Exhibit 10.26

 

AGREEMENT AND PLAN OF MERGER

 

This Agreement and Plan of Merger (the “Agreement”) was made and entered into as
of October 7, 2004, and amended and restated as of October 22, 2004, between
Pacific Data Images, Inc., a California corporation (“Target” and after the
Effective Time of the Merger (as defined below) the “Surviving Corporation”),
DreamWorks Animation SKG, Inc., a Delaware corporation (the “Acquiror”), and DWA
Acquisition Corp., a Delaware corporation (“Sub”). Target and Sub are
hereinafter collectively referred to as the “Constituent Corporations.”

 

The Constituent Corporations hereby agree as follows:

 

1. The Merger.

 

(a) Merger of Sub With and Into Target.

 

(i) Agreement to Acquire Target. Subject to the terms of this Agreement (the
“Merger Agreement”), Target shall be acquired by Acquiror through a merger (the
“Merger”) of Sub with and into Target. The closing of the Merger (the “Closing”)
will take place at 10:00 a.m., New York time, on a date to be specified by the
parties (the “Closing Date”) at the offices of Cravath, Swaine & Moore LLP, 825
Eighth Avenue, New York, NY 10019.

 

(ii) Effective Time of the Merger. The Merger shall be effective (the “Effective
Time”) as prescribed by law.

 

(iii) Surviving Corporation. At the Effective Time of the Merger, Sub shall be
merged with and into Target and the separate corporate existence of Sub shall
thereupon cease. Target shall be the surviving corporation in the Merger and the
separate corporate existence of Target, with all its purposes, objects, rights,
privileges, powers, immunities and franchises, shall continue unaffected and
unimpaired by the Merger.

 

(b) Effect of the Merger; Additional Actions.

 

(i) Effects. The Merger shall have the effects set forth in Section 1107 of the
California General Corporation Law (the “CGCL”) and Section 259 of the Delaware
General Corporation Law.

 

(ii) Additional Actions. If, at any time after the Effective Time of the Merger,
Target shall consider or be advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable (i) to
vest, perfect or confirm of record or otherwise in Target its right, title or
interest in, to or under any of the rights, properties or assets of either
Constituent Corporation acquired or to be acquired by Target as a result of, or
in connection with, the Merger or (ii) to otherwise carry out the purposes of
this Agreement, each Constituent Corporation and its officers and directors
shall be deemed to have granted to Target an irrevocable power of attorney to
execute and deliver all such deeds, bills of sale, assignments and assurances
and to take and do all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and interest in,
to and under such rights, properties or assets in Target and otherwise to carry
out the purposes of this Agreement; and the officers and directors of Target are
fully authorized in the name of each Constituent Corporation or otherwise to
take any and all such actions.

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2. The Constituent Corporations.

 

(a) Organization of Target.

 

(i) Incorporation. Target was incorporated under the laws of the State of
California on August 13, 1980.

 

(ii) Authorized Stock. Target is authorized to issue one class of shares
designated Common Stock in the aggregate amount of 30,000,000 shares (“Target
Common Stock”) .

 

(iii) Outstanding Stock. As of the date of this Agreement, 11,356,610 shares of
Target Common Stock were outstanding.

 

(b) Organization of Sub.

 

(i) Incorporation. Sub was incorporated under the laws of the State of Delaware
on September 14, 2004.

 

(ii) Authorized Stock. Sub is authorized to issue an aggregate of 1,000 shares
of Common Stock (“Sub Stock”).

 

(iii) Outstanding Stock. On the date hereof, an aggregate of 1,000 shares of Sub
Stock are outstanding.

 

(c) Target Shareholder Approval. The holders of a majority of the outstanding
shares of Target’s Common Stock are expected to approve and adopt this Agreement
without a meeting by written consent in accordance with the provisions of
Section 603 of the CGCL.

 

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3. Amended Articles of Incorporation; By-Laws and Directors and Officers of
Target.

 

(a) Amendment of Target’s Articles of Incorporation.

 

(i) Authorized Stock at Merger. At the Effective Time of the Merger, Article V
of the Articles of Incorporation of Target shall be amended in its entirety to
read as set forth on Exhibit A attached hereto.

 

(ii) Articles of Incorporation of Surviving Corporation. The Articles of
Incorporation of Target in effect at the Effective Time of the Merger, as
amended as provided in clause (a)(i) above, shall be the Articles of
Incorporation of the Surviving Corporation unless and until amended as provided
by applicable law.

 

(b) Bylaws. The Bylaws of Target, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended as provided by California law and such Bylaws.

 

(c) Officers and Directors of Surviving Corporation. The directors of Sub in
effect immediately prior to the Effective Time of the Merger shall be the
directors of the Surviving Corporation, and the officers of Target immediately
prior to the Effective Time of the Merger shall be the officers of the Surviving
Corporation, in each case until the earlier of their resignation or removal or
until their respective successors shall have been duly elected and qualified.

 

4. Effect of the Merger on the Capital Stock of the Constituent Corporations;
Exchange of Certificates.

 

(a) Effect on Capital Stock. As of the Effective Time of the Merger, by virtue
of the Merger and without any action on the part of the holder of any shares of
Target Common Stock:

 

(i) Capital Stock of Sub. Each issued and outstanding share of capital stock of
Sub shall be converted into and become one fully paid and non-assessable share
of Target Common Stock. Each stock certificate of Sub evidencing ownership of
any such shares shall continue to evidence ownership of such shares of capital
stock of the Surviving Corporation.

 

(ii) Cancellation of Treasury Stock. All shares of Target Common Stock that are
owned by Target (as treasury stock), Acquiror or Sub shall be canceled and
retired and shall cease to exist and no consideration shall be delivered in
exchange therefor.

 

(iii) Conversion of Target Common Stock. The issued and outstanding shares of
Target capital stock (other than shares to be canceled pursuant to Section
4(a)(ii) hereof and shares, if any, held by persons exercising dissenters’
rights in accordance with Section 1300 of the CGCL) held by a holder of record
of Target capital stock immediately prior to the Effective Time shall be
converted, without any action on the part of such holder, into the right to
receive a number of whole shares of Class A common stock of Acquiror, $.01 par
value (“Acquiror Common Stock”), determined by multiplying the number of shares
of Target capital

 

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stock held by such holder of Target capital stock by a fraction (the “Exchange
Ratio”), the numerator of which is $6.50, and the denominator of which is the
initial public offering price per share of Class A common stock of the Acquiror
in connection with its initial public offering (the “Merger Consideration”) and
rounding the product up for any fraction equal to or greater than one half, and
rounding the product down for any fraction that is less than one half. The
initial public offering price per share of Class A common stock of the Acquiror
shall be determined by reference to the per share amount appearing under the
column “Price to Public” on the cover page of the Acquiror’s prospectus, dated
October 28, 2004, regarding the offering of 29,000,000 shares of Class A common
stock of the Acquiror, without any deduction for underwriting discounts and
commissions.

 

(iv) Conversion of Target Options. As of the Effective Time, each outstanding
option to purchase shares of Target Common Stock granted pursuant to the PDI
Inc. 1996 Equity Incentive Plan and the PDI Inc. 1998 Stock Plan (the “Target
Stock Option Plans”), whether vested or unvested (a “Target Option”), will be
converted into an option to purchase shares of Acquiror Common Stock (each, an
“Acquiror Option”). In addition, the Target Stock Option Plans shall be
terminated by resolution of the Target’s board of directors. Except as provided
below, each such Target Option converted by Acquiror under this Agreement shall
retain its respective vesting schedule as set forth under the applicable Target
Stock Option Plan; however, the converted Target Options will be governed by the
2004 Omnibus Incentive Compensation Plan as of the Effective Time. The 2004
Omnibus Incentive Compensation Plan shall provide for terms and conditions such
that the converted Target Options shall continue to be subject to the same terms
and conditions that are comparable to those set forth in the applicable Target
Stock Option Plan, except that (i) each such option will be exercisable for that
number of whole shares of Acquiror Common Stock obtained by multiplying the
number of shares of Target Common Stock that would be issuable upon exercise of
such option immediately prior to the Effective Time, assuming that all vesting
conditions applicable to such option were then satisfied, by the Exchange Ratio
and rounded down to the nearest whole number of shares of Acquiror Common Stock,
and (ii) the per share exercise price for the shares of Acquiror Common Stock
issuable upon exercise of such converted Target Option will be equal to the
quotient determined by dividing the exercise price per share of Target Common
Stock at which such option was exercisable immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the nearest cent. Consistent with the
terms of the Target Stock Option Plans and the documents governing the
outstanding Target Options under such plans, the Merger will not terminate any
of the outstanding Target Options under the Target Stock Option Plans or
accelerate the exercisability or vesting of such options or the shares of Target
Common Stock which will be subject to those options upon the conversion of the
Target Options in connection with the Merger. It is the intention of the parties
that the Target Options converted to Acquiror Options qualify, to the maximum
extent permissible, following the Effective Time, as incentive stock options, as
defined in Section 422 of the Code, to the extent, and only to the extent, the
Target Options so converted qualified as incentive stock options prior to the
Effective Time.

 

(iv) Dissenters’ Rights. If any holder of Target Common Stock (a “Dissenting
Holder”) duly demands purchase of his, her or its shares of Target Common Stock
in connection with the Merger under Chapter 13 of the CGCL (such shares being
“Dissenting

 

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Shares”), the Dissenting Shares shall not be converted into Merger Consideration
but shall be converted into the right to receive an amount in cash equal to the
fair market value of such shares as may be determined to be due with respect to
such Dissenting Shares pursuant to the law of the State of California. After the
Effective Time of the Merger, Acquiror shall issue and deliver to any holder of
shares of Target Common Stock who shall have withdrawn his, her or its demand
for purchase or have failed to perfect or shall have otherwise lost his, her or
its right of purchase, in any case pursuant to the CGCL, upon surrender by such
Dissenting Shareholder of his, her or its, certificate or certificates
representing shares of Target Common Stock, the Merger Consideration to which
such Dissenting Shareholder is then entitled under Section 4(a)(iii) of this
Agreement.

 

(b) Exchange of Certificates.

 

(i) Exchange Agent. Prior to the Closing Date, Acquiror shall appoint The Bank
of New York to act as Exchange Agent (the “Exchange Agent”) in the Merger.

 

(ii) Exchange Procedures. At the Effective Time, the Exchange Agent shall mail
to each holder of record of a certificate (i) a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the certificates held by such person shall pass, only upon proper delivery of
the certificates to the Exchange Agent and shall be in a form and have such
other provisions as Acquiror may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for the
applicable Merger Consideration. Upon surrender of a certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly completed and validly executed, and such other documents as may reasonably
be required by the Exchange Agent, the holder of such certificate shall be
entitled to receive in exchange therefor the Merger Consideration with respect
to such shares, without interest and the certificate so surrendered shall
forthwith be canceled.

 

(iii) No Further Ownership Rights in Target Common Stock. All Merger
Consideration delivered upon the surrender of certificates that represented
shares of Target Common Stock in accordance with the terms hereof shall be
deemed to have been paid in full satisfaction of all rights pertaining to such
shares of Target Common Stock theretofore represented by such certificates. At
the close of business on the day on which the Effective Time occurs the stock
transfer books of Target shall be closed, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Target capital stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
certificates are presented to the Surviving Corporation or the Exchange Agent
for transfer or any other reason, they shall be canceled and exchanged as
provided in this Section 4.

 

5. TERMINATION

 

(a) Termination by Mutual Agreement. Notwithstanding the approval of this
Agreement by the shareholders of Target, this Agreement may be terminated at any
time prior to the Effective Time of the Merger by mutual written consent of the
Constituent Corporations.

 

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(b) Effects of Termination. In the event of the termination of this Agreement,
this Agreement shall become void and there shall be no liability on the part of
either Target or Sub or their respective officers or directors.

 

6. GENERAL PROVISIONS.

 

(a) Amendment. This Agreement may be amended by the boards of directors of the
Constituent Corporations and the Acquiror hereto any time prior to the effective
time of the Merger; however, after approval hereof by the shareholders of the
Constituent Corporations, no amendment shall be made which by law requires the
further approval of such shareholders without obtaining such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.

 

(b) Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one instrument.

 

(c) Governing Law. This Agreement and all acts and transactions pursuant hereto
and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of New York,
without giving effect to its principles governing conflicts of laws, except to
the extent the laws of California or Delaware are mandatorily applicable to the
Merger.

 

(d) Entire Agreement. This Agreement constitutes the entire agreement among such
parties pertaining to the subject matter hereof and thereof, and the agreements
contemplated hereby and all negotiations and drafts of the parties with regard
to the transactions contemplated herein, and any and all written or oral
agreements existing between the parties hereto regarding such transactions are
expressly canceled.

 

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The parties have duly executed this Agreement as of the date first written
above.

 

TARGET:

PACIFIC DATA IMAGES, INC.,

by

 

/s/ Jeffrey Katzenberg

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Name:

  Jeffrey Katzenberg

Title:

  President

 

by

 

/s/ Ann Daly

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Name:

  Ann Daly

Title:

  Vice President and Assistant Secretary

SUB:

DWA ACQUISITION CORP.,

by

 

/s/ Ann Daly

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Name:

  Ann Daly

Title:

  President

by

 

/s/ Katherine Kendrick

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Name:

  Katherine Kendrick

Title:

  Secretary

ACQUIROR:

DREAMWORKS ANIMATION SKG, INC.,

by

 

/s/ Katherine Kendrick

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Name:

  Katherine Kendrick

Title:

  General Counsel and Secretary

by

 

/s/ Kristina Leslie

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Name:

  Kristina Leslie

Title:

  Chief Financial Officer and Vice President

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EXHIBIT A

 

Amendment to Pacific Data Images, Inc.’s Articles of Incorporation:

 

Article V

 

The Corporation is authorized to issue one class of shares designated “Common
Stock.” The total number of shares of Common Stock that the Corporation is
authorized to issue is one thousand, par value $0.01 per share.

 

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