall have been obtained and be in full force and effect;


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(d) no order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Distribution shall be in effect and no other event outside the control of CCI shall have occurred or failed to occur that prevents the consummation of the Distribution; and


(e) no other events or developments shall have occurred subsequent to the Closing Date that, in the sole judgment of the Board of Directors of CCI, would result in the Distribution having a material adverse effect on CCI or on the stockholders of CCI.


The foregoing conditions are for the sole benefit of CCI and shall not give rise to or create any duty on the part of CCI or the CCI Board of Directors to waive or not waive any such condition.


3.4. FRACTIONAL SHARES. As soon as practicable after the Distribution Date, CCI shall direct the Agent to determine the number of whole shares a
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