-----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, LUubbOt1ABvWPw89ElR2WkClEACosfpEt0cg3QH+fo+esvZ3VCNjh/3PU4Fg60da xgfrxLtUZEVn54SjNLwI9g== 0000950134-01-508424.txt : 20020410 0000950134-01-508424.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950134-01-508424 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRRUS LOGIC INC CENTRAL INDEX KEY: 0000772406 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770024818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0327 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17795 FILM NUMBER: 1785225 BUSINESS ADDRESS: STREET 1: 4210 SOUTH INDUSTRIAL DR CITY: AUSTIN STATE: TX ZIP: 78744 BUSINESS PHONE: 5106238300 MAIL ADDRESS: STREET 1: 3100 W WARREN AVE CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 d91953e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 29, 2001 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER PERIOD ENDED SEPTEMBER 29, 2001 COMMISSION FILE NUMBER 0-17795 ---------- CIRRUS LOGIC, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER.) DELAWARE 77-0024818 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 4210 SOUTH INDUSTRIAL DRIVE, AUSTIN, TX 78744 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (512) 445-7222 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares of the registrant's common stock, $0.001 par value, outstanding as of September 29, 2001 was 74,044,443. ================================================================================ CIRRUS LOGIC, INC. FORM 10-Q QUARTERLY REPORT QUARTERLY PERIOD ENDED SEPTEMBER 29, 2001 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 SIGNATURES 17 INDEX TO EXHIBITS 18
2 CIRRUS LOGIC, INC. CONSOLIDATED CONDENSED BALANCE SHEET (IN THOUSANDS)
SEPTEMBER 29, MARCH 31, 2001 2001 ------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 166,757 $ 253,136 Restricted cash 10,000 10,000 Marketable equity securities 4,097 6,581 Accounts receivable, net 107,522 136,102 Inventories, net 61,489 109,161 Other current assets 20,858 18,217 ------------ ------------ 370,723 533,197 Property and equipment, net 31,009 32,340 Deposits and other assets 38,275 32,468 ------------ ------------ $ 440,007 $ 598,005 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 65,074 $ 115,254 Current maturities of long-term debt and capital lease obligations -- 3,133 Income taxes payable 40,628 41,053 ------------ ------------ 105,702 159,440 Long-term obligations 3,198 4,319 Commitments and contingencies Minority interest in eMicro 1,347 1,703 Stockholders' equity: Capital stock 665,874 715,790 Accumulated other comprehensive income 2,423 4,578 Accumulated deficit (338,537) (287,825) ------------ ------------ 329,760 432,543 ------------ ------------ $ 440,007 $ 598,005 ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 CIRRUS LOGIC, INC. CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------- ----------------------------- SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net sales $ 77,276 $ 189,537 $ 256,949 $ 370,949 Costs and expenses: Cost of sales 46,584 110,513 205,582 218,412 Research and development 26,993 34,549 57,820 65,588 Selling, general and administrative 22,403 29,299 47,851 55,567 Restructuring costs and other, net -- (1,848) 1,919 (14,362) ------------ ------------ ------------ ------------ Total costs and expenses 95,980 172,513 313,172 325,205 Income (loss) from operations (18,704) 17,024 (56,223) 45,744 Realized gain on sale of marketable equity securities -- 1,905 10,967 81,544 Interest expense (30) (5,119) (59) (10,100) Interest income 1,450 4,308 4,336 9,113 Other income 280 168 706 682 ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes (17,004) 18,286 (40,273) 126,983 Provision for income taxes -- 1,924 -- 12,635 Minority interest in loss of eMicro 84 105 356 224 ------------ ------------ ------------ ------------ Income (loss) before extraordinary gain and accounting change (16,920) 16,467 (39,917) 114,572 Extraordinary gain, net of income tax -- -- -- 2,482 Cumulative effect of change in accounting principle -- -- -- (1,707) ------------ ------------ ------------ ------------ Net income (loss) $ (16,920) $ 16,467 $ (39,917) $ 115,347 ============ ============ ============ ============ Basic income (loss) per share: Before extraordinary gain and accounting change $ (0.23) $ 0.25 $ (0.54) $ 1.73 Extraordinary gain, net of income tax -- -- -- 0.04 Cumulative effect of change in accounting principle -- -- -- (0.03) ------------ ------------ ------------ ------------ $ (0.23) $ 0.25 $ (0.54) $ 1.75 ============ ============ ============ ============ Diluted income (loss) per share: Before extraordinary gain and accounting change $ (0.23) $ 0.23 $ (0.54) $ 1.49 Extraordinary gain, net of income tax -- -- -- 0.03 Cumulative effect of change in accounting principle -- -- -- (0.02) ------------ ------------ ------------ ------------ $ (0.23) $ 0.23 $ (0.54) $ 1.50 ============ ============ ============ ============ Weighted average common shares outstanding: Basic 74,000 66,041 74,238 66,064 Diluted 74,000 70,918 74,238 81,674
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 CIRRUS LOGIC, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (IN THOUSANDS; UNAUDITED)
SIX MONTHS ENDED ----------------------------- SEPT. 29, SEPT. 23, 2001 2000 ------------ ------------ Cash flows from operating activities: Net income (loss) $ (39,917) $ 115,347 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 15,080 15,419 Extraordinary gain, net of income tax -- (2,482) Acquired in-process research and development expense 1,910 -- Gain on sale of marketable equity securities (10,967) (81,544) Other non-cash charges 391 1,512 Net change in operating assets and liabilities 23,078 (44,298) ------------ ------------ Net cash (used in) provided by operating activities (10,425) 3,954 ------------ ------------ Cash flows from investing activities: Proceeds from sale of equity investments 10,967 83,544 Additions to property and equipment (6,435) (12,327) Investments in technology (3,558) (4,416) Acquisition of Peak Audio (10,844) -- Increase in deposits and other assets (1,686) (626) Decrease in restricted cash -- 55,752 ------------ ------------ Net cash (used in) provided by investing activities (11,556) 121,927 ------------ ------------ Cash flows from financing activities: Payments on long-term debt and capital lease obligations (3,469) (6,992) Repurchase and retirement of common stock (68,662) -- Cash contributions from minority partners -- 5,000 Repurchase of convertible subordinated notes -- (24,848) Unrealized foreign currency translation 329 (59) Issuance of common stock, net of issuance costs 7,404 11,695 ------------ ------------ Net cash used in financing activities (64,398) (15,204) ------------ ------------ Net (decrease) increase in cash and cash equivalents (86,379) 110,677 Cash and cash equivalents at beginning of period 253,136 144,034 ------------ ------------ Cash and cash equivalents at end of period $ 166,757 $ 254,711 ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 CIRRUS LOGIC, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated condensed financial statements have been prepared by Cirrus Logic, Inc. ("we," "our," "us," the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In our opinion, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented. These unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements, and notes thereto for the year ended March 31, 2001, included in our 2001 Annual Report on Form 10-K. The results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the entire year. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. Such reclassifications had no effect on the results of operations or stockholders' equity. 2. ACCOUNTING CHANGES AND EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS We adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective April 1, 2001. Adoption of SFAS No. 133 did not have a material impact on our results of operations or financial position. From time to time, we enter into foreign currency forward exchange and option contracts to reduce the foreign currency exposures related to sales and balance sheet accounts denominated in yen. At September 29, 2001 we had foreign currency forward contracts to sell approximately 500 million Japanese Yen at an average rate of approximately 119.5 Japanese Yen per dollar. At September 29, 2001 the fair value and unrealized loss on these contracts was $0.1 million. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." We recorded a cumulative effect of a change in accounting principle in the first quarter of fiscal 2001 to reflect our adoption of new revenue recognition policies as a result of this guidance. Effective with the first quarter of fiscal 2001, we have recognized revenue on international shipments based on customer receipt and title passage of inventory rather than on the date of shipment, which was our historical method. The cumulative effect of the change for prior years resulted in a charge to income of $1.7 million. The effect of the change for the fiscal year 2001 was to increase revenue $5.2 million, increase cost of sales $3.5 million, increase income before extraordinary gain and net income before the change in accounting principle $1.7 million, and increase basic and diluted earnings per share by $0.02 per share. During the first quarter of fiscal 2001, we also changed our estimate of the amount of revenue that is deferred on certain distributor transactions under agreements with only limited rights of return. Results for the fiscal period ended March 31, 2001 include revenue of $5.4 million, cost of sales of $2.0 million and income of $3.4 million related to this change in estimate. The effect of this estimate change increased basic and diluted earnings per share by $0.03 for the fiscal year ended March 31, 2001. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS No. 142 effective March 31, 2002. 6 We are currently evaluating the effect that SFAS No. 142 will have on our results of operations and financial position. 3. INVENTORIES Net inventories are comprised of the following (in thousands):
SEPT. 29, MARCH 31, 2001 2001 ------------ ------------ Work-in process $ 46,809 $ 81,272 Finished goods 14,680 27,889 ------------ ------------ $ 61,489 $ 109,161 ============ ============
4. INCOME TAXES We have accrued no income tax expense for the fiscal quarter and the two fiscal quarters ended September 29, 2001 because of the losses incurred for those time periods and forecasted for the fiscal year ended March 30, 2002. SFAS No. 109, "Accounting for Income Taxes," provides for the recognition of deferred tax assets if realization of such assets is more likely than not. We have provided a valuation allowance equal to net deferred tax assets due to uncertainties regarding their realization. The realizability of the deferred tax assets will be evaluated on a quarterly basis. 5. RESTRUCTURING CHARGES AND OTHER On May 2, 2001, we announced a change to our business model, in which we are de-emphasizing our magnetic storage chip business and are focusing on consumer-entertainment electronics. On May 15, 2001, we announced cost-reduction actions to align company resources and expenses with this new business model. In connection with these strategic decisions, we reduced our workforce by approximately 120 employees worldwide, or about nine percent of the total workforce at that time. As of September 29, 2001, substantially all of the affected employees had been separated from the Company and the liability related to termination benefits had been paid. During the first quarter of fiscal 2002, we recorded a charge of $1.9 million to cover costs associated with these workforce reductions. In October 2001, we had an additional workforce reduction; see Note 12 for discussion. During the second quarter of fiscal 2001, we recorded $1.8 million in income due to the final resolution of the MiCRUS restructuring agreement. During the first quarter of fiscal 2001, we recorded $12.5 million in income to recognize the receipt of two previously-reserved notes from Intel Corporation on behalf of Basis Communications Corporation. 7 6. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
BASIC EARNINGS PER SHARE THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------- ----------------------------- SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Income (loss) before extraordinary gain and accounting change $ (16,920) $ 16,467 $ (39,917) $ 114,572 Extraordinary gain, net of income tax -- -- -- 2,482 Cumulative effect of change in accounting principle -- -- -- (1,707) ------------ ------------ ------------ ------------ Net income (loss) $ (16,920) $ 16,467 $ (39,917) $ 115,347 ============ ============ ============ ============ Weighted average shares outstanding 74,000 66,041 74,238 66,064 Basic income (loss) per share: Before extraordinary gain and accounting change $ (0.23) $ 0.25 $ (0.54) $ 1.73 Extraordinary gain, net of income tax -- -- -- 0.04 Cumulative effect of change in accounting principle -- -- -- (0.03) ------------ ------------ ------------ ------------ $ (0.23) $ 0.25 $ (0.54) $ 1.75 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE Income (loss) before extraordinary gain and accounting change $ (16,920) $ 16,467 $ (39,917) $ 114,572 Effect of convertible subordinated note conversion -- -- -- 7,313 ------------ ------------ ------------ ------------ Income (loss) including assumed conversion of subordinated notes before extraordinary gain and accounting change (16,920) 16,467 (39,917) 121,885 Extraordinary gain, net of income tax -- -- -- 2,482 Cumulative effect of change in accounting principle -- -- -- (1,707) ------------ ------------ ------------ ------------ Net income (loss) $ (16,920) $ 16,467 $ (39,917) $ 122,660 ============ ============ ============ ============ Weighted average shares outstanding 74,000 66,041 74,238 66,064 Assumed conversion of convertible subordinated notes -- -- -- 11,185 Dilutive effect of stock options outstanding -- 4,877 -- 4,425 ------------ ------------ ------------ ------------ Weighted average diluted shares outstanding 74,000 70,918 74,238 81,674 ============ ============ ============ ============ Diluted income (loss) per share: Before extraordinary gain and accounting change $ (0.23) $ 0.23 $ (0.54) $ 1.49 Extraordinary gain, net of income tax -- -- -- 0.03 Cumulative effect of change in accounting principle -- -- -- (0.02) ------------ ------------ ------------ ------------ $ (0.23) $ 0.23 $ (0.54) $ 1.50 ============ ============ ============ ============
Incremental common shares attributable to the exercise of outstanding options for the three and six months ended September 29, 2001 of 2,036,520 shares and 2,356,493 shares, respectively, were excluded from the computation of diluted net income per share because the effect would be antidilutive. Diluted earnings per share for September 23, 2000 of $1.50 includes an adjustment to increase net income by $7.3 million and diluted shares by 11.2 million, which was the quarterly after-tax interest savings and shares that would have been issued in connection with the convertible debt. 8 7. STOCK REPURCHASE On April 11, 2001, we repurchased approximately 6.4 million shares of our common stock from a former member of the Board of Directors for approximately $68.7 million. The shares were subsequently retired with $57.9 million charged to capital stock and $10.8 million charged to accumulated deficit. 8. ACQUISITION OF PEAK AUDIO On April 30, 2001, we completed the acquisition of the assets of Peak Audio, Inc. ("Peak"), a Colorado-based company specializing in commercial audio networking products. The acquisition was structured as a cash purchase of Peak's assets for an initial consideration of $11 million. As part of the acquisition, the shareholders of Peak can potentially receive up to an additional $16 million in consideration based on the financial performance of the purchased assets over a two-year period. The contingent consideration can be paid in cash or Cirrus Logic common stock at our discretion. The acquisition was accounted for under the purchase method of accounting. The purchase price was allocated to the estimated fair value of assets acquired based on independent appraisals and management estimates, resulting in goodwill of $1.1 million. The goodwill is currently being amortized based on a five-year life; such amortization will discontinue on March 31, 2002, in accordance with SFAS No. 142. Approximately $1.9 million of the Peak purchase price was allocated to in-process research and development based upon an independent third-party appraisal and was expensed upon the closing of the transaction. The results of operations of Peak have been included with those of the Company subsequent to the acquisition date, which was April 30, 2001. The results of operations of Peak were not material to our results of operations for the first two fiscal quarters of 2002. 9. COMMITMENTS AND CONTINGENCIES As of September 29, 2001, we had one volume purchase agreement. The agreement was executed in August 2000 and expires on March 31, 2003. This agreement is purchase-order based and does not have "take/pay" clauses. There are cancellation fees of 50% once the vendor acknowledges a purchase order. There are cancellation fees of 100% once the vendor begins manufacturing a purchase order. We had no purchase order commitments as of September 29, 2001 under this agreement. Additionally, we had non-cancelable assembly purchase orders with numerous vendors totaling $0.6 million. On October 19, 2001, we filed a lawsuit against Fujitsu, Ltd. in the United States District Court for the Northern District of California. We are alleging claims for breach of contract and anticipatory breach of contract, and seek damages in excess of $46 million. The basis for our complaint is Fujitsu's refusal to pay for chips delivered to and accepted by it. Fujitsu has informed us that it would not make payments due, and, instead, would set off unsubstantiated losses that Fujitsu claims to have been caused by alleged defects in our chips. We believe Fujitsu's stated reasons for not paying its contractual obligation are without merit and, therefore, we continue to carry this receivable on our balance sheet. We intend to prosecute our lawsuit vigorously. On July 5, 2001, Western Digital Corporation and its Malaysian subsidiary, Western Digital (M) SDN.BHD, filed a lawsuit against us in the Superior Court of the State of California, Orange County. The plaintiffs alleged breach of contract, breach of the covenant of good faith and fair dealing, promissory estoppel, declaratory relief, unjust enrichment, restitution, and unfair trade practices. The basis for this complaint related to negotiations regarding prices and commitments for the guaranteed purchase of channel chips. The plaintiffs sought damages in excess of $60 million and currently owe us amounts exceeding $53 million for products we have shipped and for non-cancelable orders placed with us. We have a receivable recorded on our balance sheet of $27 million for the products we have shipped. This suit was filed shortly after we made demand upon the plaintiffs to fulfill their purchase obligations with regard to the chips in question. We believe the asserted claims were without merit and on August 20, 2001, we filed a cross-complaint against Western Digital Corporation and Western Digital (M) SDN.BHD in the Superior Court of the State of California, Orange County, for breach of contract, fraud and negligent misrepresentation for damages exceeding $53 million. On October 9, 2001, the Court granted our motion for judgment on the pleadings that resulted in the dismissal of the plaintiffs' entire original complaint and allowed the plaintiffs 30 days to file an amended complaint. The plaintiffs have notified us that they will be amending their complaint. 9 From time to time, various claims, charges, and litigation are asserted or commenced against us arising from, or related to, contractual matters, intellectual property, personal injury, insurance coverage and personnel and employment disputes. Frequent claims and litigation involving patent and other intellectual property rights are not uncommon in the semiconductor industry. As to any such claims or litigation, we cannot predict the ultimate outcome with certainty. In the event a third party makes a valid intellectual property claim and a license is not available on commercially reasonable terms, we would be forced either to redesign or to stop production of products incorporating that intellectual property, and our operating results could be materially and adversely affected. Litigation may also be necessary to enforce our intellectual property rights or to defend us against claims of infringement, and this litigation may be costly and divert the attention of key personnel. 10. COMPREHENSIVE INCOME The components of comprehensive income, net of tax, are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------- ---------------------------- SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net income (loss) $ (16,920) $ 16,467 $ (39,917) $ 115,347 Change in unrealized gain on marketable equity securities (7,259) 9,924 (2,484) (14,694) Change in unrealized loss on foreign currency translation adjustments 205 (202) 329 (59) ------------ ------------ ------------ ------------ $ (23,974) $ 26,189 $ (42,072) $ 100,594 ============ ============ ============ ============
11. SEGMENT INFORMATION We design and manufacture integrated circuits that employ precision linear and advanced mixed-signal processing technologies. We are organized into three principal businesses or operating segments: Analog Products Business Group, Internet Solutions Business Group and the Magnetic Storage Business Group, with the remaining products grouped as End of Life. Each of these business groups has one or more general managers who report directly to the Chief Executive Officer (CEO). The CEO has been identified as the Chief Operating Decision Maker as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Operating segments do not have material sales to other segments, and accordingly, there are no inter-segment revenues to be reported. We also do not allocate our restructuring charges, interest and other income, interest expense or income taxes to operating segments. We do not identify or allocate assets by operating segments, nor does the CEO evaluate the business groups based upon these criteria. 10 Information on reportable segments is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------- ----------------------------- SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues: Analog $ 55,527 $ 86,658 $ 104,436 $ 170,301 Internet 12,103 26,118 23,012 49,120 Magnetic Storage 9,588 63,217 129,415 116,829 End of Life 58 12,404 86 23,733 Corporate and all other -- 1,140 -- 10,966 ------------ ------------ ------------ ------------ $ 77,276 $ 189,537 $ 256,949 $ 370,949 ============ ============ ============ ============ Operating profit (loss): Analog $ (7,914) $ 24,393 $ (29,615) $ 54,973 Internet (8,447) 5,449 (19,846) 9,170 Magnetic Storage (3,123) 10,210 (5,742) 14,573 End of Life (149) 1,708 (169) 3,847 Corporate and all other 929 (24,736) (851) (36,819) ------------ ------------ ------------ ------------ $ (18,704) $ 17,024 $ (56,223) $ 45,744 ============ ============ ============ ============
The operating loss for the six months ended September 29, 2001 included charges to reserve inventory in the Analog, Internet, Magnetic Storage and End of Life segments of $9.2 million, $3.2 million, $36.2 million and $0.3 million, respectively. 12. SUBSEQUENT EVENTS On October 2, 2001, we acquired ShareWave, Inc. ("ShareWave"). Under the terms of the Merger Agreement, we are exchanging approximately 3.4 million shares of our common stock and options for all outstanding shares and options of ShareWave. On October 10, 2001, we acquired LuxSonor Semiconductors, Inc. ("LuxSonor") by paying approximately $10 million in cash and exchanging approximately 2.1 millions shares of our common stock and options for all outstanding shares and options of LuxSonor. On August 9, 2001, we announced a definitive agreement to acquire Stream Machine Company ("Stream Machine") pursuant to an Agreement of Merger by and among Cirrus Logic, Stream Machine, and Target Acquisition Corporation, dated as of August 9, 2001. Under the terms of the Merger Agreement, we will exchange approximately 5.4 million shares of our common stock and options for all outstanding shares and options of Stream Machine. This transaction is expected to close during the third quarter of fiscal 2002. See the Commitments and Contingencies footnote for a discussion of the lawsuit we filed against Fujitsu, Ltd. on October 19, 2001. During October 2001, we completed a worldwide workforce reduction of approximately 300 employees, or about 26% of the total workforce at that time, in response to the current market outlook. We expect to record a cash charge of $4 million to $5 million to cover costs associated with these workforce reductions. As a result of these workforce reductions, we also expect to record a non-cash charge next quarter for costs associated with facilities closures and lease abandonments. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended March 31, 2001, contained in the 2001 Annual Report on Form 10-K. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein or in the 2001 Annual Report on Form 10-K. Certain reclassifications have been made to conform to the 2002 presentation. Such reclassifications had no effect on the results of operations or stockholders' equity. Cirrus Logic ("we," "our," "us," the "Company") is a leading supplier of high-performance analog and DSP chip solutions for Internet entertainment electronics, analog and magnetic markets. The Company designs and manufactures integrated circuits, or chips, that use high-performance analog and digital signal processing technologies. Our mixed signal devices are designed for specific markets that derive value from our expertise in advanced mixed-signal design processing, systems-level engineering and software knowledge. Our products, sold under our own name and the Crystal(R), Maverick(R), and 3Ci(TM) product brands, enable our customers to quickly deliver leading-edge technology products that are in high demand from consumers. RESULTS OF OPERATIONS
PERCENTAGE OF NET SALES ------------------------------------------------------------------ THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ------------------------------ SEPT. 29, SEPT. 23, SEPT. 29, SEPT. 23, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net sales 100% 100% 100% 100% Gross margin 40% 42% 20% 41% Research and development 35% 18% 22% 18% Selling, general and administrative 29% 15% 19% 15% Restructuring costs and other, net 0% (1)% 1% (4)% ------------ ------------ ------------ ------------ Income (loss) from operations (24)% 9% (22)% 12% Realized gain on sale of marketable equity securities 0% 1% 4% 22% Interest expense 0% (3)% 0% (3)% Interest income 2% 2% 2% 2% Other income 0% 0% 0% 0% ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes (22)% 10% (16)% 34% Provision for income taxes 0% 1% 0% 3% Minority interest in loss of eMicro 0% 0% 0% 0% ------------ ------------ ------------ ------------ Income (loss) before extraordinary gain and accounting change (22)% 9% (16)% 31% Extraordinary gain, net of income tax 0% 0% 0% 1% Cumulative effect of change in accounting principle 0% 0% 0% 0% ------------ ------------ ------------ ------------ Net income (loss) (22)% 9% (16)% 31% ============ ============ ============ ============
NET SALES Net sales for the second quarter of fiscal 2002 of $77.3 million decreased by $112.2 million, or 59%, from $189.5 million for the second quarter of fiscal 2001. The decrease in net sales was due primarily to a decrease in Magnetic Storage revenues of $53.6 million, or 85%, to $9.6 million in the second quarter of fiscal 2002 in line with our previously announced decision to de-emphasize our magnetic storage chip business. Revenues from our Analog business group decreased $31.1 million or 36% in the second quarter of fiscal 2002 from the comparable quarter of the prior year, mainly due to market conditions. Revenues from our Internet business group decreased from $26.1 million in the second quarter of fiscal 2001 to $12.1 million in the second quarter of fiscal 2002. Net sales from 12 businesses that have been discontinued by us are included in our End of Life business segment. Net sales from that group were essentially zero in the second quarter of fiscal 2002, down from $12.4 million in the same quarter of the prior year. Net sales for the first two quarters of fiscal 2002 decreased by $114.0 million, or 31%, to $256.9 million from $370.9 million for the first two quarters of fiscal 2001. Analog revenues decreased $65.9 million to $104.4 million in the first two quarters of fiscal 2002 primarily due to market conditions. Internet revenues decreased $26.1 million, or 53%, in the first half of fiscal 2002 as compared to the first half of fiscal 2001, mainly due to the strong production ramp of Maverick(R) processors for MP3 players in advance of last year's Christmas season. Revenues from discontinued businesses in the first two quarters of fiscal 2002 were $0.1 million compared to $23.7 million in the first two quarters of fiscal 2001. Corporate and all other net sales decreased $11.0 million in the first six months of fiscal 2002 versus the comparable period of the prior year while Magnetic Storage net sales increased $12.6 million during the same time period. We do not expect to record any revenues related to our magnetic storage business, comprised previously of sales mainly to Fujitsu, Western Digital and Hitachi, Ltd., in the third or fourth quarters of fiscal 2002. Effective with the first quarter of fiscal 2001, we have recognized revenue on international shipments based on customer receipt and title passage of inventory, instead of on the date of shipment, which was our historical method. Results for fiscal 2001 include revenue of $5.2 million, cost of sales of $3.5 million, and a cumulative effect of change in accounting principle of $1.7 million as a result of this change. Also, during the first quarter of fiscal 2001, we changed our estimate of the amount of revenue that is deferred on distributor transactions under agreements with only limited rights of return. Results for fiscal 2001 include revenue of $5.4 million, cost of sales of $2.0 million, and income of $3.4 million related to this change in estimate. The effect of this estimate change increased basic and diluted earnings per share by $0.03 for fiscal 2001. Export sales, principally to Asia, including sales to U.S.-based customers with manufacturing plants overseas, were 79% and 78% of total sales in the second quarter of fiscal 2002 and fiscal 2001, respectively, and were 89% and 77% of total sales in the first two quarters of fiscal 2002 and fiscal 2001, respectively. Our sales are denominated primarily in U.S. dollars. From time to time, we enter into foreign currency forward exchange and option contracts to reduce the foreign currency exposures related to sales and balance sheet accounts denominated in yen. During the second fiscal quarter of 2002, sales to Thomson Mutimedia S.A. and Fujitsu accounted for 12% and 11% of net sales, respectively. During the first half of fiscal 2002, sales to Fujitsu and Western Digital represented 33% and 14% of net sales, respectively. As set forth above, we do not anticipate any sales to Fujitsu or Western Digital in the third or fourth quarters of fiscal 2002. Sales to Fujitsu comprised approximately 22% of sales in the second quarter of fiscal 2001 and 19% of sales in the first half of fiscal 2001. GROSS MARGIN Gross margin as a percentage of net sales was 40% in the second quarter of fiscal 2002, down slightly from 42% in the second quarter of fiscal 2001. Gross margin as a percentage of net sales was 20% and 41% in the first half of fiscal 2002 and 2001, respectively. The significant reduction in gross margin during first half of fiscal 2002 was primarily the result of inventory charges recorded during the period. During the first half of fiscal 2002, we recorded a net inventory charge of $36.2 million related to exiting the magnetic storage business and a charge of $12.7 million, mainly to reserve inventory that was excess to short-term usage forecasts. As discussed more fully in Note 12 to the financial statements, the Company acquired ShareWave and LuxSonor during October 2001 and also expects to complete its acquisition of Stream Machine during the third quarter of fiscal 2002. In conjunction with completing these acquisitions and the recent workforce reductions and change in business model, the Company will be reviewing and prioritizing its entire product portfolio during the third quarter of fiscal 2002 and may decide to discontinue selling certain products. The Company currently believes all products are carried at amounts not exceeding net realizable value less selling costs. 13 RESEARCH AND DEVELOPMENT EXPENSE Research and development expense for the second quarter of fiscal 2002 of $27.0 million decreased $7.5 million, or 22%, from $34.5 million in the second quarter of fiscal 2001. During the first two quarters of fiscal 2002, research and development expense decreased $7.8 million, or 12%, from the comparable period of the prior year. The decrease for both the three and six month periods was mainly due to the implementation of cost reduction and expense control measures, including the workforce reduction in May 2001, and a reduction in mask expense in fiscal 2002. Included in research and development expense for the first half of fiscal 2002 was $1.9 million related to the write-off of in-process research and development associated with the acquisition of Peak Audio. Despite the decline in absolute dollar amounts, research and development expense as a percentage of net sales increased from 18% to 35% in the second quarter of fiscal 2001 and 2002, respectively, and from 18% to 22% in the first two quarters of fiscal 2001 and 2002, respectively, primarily due to the significant reduction in our net sales in the current fiscal year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense in the second quarter of fiscal 2002 decreased $6.9 million, or 24%, to $22.4 million from $29.3 million in the second quarter of fiscal 2001. During the first two quarters of fiscal 2002, selling, general and administrative expense decreased to $57.8 million from $65.6 million in the comparable period of the prior year, a decline of 12%. The decrease for both time periods was primarily related to cost reduction and expense control measures implemented in the current year. As a percentage of net sales, selling, general and administrative expense for the second quarter and first six months of fiscal 2002 increased 14% and 4%, respectively, from the same periods in fiscal 2001 due to the substantial reduction in the Company's net sales in fiscal 2002. RESTRUCTURING COSTS, GAIN ON SALE OF ASSETS AND OTHER, NET On May 2, 2001, we announced a change to our business model, in which we are de-emphasizing our magnetic storage chip business and are focusing on consumer-entertainment electronics. On May 15, 2001, we announced cost-reduction actions to align company resources and expenses with this new business model. In connection with these strategic decisions, we reduced our workforce by approximately 120 employees worldwide, or about nine percent of the total workforce at that time. During the first quarter of fiscal 2002, we recorded a charge of $1.9 million to cover costs associated with these workforce reductions. During the second quarter of fiscal 2001, we recorded $1.8 million in income due to the final resolution of the MiCRUS restructuring agreement. During the first fiscal quarter of 2001, we recorded $12.5 million in income to recognize the receipt of two previously-reserved notes from Intel Corporation on behalf of Basis Communications Corporation ("Basis"). REALIZED GAINS ON THE SALE OF MARKETABLE EQUITY SECURITIES AND INVESTMENTS During the first quarter of fiscal 2002 and the second and first quarters of fiscal 2001, we recorded gains of $1.2 million, $1.9 million and $1.1 million, respectively, related to the sale of call options in Openwave Systems, Inc. (formerly known as Phone.com) common stock. Also, during the first quarters of fiscal 2002 and 2001, we recognized gains on the sale of marketable equity securities of $9.8 million and $78.5 million, respectively. These gains were related to the fiscal 2001 sale of our holdings of approximately 1 million shares of Series A preferred stock and 0.5 million shares of common stock in Basis to Intel Corporation ("Intel") for $91.8 million. The sale was part of a tender offer whereby Intel purchased the outstanding preferred and common stock of Basis for $61.18 per share. Intel withheld from the total consideration paid $11.2 million pursuant to the indemnification provisions of the merger agreement between Intel and Basis, of which $9.8 million was received in the first quarter of fiscal 2002. INTEREST EXPENSE Interest expense was essentially zero for the second fiscal quarter of 2002 compared to $5.1 million for the second quarter of fiscal 2001. Interest expense was $0.1 million for the first two fiscal quarters of 2002 compared to 14 $10.1 million for the first two fiscal quarters of 2001. The decrease in interest expense was primarily due to the repurchase and conversion of $299.0 million of our 6% convertible subordinated notes during fiscal 2001. INTEREST INCOME Interest income was $1.5 million for the second quarter of fiscal 2002 and $4.3 million for the second quarter of fiscal 2001. Interest income was $4.3 million for the first six months of fiscal 2002 and $9.1 million for the first six months of fiscal 2001. The decrease for both the three-month and six-month periods was primarily due to lower cash and cash equivalent balances, on which interest was earned during fiscal 2002, and to lower interest rates in fiscal 2002. Additionally, we recorded non-recurring interest income in the first quarter of fiscal 2001 of $1.4 million related to interest received on two outstanding notes receivable that had previously been written off. INCOME TAXES We have accrued no income tax expense for the fiscal quarter and the two fiscal quarters ended September 29, 2001 because of the losses incurred for those time periods and forecasted for the fiscal year ended March 30, 2002. SFAS No. 109, "Accounting for Income Taxes," provides for the recognition of deferred tax assets if realization of such assets is more likely than not. We have provided a valuation allowance equal to net deferred tax assets due to uncertainties regarding their realization. The realizability of the deferred tax assets will be evaluated on a quarterly basis. EXTRAORDINARY GAIN During May 2000, we repurchased $28.1 million par value of our 6% convertible subordinated notes on the open market and recognized an extraordinary gain in the first quarter of fiscal 2001 of approximately $2.5 million (after income tax effect of $0.3 million) as a result of these repurchases. LIQUIDITY AND CAPITAL RESOURCES We used approximately $10.4 million of cash and cash equivalents in our operating activities during the first six months of fiscal 2002 and generated approximately $4.0 million of cash and cash equivalents during the first six months of fiscal 2001. The cash used by operating activities in the first half of fiscal 2002 was primarily due to a decline in accounts payable and accrued liabilities, and the net loss recognized during the period. These uses of cash were partially offset by non-cash charges related to inventory reserves and a decrease in accounts receivable and gross inventory levels. The cash provided by operations in the first half of fiscal 2001 was primarily the result of operating profits, partially offset by increases in inventory and accounts receivable. We used $11.6 million in cash for investing activities during the first two quarters of fiscal 2002, primarily due to the acquisition of Peak Audio, compared to cash provided by investing activities of $121.9 million during the comparable period of fiscal 2001. The cash provided by investing activities for fiscal 2001 was primarily due to the sale of our interest in Basis. We used $64.4 million in cash for financing activities during the first six months of fiscal 2002 primarily related to the repurchase of approximately 6.4 million shares of stock for $68.7 million. During the first six months of fiscal 2001, we used $15.2 million in cash for financing activities primarily related to the repurchased $28.1 million par value of our 6% convertible subordinated notes for $24.9 million. As of September 29, 2001, we had $176.8 million of cash, cash equivalents and restricted cash. We currently have a $9 million letter of credit secured by $10 million cash. The letter of credit was issued to secure certain of our obligations under our lease agreement for a new headquarters facility in Austin, Texas. The cash collateral for this letter of credit is classified as restricted cash. Although we can not assure that we will be able to generate cash in the future, we anticipate that our existing capital resources and cash flow generated from future operations will enable us to maintain our current level of operations for the foreseeable future. 15 FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS There are numerous factors that affect our business and the results of our operations. These factors include strong competition in the integrated circuit market; general economic and business conditions, including a downturn in our industry; our ability to introduce new products on a timely basis and market acceptance of those new products; the level of demand for our existing products; our ability to efficiently integrate acquired businesses; delays in product development; customer demand for our products; defects in our products, which could reduce the sales of those products or result in claims against us; risks associated with our significant international sales; potential intellectual property claims; our ability to effectively manage our operating costs consistent with our reduced revenue forecasts; adverse results of current litigation; continued investments in research and development, which is required for us to develop new products; and the effects of terrorist activities and possible military action, which may cause disruptions to general economic, market and political conditions throughout the world, as well as disrupt our receipt of shipments we need for our products or disrupt our delivery of products to customers. For a discussion of these and other factors affecting our business, see "Item 1 - Business - Factors That May Affect Future Operating Results" in our Annual Report on Form 10-K for the year ended March 31, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Part II, Item 7a, Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2001. 16 PART II ITEM 1. LEGAL PROCEEDINGS See Note 9 to the financial statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. A list of exhibits is set forth in the Exhibit Index found on page 18 of this report. (b) Reports on Form 8-K: We filed two reports on Form 8-K during the quarter ended September 29, 2001. On July 20, 2001, we filed a Form 8-K announcing definitive agreements to acquire LuxSonor Semiconductors, Inc. and ShareWave, Inc. On August 13, 2001, we filed a Form 8-K announcing a definitive agreement to acquire Stream Machine Company. We filed one report subsequent to the end of the fiscal quarter. On October 4, 2001, we filed a Form 8-K regarding our October 1, 2001 press release in which we provided earnings guidance for the second fiscal quarter of 2002 and announced an upcoming workforce reduction. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. CIRRUS LOGIC, INC. By: /s/ STEVEN D. OVERLY Steven D. Overly Senior Vice President of Administration, acting Chief Financial Officer, and General Counsel Date: November 13, 2001 17 EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- Exhibit 2.1 Agreement of Merger, dated July 18, 2001, by and among the Company, Target Acquisition Corporation (a wholly owned subsidiary of the Company), LuxSonor Semiconductors, Inc. and Shareholders' Representative. Exhibit 2.2 Agreement of Merger, dated July 18, 2001, by and among the Company, Target I Acquisition Corporation (a wholly owned subsidiary of the Company), ShareWave, Inc. and Shareholders' Representative. Exhibit 2.3 Amendment No. 1, dated September 27, 2001, to Agreement of Merger, dated July 18, 2001, by and among the Company, Target I Acquisition Corporation, ShareWave, Inc. and Shareholders' Representative. Exhibit 2.4 Agreement and Plan of Reorganization, dated August 9, 2001, by and among the Company, Cirrus Logic SM Acquisition Corporation (a wholly owned subsidiary of the Company), Stream Machine Company and Shareholders' Agent.
18 EX-2.1 3 d91953ex2-1.txt AGREEMENT OF MERGER-LUXSONOR SEMICONDUCTORS, INC. EXHIBIT 2.1 AGREEMENT OF MERGER (this "AGREEMENT"), dated July 18, 2001, by and among Cirrus Logic, Inc., a Delaware corporation ("CIRRUS"), Target Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Cirrus ("ACQUISITION SUB"), LuxSonor Semiconductors, Inc., a California corporation (the "COMPANY"), and all of the shareholders of the Company, identified in Exhibit A attached hereto and represented by Harold Liang in his capacity as the appointed representative and attorney-in-fact of such shareholders (the "SHAREHOLDERS' REPRESENTATIVE"). W I T N E S S E T H: WHEREAS, Cirrus desires to acquire the Company and Company desires to be acquired by Cirrus; WHEREAS, it is intended that the acquisition be consummated through a merger of the Acquisition Sub with and into the Company, with the Company being the surviving entity, pursuant to the terms and conditions of this Agreement (the "MERGER") and that such transaction be treated for federal income tax purposes as a "reorganization" within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE"); WHEREAS, the Board of Directors of the Company has unanimously (i) determined that the Merger is advisable and is fair to, and in the best interest of, the Company, (ii) adopted and approved the Merger and this Agreement and (iii) resolved to recommend that the shareholders of the Company (the "SHAREHOLDERS") adopt and approve the Merger and this Agreement; WHEREAS, Cirrus and Acquisition Sub are unwilling to enter into this Agreement unless Shareholders holding in the aggregate at least a majority (50.1%) of the outstanding shares of each of the Company Common Stock and the Company Preferred Stock (cumulatively, the "COMPANY SHARES") on a fully diluted basis (the "PRINCIPAL SHAREHOLDERS") within two (2) business days from the execution and delivery of this Agreement, enter into a voting agreement with Cirrus and Acquisition Sub (the "VOTING RIGHTS AGREEMENT") pursuant to which such Principal Shareholders agree to vote all Company Shares owned by such Principal Shareholders in favor of the Merger; and WHEREAS, the Shareholders have agreed to indemnify Cirrus, Acquisition Sub and certain others in respect of certain liabilities arising out of the Company's representations and warranties hereunder. NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE I DEFINITIONS, INTERPRETATION AND CONSTRUCTION SECTION 1.1 DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "24/7" shall have the meaning set forth in Section 3.17(k). "2001 BUDGET" shall have the meaning set forth in Section 3.18(a)(iii). "AAA" shall have the meaning set forth in Section 13.3. "ACQUISITION SUB" shall have the meaning set forth in the Preamble. "AFFILIATE" of any Person means any Person directly or indirectly controlling, controlled by, or under common control with, such Person; provided that, for the purposes of this definition, "control" (including with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and polices of such Person, whether through the ownership of voting securities or partnership interests, by contract or otherwise. "AGREEMENT" shall have the meaning set forth in the Preamble. "ANTITRUST AUTHORITY" means the Federal Trade Commission, the Antitrust Division of the United States Department of Justice, the attorneys general of the several states of the United States and any other Governmental -2- Authority having jurisdiction with respect to the transactions contemplated hereby pursuant to applicable Antitrust Laws. "ANTITRUST LAWS" means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended and all other federal, state and foreign statutes, rules, regulations, orders, decrees, administrative and judicial doctrines, and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade. "ASSUMED OPTIONS" shall have the meaning set forth in Section 2.2(b). "AVERAGE CLOSING PRICE" shall mean the average closing price per share of Cirrus Common Stock on the NASDAQ National Market in the most recent ten (10) trading days ending on the second trading day prior to the signing of this Agreement. "BOOKS AND RECORDS" shall have the meaning set forth in Section 3.23. "BUSINESS DAY" means any day except Saturday, Sunday and any day which, in the State of California or Texas, shall be a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close. "CERTIFICATES" means the stock certificates representing the Company Shares. "CERTIFICATES OF MERGER" shall have the meaning set forth in Section 2.1. "CGCL" means the California General Corporation Law. "CIRRUS" shall have the meaning set forth in the Preamble. "CIRRUS COMMON STOCK" means the common stock of Cirrus, par value $0.001 per share. "CIRRUS DISCLOSURE LETTER" shall have the meaning set forth in Section 4. "CIRRUS INDEMNITEES" shall have the meaning set forth in Section 11.2(a). -3- "CLAIM NOTICE" shall have the meaning set forth in Section 11.3. "CLOSING" shall have the meaning set forth in Section 2.11. "CLOSING DATE" shall have the meaning set forth in Section 2.11. "COBRA" shall have the meaning set forth in Section 3.13(f). "CODE" shall have the meaning set forth in the Recitals. "COMMERCIAL SOFTWARE RIGHTS" means packaged commercially available software programs that are generally available to the public through retail dealers in computer software. "COMPANY" shall have the meaning set forth in the Preamble. "COMPANY COMMON STOCK" means the common stock of the Company, without par value. "COMPANY DISCLOSURE LETTER" shall have the meaning set forth in Section 3. "COMPANY FINANCIAL STATEMENTS" shall have the meaning set forth in Section 3.6. "COMPANY INDEMNITEES" shall have the meaning set forth in Section 11.2(b). "COMPANY PREFERRED STOCK" means the preferred stock of the Company, without par value. "COMPANY SHARES" shall have the meaning set forth in the Recitals. "CONFIDENTIAL INFORMATION" shall have the meaning set forth in Section 6.3. "CONSENTS" shall have the meaning set forth in Section 3.5. "CONTRACTS" shall have the meaning set forth in Section 3.18(b). "DGCL" means the Delaware General Corporation Law. "DISSENTING SHARES" shall have the meaning set forth in Section 2.3. -4- "EFFECTIVE TIME" shall have the meaning set forth in Section 2.1. "EMPLOYEE BENEFIT PLANS" shall have the meaning set forth in Section 3.13(a). "EMPLOYMENT AGREEMENT" shall have the meaning set forth in Section 8.1(e). "EMPLOYMENT AGREEMENT ADDENDA" means the certain addenda to the Employment Agreements between Cirrus and each of Harold Liang, Mark Rygh, Ed Miller, Alex Kipnis and Jeff Fratus, to be delivered in accordance with Section 8.1(e). "ENCUMBRANCE" shall mean any claim, lien, pledge, option, charge, easement, security interest, mortgage, deed of trust, right-of-way, encumbrance or adverse interest of any kind. "ERISA" shall have the meaning set forth in Section 3.13(a). "ESCROW AGENT" shall have the meaning set forth in the Escrow Agreement. "ESCROW AGREEMENT" shall mean the escrow agreement duly executed by Cirrus, the Shareholders' Representative on behalf of the Shareholders and the Escrow Agent substantially in the form attached hereto as Exhibit G. "EXCHANGE PERCENTAGE" as to any specified class of Company security means the percentage of the Merger Consideration with respect to Company securities within such class, as set forth in Schedule 2.2., subject to adjustment as provided in Section 2.3(b). "FORMER PLANS" shall have the meaning set forth in Section 3.13(c). "GAAP" means U.S. generally accepted accounting principles consistently applied, as in effect from time to time. "GOVERNMENTAL AUTHORITY" shall mean (i) the United States of America or any other country or nation, (ii) any state, commonwealth, territory or possession of the United States of America or any other country or nation, and -5- any political subdivision thereof, including counties, municipalities and the like, and (iii) any agency, authority or instrumentality of any of the foregoing, including any court, tribunal, department, bureau, commission or board. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "INDEMNITEE" shall have the meaning set forth in Section 11.3. "INDEMNITOR" shall have the meaning set forth in Section 11.3. "INDEMNITY FUND" shall have the meaning set forth in Section 2.2(c). "INTELLECTUAL PROPERTY" means property described in any of the following categories: (i) domestic and foreign patents and patent applications; (ii) trademarks, service marks and other indicia of origin, pending trademark and service mark registrations, and intent-to-use registrations or similar reservations of marks; (iii) registered copyrights and mark works and applications for registration thereof; (iv) Internet domain name applications and reservations therefor; (v) URL's and the corresponding Internet sites (including any content of material accessible or displayed thereon); and (vi) confidential information not otherwise listed in (i)-(v) above, including, without limitation, inventions (whether or not patentable), invention disclosures, moral and economic rights of authors and inventors (however denominated), technical data, customer lists, corporate and business names, trade names, trade dress, brand names, know how, formulae, methods (whether or not patentable), designs, processes, procedures, technology, source codes, object codes, computer software programs, databases, data collectors, technology, and other proprietary information or material of any type, in all cases owned by the Company and/or any of the Subsidiaries or used in connection with the business of the Company and/or any of the Subsidiaries (and all derivatives, improvements and refinements of any of the foregoing whether or not recorded) together with all goodwill associated with any of the foregoing, and all agreements and other rights relating to intellectual property used by the Company and/or any of the Subsidiaries. "IRS" shall have the meaning set forth in Section 3.13(j). "KEY EMPLOYEES" shall have the meaning set forth in Section 2.2(d). -6- "LOSSES" shall have the meaning set forth in Section 11.2(c). "MATERIAL ADVERSE EFFECT" shall have the meaning set forth in Section 3.1. "MERGER" shall have the meaning set forth in the Recitals. "MERGER CONSIDERATION" means sixty-five million dollars ($65,000,000), subject to adjustment as provided in Section 2.3(b). "OPTION PLAN" shall have the meaning set forth in Section 2.2(b). "PERMITS" shall have the meaning set forth in Section 3.11(b). "PERSON" means a natural person, partnership, joint venture, corporation, trust, limited liability company, unincorporated organization, group, entity or Governmental Authority. "PRINCIPAL SHAREHOLDERS" shall have the meaning set forth in the Recitals. "PRODUCTS" means all products and services sold, licensed, developed or otherwise provided by the Company to customers or other third parties, or supported or tested by the Company. "RETURNS" shall have the meaning set forth in Section 3.15(a). "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. "SERVER" shall have the meaning set forth in Section 3.17(k). "SHAREHOLDERS" shall have the meaning set forth in the Recitals. "SHAREHOLDERS' REPRESENTATIVE" shall have the meaning set forth in the Preamble. "SITES" shall have the meaning set forth in Section 3.17(k). -7- "SUBSIDIARY" means any Person in which the Company owns or controls, directly or indirectly, at least a majority in voting power of the outstanding equity securities or other interests, or any Person of which the Company is a general partner or has an equivalent or similar power or role to direct or cause the direction of the management and policies of such Person. "SURVIVING CORPORATION" shall have the meaning set forth in Section 2.1. "TAXES" means all taxes, assessments, charges, duties, fees, levies or other governmental charges including, without limitation, all federal, state, local, foreign and other income, franchise, profits, capital gains, capital stock, transfer, sales, use, occupation, property, excise, severance, windfall profits, stamp, license, payroll, withholding and other taxes, assessments, charges, duties, fees, levies or other governmental charges of any kind whatsoever (whether payable directly or by withholding and whether or not requiring the filing of any return), all estimated taxes, deficiency assessments, additions to tax, penalties and interest and includes any liability for such amounts as a result of being a member of a combined, consolidated, unitary or affiliated group. "TECHNOLOGY SYSTEMS" shall have the meaning set forth in Section 3.25(a). "TRADE CREDIT AGREEMENT" shall mean the trade credit agreement dated June 22, 2001 by and between Cirrus and the Company. "TRANSACTION DOCUMENTS" means this Agreement, the Escrow Agreement, the Voting Rights Agreement, the Employment Agreements, the Employment Agreement Addenda, and the various other agreements, certificates, and documents provided for herein and therein. "URL" means Uniform Resource Locator. "VOTING RIGHTS AGREEMENT" shall have the meaning set forth in the Recitals. "WORKING CAPITAL" means short-term assets in excess of short-term liabilities as determined in accordance with GAAP. "YEAR 2000 COMPLIANT" shall have the meaning set forth in Section 3.25(a). -8- SECTION 1.2 INTERPRETATION. Unless the context otherwise requires: (a) references to a party shall include such party's heirs, successors and permitted assigns and transferees of such party's rights and/or obligations; (b) references to this Agreement or any other agreement, document or instrument is a reference to this Agreement or that other agreement, document or instrument as amended, varied, novated or substituted from time to time; (c) references to Sections, Schedules and Exhibits are to sections, schedules and exhibits to this Agreement; (d) headings are included for convenience only and shall not affect the interpretation of this Agreement; (e) words importing the singular number shall include the plural and vice versa, and words importing any gender shall include all genders; and (f) "including" means including, without limitation. SECTION 1.3. CONSTRUCTION. No rule of construction shall be applied to the disadvantage of a party because that party was responsible for or participated in the preparation of this Agreement or any part of it. ARTICLE II THE MERGER SECTION 2.1. THE MERGER. On the terms and subject to the conditions set forth in this Agreement, Acquisition Sub shall merge with and into the Company (with such merger referred to herein as the Merger) at the Effective Time (as defined in this Section 2.1). From and after the Effective Time, the separate corporate existence of Acquisition Sub shall cease and the Company shall continue as the surviving corporation in the Merger (the "SURVIVING CORPORATION"). The "EFFECTIVE TIME" shall be the time as is specified in the certificates of merger attached hereto as Exhibit B (the "CERTIFICATES OF MERGER") and other appropriate documents prepared in -9- accordance with the relevant provisions of each of the CGCL and the DGCL and filed by the Company and Acquisition Sub with the Secretary of State of the State of California and with the Secretary of State of the State of Delaware. The Merger shall have the effects of a merger as set forth in the CGCL and the DGCL. The Surviving Corporation shall continue to be governed by the laws of the State of California, and the separate corporate existence of the Surviving Corporation with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. Without limiting the generality of the foregoing, all the properties, rights, privileges, powers and franchises of the Company and the Acquisition Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and the Acquisition Sub shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.2. CONVERSION AND ASSUMPTION OF COMPANY SECURITIES. (a) COMPANY SHARES. At the Effective Time, by virtue of the Merger and without any action on the part of any party, each Company Share issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares and Company Shares held in the Company's treasury) shall be converted into and represent the right to receive (i) such number of shares of Cirrus Common Stock as equals the product of the applicable Exchange Percentage set forth in Schedule 2.2 attached hereto for the class of such Company Share multiplied by a fraction equal to: (A) 83.664365% of the Merger Consideration, over (B) the Average Closing Price; and (ii) such cash amount as equals the product of the applicable Exchange Percentage set forth in Schedule 2.2 hereto for the class of such Company Share multiplied by 16.335635% of the Merger Consideration. (b) COMPANY OPTIONS. At the Effective Time, each issued and outstanding option to purchase or otherwise acquire Company Shares (whether or not vested) ("ASSUMED OPTIONS") issued pursuant to the Company's 1995 Stock Option Plan, dated November 4, 1995 (the "OPTION PLAN") shall be assumed by Cirrus in connection with the Merger. Each Assumed Option so assumed by Cirrus under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Option Plan immediately prior to the Effective Time (including, without limitation, any vesting schedule or repurchase rights, but not taking into account any changes thereto, including the acceleration thereof, provided for in the Option Plan resulting from the Merger), except that (i) each Assumed Option will be exercisable for that number of shares of Cirrus Common Stock equal to the product of -10- the applicable Exchange Percentage set forth in Schedule 2.2 attached hereto for such Assumed Option multiplied by a fraction equal to: (A) the product of the Merger Consideration multiplied by the number of Company Shares that were issuable upon exercise of such Assumed Option immediately prior to the Effective Time, over (B) the Average Closing Price, rounded down to the nearest whole number of shares of Cirrus Common Stock, and (ii) the per share exercise price for the shares of Cirrus Common Stock issuable upon exercise of such Assumed Option will be equal to the quotient determined by dividing: (A) the product of the exercise price per Company Share at which such Assumed Option was exercisable immediately prior to the Effective Time multiplied by that number of Company Shares that were issuable upon the exercise of the Assumed Option prior to the Effective Time, over (B) that number of shares of Cirrus Common Stock for which the Assumed Option will be exercisable, rounded up to the nearest whole cent. (c) PAYMENT OF THE MERGER CONSIDERATION. Cirrus shall instruct the Shareholders' Representative to deliver to the Shareholders as provided in this Section 2.2(c) and Section 2.2(d) promptly following the Closing in accordance with Section 9.2(a) the shares of Cirrus Common Stock into which the Company Shares are converted pursuant to Section 2.2(a). Cirrus shall deliver at the Closing the cash portion of the Merger Consideration (including all earnings thereof, the "INDEMNITY FUND", but excluding the cash payment for fractional shares pursuant to Section 2.3) to the Escrow Agent, which shall be held in escrow subject to the Escrow Agreement as the sole recourse for the Shareholders' indemnity obligations hereunder. (d) HOLDBACK. Notwithstanding anything in this Section 2.2 to the contrary, Cirrus shall instruct the Shareholders' Representative to transfer to each of Harold Liang, Mark Rygh, Ed Miller, Alex Kipnis and Jeff Fratus (collectively, the "KEY EMPLOYEES") fifty percent (50%) of the shares of Cirrus Common Stock to which they are entitled pursuant to the first sentence of Section 2.2(c). The Key Employees shall be entitled to receive the remaining fifty percent (50%) of the shares of Cirrus Common Stock to which they would otherwise be entitled pursuant to the first sentence of Section 2.2(c) as provided in their respective Employment Agreement Addenda delivered to Cirrus pursuant to Section 8.1(e). The Key Employees shall have the right to receive the cash equivalent of such Cirrus Common Stock, as provided in their respective Employment Agreement Addenda, based upon the Average Closing Price, if all Key Employees give written notice to such effect to Cirrus within fifteen (15) days from the date of this Agreement, together with an opinion of counsel to the Shareholders, reasonably satisfactory to Cirrus, -11- that the implementation of such an election would not affect the status of the Merger as a "reorganization" within the meaning of Section 368 of the Code. (e) TREASURY STOCK. Each Company Share held in the Company's treasury immediately prior to the Effective Time shall be cancelled and retired without payment of any consideration therefor. (f) ACQUISITION SUB STOCK. Each share of common stock of the Acquisition Sub issued and outstanding immediately prior to the Effective Time shall be converted into and thereafter evidence one share of common stock of the Surviving Corporation. (g) RESTRICTIONS ROLLOVER. If any Company Shares outstanding immediately prior to the Effective Time are subject to a repurchase option, risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with the Company, then, except to the extent otherwise provided in such agreement, the shares of Cirrus Common Stock issued in exchange for such Company Shares will also be subject to the same repurchase option, risk of forfeiture or other condition, and the certificates representing such shares of Cirrus Common Stock may be marked with an appropriate legend to such effect. SECTION 2.3. DISSENTING SHARES. (a) For purposes of this Agreement, "DISSENTING SHARES" means Company Shares held as of the Effective Time by a Shareholder who has not voted such Company Shares in favor of this Agreement and the Merger and with respect to which appraisal shall have been duly demanded and perfected in accordance with the CGCL and not effectively withdrawn or forfeited prior to the Effective Time. Dissenting Shares shall not be converted into or represent the right to receive the Merger Consideration, unless prior to the Effective Time such Shareholder shall have forfeited such Shareholder's right to appraisal under the CGCL or withdrawn, with the consent of the Company, such Shareholder's demand for appraisal. If such Shareholder has so forfeited or withdrawn such Shareholder's right to appraisal of Dissenting Shares, then as of the occurrence of such event, such Shareholder's Dissenting Shares shall cease to be Dissenting Shares and shall be entitled to participate in the Merger. (b) APPRAISAL NOTICE. The Company shall give Cirrus (i) prompt notice of any written demands for appraisal of any Company Shares, withdrawals of such demands, and any other instruments that relate to such demands received by the Company and (ii) the opportunity to participate in all negotiations and proceedings with -12- respect to demands for appraisal under the CGCL. The Company shall not, except with the prior written consent of Cirrus, make any payments with respect to any demands for appraisal of Company Shares or offer to settle or settle any such demands. At the Closing, the Merger Consideration shall be reduced to the extent of the aggregate value of the Cirrus Shares and cash to which the Dissenting Shares would otherwise be entitled pursuant to Section 2.2(a) if such Dissenting Shares had participated in the Merger, and the applicable Exchange Percentage(s) shall be proportionately adjusted to reflect such reduction. If and to the extent that the Dissenting Shares receive an appraised value in excess of the amount by which the Merger Consideration is decreased, Cirrus shall be reimbursed for such excess amount from the Indemnity Fund. SECTION 2.4. FRACTIONAL SHARES. No certificates or script representing fractional shares of Cirrus Common Stock shall be issued to Shareholders upon conversion of Company Shares into shares of Cirrus Common Stock in the Merger, and such Shareholders shall not be entitled to any voting rights, rights to receive any dividends or distributions or other rights as a stockholder of Cirrus with respect to any fractional shares of Cirrus Common Stock. In lieu of any such fractional shares, Cirrus shall transfer to each Shareholder, otherwise entitled to receive a fraction of a share of Cirrus Common Stock (after aggregating all fractional shares of Cirrus Common Stock to which such Shareholder otherwise would be entitled) in the Merger, cash (rounded to the nearest whole cent) without interest, in an amount equal to the product obtained by multiplying such fraction by the Average Closing Price. SECTION 2.5. DIVIDENDS. No dividends or other distributions with respect to shares of Cirrus Common Stock with a record date on or after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the Cirrus Common Stock represented thereby by reason of the conversion of shares of Company Shares pursuant to Section 2.2(a) hereof and no cash payment in lieu of fractional shares of Cirrus Common Stock shall be paid to any such holder pursuant to Section 2.4 hereof until such Certificate is surrendered in accordance with this Agreement. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid, without interest, to the Person in whose name the shares of Cirrus Common Stock represented by such certificate are registered at the time of such surrender, the amount of any cash payable in lieu of fractional shares of Cirrus Common Stock to which such holder is entitled pursuant to Section 2.4 hereof and the proportionate amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to shares of Cirrus Common Stock. -13- SECTION 2.6. WITHHOLDING RIGHTS. Cirrus shall be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Article II such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign laws relating to Taxes. To the extent that amounts are so withheld by Cirrus, such amounts shall be treated for all purposes of this Agreement as having been paid to the Shareholders in respect of which such deduction and withholding was made by Cirrus. Such withholding may be made from any transfer of shares of Cirrus Common Stock otherwise required to be made pursuant to Sections 2.2(a), (b), (c) and (d) or in respect of any such withholding requirement applicable to payment of cash otherwise required to be made pursuant to such Sections or Section 2.4. SECTION 2.7. NO FURTHER RIGHTS. From and after the Effective Time, other than the common stock of the Surviving Corporation pursuant to Section 2.2(f), no Company Shares shall be deemed to be outstanding, and holders of Certificates shall cease to have any rights with respect thereto, except as provided herein or by law. The stock transfer books of the Company shall be closed immediately upon the Effective Time and there shall be no further registration of transfers of Company Shares thereafter on the records of the Company. SECTION 2.8. ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION. The Articles of Incorporation of Acquisition Sub as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation. SECTION 2.9. BYLAWS OF THE SURVIVING CORPORATION. The Bylaws of Acquisition Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation. SECTION 2.10. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors and officers of the Surviving Corporation from and after the Effective Time shall be as set forth in Schedule 2.10, each to hold such office, subject to the applicable provisions of the Articles of Incorporation and Bylaws of the Surviving Corporation, until their respective successors shall be duly elected or appointed and qualified. SECTION 2.11. CLOSING. The closing of the transactions contemplated by this Agreement (the "CLOSING"), shall take place at 10:00 A.M. at the offices of White & Case LLP, 3000 El Camino Real, 5 Palo Alto Square, 10th Floor, Palo Alto, CA 94306 two (2) Business Days after the last of the conditions set forth in -14- Article VIII hereof is satisfied or waived, other than those conditions that by their nature are to be satisfied at the Closing, or at such other date, time or place as the parties hereto shall agree in writing. The date on which the Closing shall occur is herein referred to as the "CLOSING DATE." If the Closing shall not occur on or before October 12, 2001, then the parties shall have no further obligation to consummate the transactions contemplated by this Agreement or otherwise to perform as provided therein, except that (i) all rights of the parties theretofore accrued hereunder shall remain unaffected and shall be enforceable as provided herein, and (ii) the obligations of the Company and the Shareholders provided for in Section 6.3 and the obligations of Cirrus and Acquisition Sub provided for in Section 7.1 shall continue in force until June 30, 2004. SECTION 2.12. ADDITIONAL ACTION. The Surviving Corporation may, at any time after the Effective Time, take any action, including executing and delivering any document, in the name and on behalf of either or both of the Company and the Acquisition Sub reasonably necessary in order to consummate the transactions contemplated by this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in the corresponding sections of the disclosure letter delivered by the Company to Cirrus prior to entering into this Agreement (the "COMPANY DISCLOSURE LETTER"), the Company hereby represents and warrants to Cirrus and Acquisition Sub as of the date hereof and as of the Closing Date (except as otherwise indicated) as follows: SECTION 3.1. DUE ORGANIZATION, GOOD STANDING AND CORPORATE POWER. The Company and each of the Subsidiaries is a corporation or other limited liability enterprise duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Company and each of the Subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the failure to be so qualified, or licensed, individually or in the aggregate, would be reasonably -15- likely to have an effect (or any development or developments which individually or in the aggregate could reasonably be expected to result in any effect) that is materially adverse on the business, properties, assets, liabilities (contingent or otherwise), financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, other than any effect (i) relating to the economy in general or (ii) relating to the industry in which the Company operates in general and not specifically relating to the Company or to an action of the Company, that affects the ability of the Company to consummate the transactions contemplated by the Transaction Documents (a "MATERIAL ADVERSE EFFECT"). The Company has, prior to the date of this Agreement, made available to Cirrus complete and correct copies of the Articles of Incorporation and Bylaws (or similar constitutive documents) for the Company and each of the Subsidiaries. SECTION 3.2. AUTHORIZATION AND VALIDITY OF AGREEMENT. The Company has the requisite power and authority to execute and deliver the Transaction Documents to which it is a party, to perform its obligations thereunder and to consummate the transactions contemplated thereby. The execution, delivery and performance of the Transaction Documents to which the Company is a party, and the consummation by it of the transactions contemplated thereby, have been duly authorized and approved by the Company's Board of Directors, and no other action on the part of the Company, other than the approval of the transactions contemplated hereby (including the Merger) by the Shareholders in accordance with applicable law, is necessary to authorize the execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby. Such of the Transaction Documents as have been executed and delivered by the Company on or prior to the date hereof have been, and on the Closing Date such other of the Transaction Documents to which the Company is a party will have been, duly executed and delivered by the Company and are and will be valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and general equitable principles. SECTION 3.3. CAPITALIZATION. (a) The Company has an authorized capitalization consisting of (a) 40,000,000 shares of Company Common Stock of which 10,071,246 shares of Company Common Stock are outstanding as of the date of this Agreement; and (b) 13,401,903 shares of Company Preferred Stock of which 350,000 shares are designated as Series A, 420,000 shares are designated as Series B, 3,288,635 are designated as -16- Series C, 888,889 are designated as Series D, 621,334 are designated as Series E, 5,333,045 are designated as Series F and 2,500,000 are designated as Series G, of which respectively 350,000, 420,000, 3,288,635, 888,889, 621,334, 5,333,045, and 1,350,000 shares are outstanding as of the date of this Agreement. All outstanding shares of capital stock of the Company and the Subsidiaries are duly authorized, validly issued, fully paid and non-assessable. Other than options to acquire 3,807,260 shares of Company Common Stock granted under the Option Plan, there are no outstanding subscriptions, options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements or commitments, contingent or otherwise, providing for the purchase, redemption, acquisition, retirement, issuance or sale by the Company or any of the Subsidiaries of any shares of capital stock of the Company or any of the Subsidiaries or other securities exchangeable or convertible into capital stock of the Company or any of the Subsidiaries, and there are no stock appreciation rights or phantom stock plans outstanding with respect to the capital stock of the Company or any of the Subsidiaries. There are no rights, agreements, restrictions or Encumbrances (including without limitation, preemptive rights, rights of first refusal, rights of first offer, proxies, voting agreements, voting trusts, registration rights agreements or shareholders' agreements), whether or not the Company or any of the Subsidiaries is a party thereto, on or with respect to the Company Shares, pursuant to any provision of any applicable law, contract or otherwise, on or with respect to the purchase, sale or voting of any shares of capital stock, whether outstanding or issuable upon conversion, exchange or exercise of any other security, of the Company or any of the Subsidiaries. The Company and the Subsidiaries have no outstanding bonds, debentures, notes or other obligations, the holders of which have the right to vote (or which are convertible into or exercisable for securities the holders of which have the right to vote). (b) The stock register of the Company accurately records: (i) the name and address of each Person owning Company Shares and (ii) the certificate number of each Certificate evidencing such Company Shares, the number of shares evidenced by each such certificate, the date of issuance thereof and, in the case of cancellation of such Certificate, the date of cancellation. (c) The number of Company Shares set forth opposite the name of each Shareholder on Schedule 3.3(c) are owned of record and beneficially solely by such Shareholder free and clear of all Encumbrances. -17- SECTION 3.4. SUBSIDIARIES. Set forth in Schedule 3.4 attached hereto is an accurate and complete list of all Subsidiaries. All of the outstanding shares of capital stock of each Subsidiary are validly issued, fully paid and non-assessable and are owned by the Company free and clear of all Encumbrances. There are no restrictions of any kind which prevent or restrict the payment of dividends by any of the Subsidiaries. SECTION 3.5. CONSENTS AND APPROVALS; NO VIOLATIONS. The execution and delivery by the Company of the Transaction Documents to which it is a party and the consummation by the Company of the transactions contemplated thereby will not: (a) violate or conflict with any provision of the Articles of Incorporation or Bylaws (or similar constitutive documents) of the Company or any of the Subsidiaries; (b) violate or conflict with any statute, ordinance, rule, regulation, order or decree of any court or Governmental Authority applicable to the Company or any of the Subsidiaries or by which any of their respective properties or assets are or may be bound; (c) require any filing with, or permit, consent or approval of, or the giving of any notice to, any Governmental Authority or other Person ("CONSENTS"); or (d) result in a violation or breach of, conflict with or constitute (with or without due notice or lapse of time or both) a default under, or result in the creation of any Encumbrance upon any of the properties or assets of the Company or any of the Subsidiaries under, or give rise to any obligation, right of termination, cancellation, acceleration, payment or increase of any obligation or loss of a material benefit under, any of the terms, conditions or provisions of any agreement, instrument or other obligation to which the Company or any of the Subsidiaries is a party, or by which it or any of its properties or assets are or may be bound, except for any such violations, breaches, conflicts, defaults, Encumbrances, increases or losses which, individually or in the aggregate, will not have a Material Adverse Effect. SECTION 3.6. COMPANY FINANCIAL STATEMENTS. The Company has, prior to the date of this Agreement, made available to Cirrus true and complete copies of the Company's unaudited year-end balance sheet for each of the Company's fiscal years ended December 31, 1998, December 31, 1999 and December 31, 2000, each of the Company's unaudited balance sheets for the fiscal quarters ended June 30, September 30 and December 31, 2000, and the Company's unaudited balance sheet as of March 31, 2001, and the related unaudited statements of operations of the Company for such fiscal years, quarters and three-month period ended March 31, 2001 (the "COMPANY FINANCIAL STATEMENTS"). The Company Financial Statements present fairly the consolidated and unconsolidated -18- financial position of the Company as of the dates thereof and the results of its operations for the periods then ended in accordance with GAAP consistently applied. SECTION 3.7. NO FORESEEABLE CHANGE. Since January 1, 2001, there have been no changes with respect to the Company, any of the Subsidiaries or their businesses that could individually or in the aggregate have a Material Adverse Effect, other than changes in general economic and business conditions that do not relate specifically to the Company and the Subsidiaries. SECTION 3.8. ABSENCE OF CERTAIN CHANGES. Since January 1, 2001, (a) there has been no material adverse change in the business, assets, liabilities, operations, results of operations, condition (financial or otherwise) or prospects of the Company, (b) the business of the Company has been conducted in all material respects only in the ordinary course consistent with past practice, and (c) the Company has not taken any of the actions set forth in Section 6.1(b). SECTION 3.9. TITLE TO PROPERTIES; ENCUMBRANCES. The Company and each of the Subsidiaries has good, valid and marketable title to, or, in the case of leased properties and assets, valid leasehold interests in, (a) all of its tangible properties and assets (real and personal), including, without limitation, all the properties and assets reflected in the most recent balance sheet contained in the Company Financial Statements, except for properties and assets which have been sold or otherwise disposed of in the ordinary course of business after the date of such balance sheet, and (b) none of the tangible properties and assets purchased by the Company or any of the Subsidiaries since such date is subject to any Encumbrance. Schedule 3.9 sets forth a complete and accurate list of all of the Company's and Subsidiaries' tangible property that is used in the Company and each of the Subsidiary's businesses as of May 31, 2001 except for properties and assets which have been sold or otherwise disposed of in the ordinary course of business after such date. SECTION 3.10. ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. All accounts receivable of the Company and each of the Subsidiaries, whether reflected in the Company Financial Statements or otherwise, represent sales actually made in the ordinary course of business, and are current and collectible net of any reserves shown on the Company Financial Statements (which reserves are adequate and were calculated consistent with the Company -19- and/or the Subsidiary's ordinary business practice). All accounts payable of the Company and each of the Subsidiaries, whether reflected in the Company Financial Statements or otherwise, have been duly and properly paid in accordance with their terms, consistent with the prevailing practice between the Company and/or the Subsidiary and the relevant trade creditor. SECTION 3.11. COMPLIANCE WITH LAWS. (a) LAWS AND DECREES. The Company and the Subsidiaries are in compliance with all applicable federal, state, local and foreign statutes, laws, regulations, orders, judgments and decrees, except for failures to comply or violations which, individually or in the aggregate, have not had, and will not have, a Material Adverse Effect. (b) APPROVALS AND LICENSES. The Company and the Subsidiaries hold, to the extent required by applicable law, all permits, approvals, licenses, authorizations, certificates, rights, exemptions and orders from Governmental Authorities (the "PERMITS") that are required for the operation of the business of the Company and the Subsidiaries as now conducted, and there has not occurred any default under any such Permit, except for any which, individually or in the aggregate, have not had, and will not have, a Material Adverse Effect. SECTION 3.12. LITIGATION. To the best of the Company and each of the Subsidiaries' knowledge, there is no action, suit, proceeding at law or in equity, or any arbitration or any administrative or other proceeding by or before (or any investigation by) any Governmental Authority, pending or threatened against or affecting the Company or any of the Subsidiaries, or any of their respective properties or rights. Neither the Company nor any of the Subsidiaries is subject to any judgment, order or decree entered in any action, suit or proceeding. SECTION 3.13. EMPLOYEE BENEFIT PLANS. (a) PLANS. Schedule 3.13 sets forth an accurate and complete list of each domestic and foreign employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder ("ERISA"), whether or not subject to ERISA, and each stock option, stock appreciation right, restricted stock, stock purchase, stock unit, performance share, incentive, bonus, -20- profit-sharing, savings, deferred compensation, health, medical, dental, life insurance, disability, accident, supplemental unemployment or retirement, employment, severance or salary or benefits continuation or fringe benefit plan, program, arrangement, agreement or commitment maintained by the Company of any Affiliate thereof (including, for this purpose and for the purpose of all of the representations in this Section 3.13, any predecessors to the Company or its Affiliates and all employers (whether or not incorporated) that would be treated together with the Company and/or any such Affiliate as a single employer (within the meaning of Section 414 of the Code) or to which the Company or any Affiliate thereof contributes (or has any obligation to contribute)), has any liability or is a party (collectively, the "EMPLOYEE BENEFIT PLANS"). No Employee Benefit Plan is subject to Title IV of ERISA or the minimum funding standards of Section 302 of ERISA or Section 412 of the Code. Neither the Company nor any of its Subsidiaries has ever maintained or contributed to, or had any obligation to contribute to (or borne any liability with respect to) any "multiple employer plan" (within the meaning of the Code or ERISA) or any "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA). (b) STATUS OF PLANS. Each Employee Benefit Plan (including any related trust) complies in form with the requirements of all applicable laws, including, without limitation, ERISA and the Code, and has at all times been maintained and operated in substantial compliance with its terms and the requirements of all applicable laws, including, without limitation, ERISA and the Code. No complete or partial termination of any Employee Benefit Plan has occurred or is expected to occur. Neither the Company nor any of its subsidiaries has any commitment, intention or understanding to create, modify or terminate any Employee Benefit Plan. Except as required to maintain the tax-qualified status of any Employee Benefit Plan intended to qualify under Section 401(a) of the Code, no condition or circumstance exists that would prevent the amendment or termination of any Employee Benefit Plan. No event has occurred and no condition or circumstance has existed that could result in a material increase in the benefits under or the expense of maintaining any Employee Benefit Plan from the level of benefits or expense incurred for the most recent fiscal year ended thereof. (c) NO LIABILITIES. There are no liabilities or obligations under any Employee Benefit Plan or any such plan, program, arrangement, agreement or commitment previously maintained by the Company or any Affiliate (or any other entity described in Section 3.13(a)) ("FORMER PLANS") with respect to which Cirrus could have any liability or obligation (including any successor liability under the Code or ERISA). -21- Neither the Company nor any of its Subsidiaries has incurred any liability for any tax or excise tax arising under Chapter 43 of the Code, and no event has occurred and no condition or circumstance has existed that could give rise to any such liability. There are no actions, suits, claims or disputes pending, or, to the best knowledge and belief of the Company and the Subsidiaries, threatened, anticipated or expected to be asserted against or with respect to any Employee Benefit Plan or the assets of any such plan (other than routine claims for benefits and appeals of denied routine claims). No civil or criminal action brought pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA is pending, threatened, anticipated, or expected to be asserted against the Company or any of its Subsidiaries or any fiduciary of any Employee Benefit Plan, in any case with respect to any Employee Benefit Plan. No Employee Benefit Plan or any fiduciary thereof has been the direct or indirect subject of an audit, investigation or examination by any governmental or quasi-governmental agency. (d) CONTRIBUTIONS. Full payment has been timely made of all amounts which the Company or any of its Subsidiaries is required, under applicable law or under any Employee Benefit Plan or any agreement relating to any Employee Benefit Plan to which the Company or any of its subsidiaries is a party, to have paid as contributions or premiums thereto as of the last day of the most recent fiscal year of such Employee Benefit Plan ended prior to the date hereof. All such contributions and/or premiums have been fully deducted for income tax purposes and no such deduction has been challenged or disallowed by any governmental entity, and to the best knowledge and belief of the Company and its Subsidiaries no event has occurred and no condition or circumstance has existed that could give rise to any such challenge or disallowance. The Company and each of the Subsidiaries have made adequate provision for reserves to meet contributions and premiums and any other liabilities that have not been paid or satisfied because they are not yet due under the terms of any Employee Benefit Plan, applicable law or related agreements. Benefits under all Employee Benefit Plans are as represented and have not been increased subsequent to the date as of which documents have been provided. (e) TAX QUALIFICATION. Each Employee Benefit Plan intended to be qualified under Section 401(a) of the Code has, as currently in effect, been determined to be so qualified by the Internal Revenue Service. Each trust established in connection with any Employee Benefit Plan which is intended to be exempt from Federal income -22- taxation under Section 501(a) of the Code has, as currently in effect, been determined to be so exempt by the Internal Revenue Service. (f) COBRA. The Company and each of its Subsidiaries have complied with all obligations arising in connection with the transactions contemplated by this Agreement under Part 6 of Subtitle B of Title I or ERISA and Section 4980B of the Code ("COBRA"). (g) NO OTHER BENEFITS. No Employee Benefit Plan provides for post-employment or retiree health, life insurance or other welfare benefits (except to the extent required by COBRA) Neither the Company nor any of its Subsidiaries has any unfunded liabilities pursuant to any Employee Benefit Plan that is not intended to be qualified under Section 401(a) of the Code. No Employee Benefit Plan holds as an asset any interest in any annuity contract, guaranteed investment contract or any other investment or insurance contract, policy or instrument issued by an insurance company that, to the knowledge of the Company and the Subsidiaries, are or may be the subject of bankruptcy, conservatorship, insolvency, liquidation, rehabilitation or similar proceedings. (h) NO TRIGGERING EVENT. The execution of this Agreement and the consummation of the transactions contemplated hereby do not constitute a triggering event under any Employee Benefit Plan, policy, arrangement, statement, commitment or agreement, which (either alone or upon the occurrence of any additional or subsequent event) will or may result in any payment, "parachute payment" (as such term is defined in Section 280G of the Code), severance, bonus, retirement or job security or similar-type benefit, or increase any benefits or accelerate the payment or vesting of any benefits to any employee or former employee or director of the Company or its Affiliates. (i) NO SEVERANCE BENEFIT. No Employee Benefit Plan provides for the payment of severance, termination, change in control or similar-type payments or benefits. (j) DOCUMENTS. The Company has delivered to Cirrus true and complete copies of all material documents in connection with each Employee Benefit Plan, if any, including, without limitation: (i) all Employee Benefit Plans as in effect on the date hereof, together with all amendments thereto, including, in the case of any Employee Benefit Plan not set forth in writing, a written description thereof; (ii) all current summary plan descriptions, summaries of material modifications, and material communications, (iii) the annual report on Internal -23- Revenue Service ("IRS") Form 5500-series, including any attachments thereto, for each of the last three plan years, (iv) the most recent actuarial valuation report, and (v) the most recent IRS determination letter. SECTION 3.14. EMPLOYMENT RELATIONS AND AGREEMENTS. (i) Each of the Company and the Subsidiaries is in compliance in all material respects with all federal, state, foreign, or other applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and has not and is not engaged in any unfair labor practice; (ii) no representation question exists respecting the employees of the Company or any of the Subsidiaries; and (iii) neither the Company nor any of the Subsidiaries has experienced any unfair labor practice charge or complaint, strike, slowdown, stoppage or other labor dispute or difficulty during the last three years. No employee of the Company or any of the Subsidiaries is covered by a collective bargaining agreement. SECTION 3.15. TAXES. (a) TAX RETURNS. The Company and each of the Subsidiaries has timely filed with the appropriate taxing authorities all federal, state and other returns, statements, forms and reports for Taxes ("RETURNS") that are required to be filed by, or with respect to, the Company and the Subsidiaries on or prior to the Closing Date. The Returns (including any schedule or attachment thereto or any amendment thereof) reflect all liability for Taxes of the Company and each of the Subsidiaries for the periods covered thereby. Neither the Company nor any Subsidiary currently is the beneficiary of any extension of time within which to file any Return. No claim has ever been made by any jurisdiction where any of the Company and the Subsidiaries does not file Returns, that the Company or any Subsidiary is or may be subject to taxation by that jurisdiction. (b) PAYMENT OF TAXES. Each of the Company and the Subsidiaries has timely paid all Taxes that are currently due and payable except for those contested in good faith and for which adequate reserves have been made on the Company Financial Statements. (c) OTHER TAX MATTERS. -24- (i) Neither the Company nor any of the Subsidiaries has been the subject of an audit or other examination of Taxes by any Governmental Authority with respect to any taxable period for which the statute of limitations has not expired, nor has the Company or any of the Subsidiaries received any written notices with respect to such taxable periods relating to any issue which could affect the Tax liability of the Company or any of the Subsidiaries that has not been resolved or paid in full. (ii) Neither the Company nor any of the Subsidiaries has been included as a member in any "consolidated," "unitary" or "combined" Return (other than Returns which include only the Company and any or all of the Subsidiaries) with respect to Taxes for any taxable period for which the statute of limitations has not expired. (iii) All Taxes which the Company or any of the Subsidiaries is or has been required by law to withhold or collect have been duly withheld or collected, and have been timely paid over to the proper authorities to the extent due and payable. (iv) There are no tax sharing, allocation, indemnification or similar agreements or arrangements in effect as between the Company, any Subsidiary, or any predecessor or Affiliate of any of them and any other party under which Cirrus or the Company or any of the Subsidiaries could be liable for any Taxes of any Person. (v) Neither the Company nor any of the Subsidiaries has been required to include in income any adjustment pursuant to Section 481 or any similar provision of the Code or any other corresponding applicable tax laws by reason of a voluntary change in accounting method initiated by the Company or any of the Subsidiaries, and neither the Internal Revenue Service nor any other taxing authority has initiated or proposed any such adjustment or change in accounting method. (vi) Neither the Company nor any of the Subsidiaries (A) has entered into an agreement or waiver extending any statute of limitations relating to the payment or collection of Taxes of the Company or any of the Subsidiaries or agreed to any extension of time with respect to a Tax assessment or deficiency, or (B) is presently contesting the Tax liability of the Company or any of the Subsidiaries. -25- (vii) No election under 341(f) of the Code has been made to treat the Company as a consenting corporation, as defined in Section 341(f) of the Code. (viii) None of the Company and the Subsidiaries has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate it to make any payments, that will not be deductible under Section 280G of the Code. (ix) The Company has not redeemed any Company Shares in a manner that would cause the transactions contemplated hereby to fail to qualify as a reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. The Company has not redeemed any Company Shares or made any distributions, and no Person related to the Company within the meaning of Treasury Regulation Section 1.368-1(e)(3)(i)(B) has acquired any Company Shares, in a manner that would cause the transactions contemplated hereby to violate the continuity of interest requirement set forth in Treasury Regulation Section 1.368-1(e). (x) The Company operates at least one significant historic business line, or owns at least a significant portion of its historic business assets, in each case within the meaning of Section 1.368-1(d). SECTION 3.16. LIABILITIES. Except as set forth in the most recent balance sheet contained in the Company Financial Statements, neither the Company nor any of the Subsidiaries has any outstanding claims, liabilities or indebtedness, contingent or otherwise, other than liabilities not exceeding $25,000 to trade creditors incurred subsequent to the date of such balance sheet in the ordinary course of business not involving borrowings by the Company or any Subsidiary. Neither the Company nor any of the Subsidiaries is in default in respect of the terms or conditions of any indebtedness. SECTION 3.17. INTELLECTUAL PROPERTY. (a) REGISTRATIONS. Schedule 3.17(a) is a complete list of all Intellectual Property used or held for use in the business of the Company or the Subsidiaries (except for unregistered copyrights, know how and trade secrets). To the extent indicated on Schedule 3.17(a), the Intellectual Property listed on Schedule 3.17(a) has been duly -26- registered in, filed in or issued by the United States Patent and Trademark Office, United States Copyright Office or Network Solutions, Inc., the appropriate government or officially recognized offices in the various states of the United States and the appropriate government or officially recognized offices of other jurisdictions (foreign and domestic), and each such registration, filing and issuance (i) has not been abandoned, canceled or otherwise compromised and (ii) remains in full force and effect as of the Closing Date. Copies of all items of Intellectual Property which have been reduced to writing or other tangible form have been delivered by the Company to Cirrus (including, without limitation accurate and complete copies of all related licenses, and amendments and modifications thereto). (b) LICENSES. Schedule 3.17(b) sets forth all licenses to which the Company or any of the Subsidiaries is a party, whether as licensor, licensee, or otherwise with respect to any of the Intellectual Property, other than Commercial Software Rights. To the extent any Intellectual Property is used under license in the business of the Company and/or any Subsidiary, no notice of a material default has been sent or received by the Company or any of the Subsidiaries under any such license which remains uncured, and the execution, delivery or performance of the Company's or its Subsidiary's obligations hereunder will not result in such a default. Each such license agreement (other than Commercial Software Rights) is a legal, valid and binding obligation of the Company and/or the Subsidiaries, as the case may be, and each of the other parties thereto, enforceable in accordance with the terms thereof and the transactions contemplated by this agreement will not breach the terms thereof. (c) NO INFRINGEMENT. Each of the Company and the Subsidiaries owns or is licensed to use, all of the Intellectual Property, free and clear of any Encumbrances without obligation to pay any royalty or any other fees with respect thereto. Neither the Company's nor any Subsidiary's use of the Intellectual Property (including, without limitation, the manufacturing, marketing, licensing, sale or distribution of product and the general condition and operations of the business of the Company or any of its Subsidiaries) violates, infringes, misappropriates or misuses any intellectual property rights of any third party. Each of the Company and the Subsidiaries has the exclusive right to file, prosecute and maintain all applications and registrations with respect to the Intellectual Property. There are no actions that must be taken or payments that must be made by the Company or any of its Subsidiaries within 180 days following the Closing Date that, if not taken, will adversely effect the Intellectual Property or the right of the Company or any of its Subsidiaries to use same as where used as of the Closing Date. -27- (d) DISCLOSURE REQUIREMENTS. The Company and each of the Subsidiaries has used all necessary and commercially reasonable efforts to comply with all applicable disclosure requirements in the application for and maintenance of any patent, trademark or copyright of the Company and each Subsidiary. (e) FEES AND FILINGS. Each item of the Intellectual Property is valid and subsisting and each registration, filing or issuance relating to the Intellectual Property has been maintained effective by the Company and each of the Subsidiaries through making all requisite filings, renewals and/or related maintenance products in connection with such Intellectual Property and file all necessary documents and certificates in connection with such Intellectual Property 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 preserving such Intellectual Property and maintaining the Company and each of the Subsidiary's interest therein. (f) NO NOTICE OF INFRINGEMENT. As of the Closing Date, neither the Company nor any of the Subsidiaries has received any written notice of any claim, threat of claim, nor any correspondence that might, directly or indirectly, imply the existence of a claim, from any Person relating to the right of the Company or any of the Subsidiaries to use any of the Intellectual Property. The Intellectual Property set forth in Schedule 3.17 constitutes all the Intellectual Property necessary to operate the business of the Company and the Subsidiaries as of the Closing Date in the manner in which it is presently operated or contemplated to be operated. (g) NO PENDING CLAIMS. There are no pending or threatened claims, in writing or otherwise, by any Person: (i) of unfair competition or trade practices by the Company or any of the Subsidiaries under the laws of any jurisdiction applicable to the Company or any of the Subsidiaries; (ii) challenging the right of the Company and/or any of its Subsidiaries to use any Intellectual Property or indicating that the failure to take a license would result in such a claim; (iii) alleging any violation, infringement, misuse or misappropriation by the Company and/or any of its Subsidiaries of Intellectual Property owned by any Person; or (iv) assertion of any opposition, interference, invalidity, termination, abandonment, unenforceability, or other infirmity of any Intellectual Property. To the knowledge of the Company, neither the Company nor any Subsidiaries know of any valid basis for such claims. Moreover, neither the Company nor any of the Subsidiaries has made any claim in writing of a violation, infringement, misuse or misappropriation by any Person (including, without limitation, any employee or former -28- employee of the Company or any of the Subsidiaries of its rights to, or in connection with, any Intellectual Property, which claim is pending. Neither the Company nor any of its Subsidiaries has entered into any agreement to indemnify any other Person against any charge of infringement of any Intellectual Property, other than indemnification provisions contained in purchase orders or license agreements arising in the ordinary course of business. (h) NO UNFAIR COMPETITION. The operation of the businesses of the Company and the Subsidiaries as such business currently is conducted, or is reasonably contemplated to be conducted, including the Company and Subsidiaries' design, development, manufacture, marketing and sale of the products or services of the Company and the Subsidiaries (including without limitation, products currently under development) have not and does not infringe, misuse or misappropriate the rights of any third party. (i) NO PROCEEDINGS. To the knowledge of the Company and the Subsidiaries, there are no interferences, oppositions or other contested proceedings, either pending or threatened, in the United States Copyright Office, the United States Patent and Trademark Office, or any other Governmental Authority relating to any pending application with respect to the Company's and its Subsidiaries' Intellectual Property. There is no proceeding or action pending before any tribunal (including the United States Patent and Trademark office or equivalent authority anywhere in the world), or threatened, that relates to any Intellectual Property of the Company or any of the Subsidiaries. (j) NO IMPEDIMENTS TO PATENTS. The Company and each of the Subsidiaries is not barred by its own action from seeking patents (whether U.S. or foreign, where applicable) on material potentially patentable inventions of the Company and the Subsidiaries by "on sale" or similar bars to patentability or by failure to apply for a patent on such inventions within the time required under the laws of any applicable jurisdiction. (k) SITES AND SERVERS. For the twelve month period prior to the Closing Date, the Internet domain names and URL's constituting part of the Company's and its Subsidiaries' Intellectual Property (together with any content and other materials accessible and/or displayed thereon, the "SITES") direct and resolve to the appropriate Internet protocol addresses and are and have been maintained and accessible to Internet users on those certain -29- computers used by the Company to make the Sites so accessible (the "SERVER") approximately twenty-four (24) hours per day, seven (7) days per week ("24/7") and are and have been operational for downloading content from the Server on a 24/7 basis. The Company has fully operational back-up copies of the Sites (and all related software, databases and other information), made from the current versions of the Sites as accessible to Internet users on the Server (and copied directly therefrom), which copies will have been made at least every two weeks from the date hereof until the Closing Date. Such back-up copies have been and are kept in a safe and secure environment, fit for the back-up of media, and are not located at the same location as the Server. The Company has no reason to believe that the Sites will not operate on the Server or will not continue to be accessible to Internet users on a 24/7 basis prior to, at the time of, and after the Closing Date. (l) CONFIDENTIALITY. The Company and each of the Subsidiaries has taken all necessary and reasonable steps required under the circumstances to protect and preserve the confidentiality of all proprietary non-public information relating to the Intellectual Property constituting part of or relating to intellectual property of other Persons provided to the Company or its Subsidiaries. All use and/or disclosure of such information to any third party (other than (i) to competent regulators, accountants and counsel in each instance acting in their professional capacities, or (ii) pursuant to competent judicial or equivalent order) has been pursuant to the terms of a written agreement between such third parties and the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has breached any agreements of non-disclosure or confidentiality or is currently alleged or claimed to have done so. (m) WRITTEN AGREEMENTS. To the extent any work, invention or material has been developed or created by a third party exclusively for the Company or its Subsidiaries, the Company or its Subsidiaries has entered into and maintains a written agreement with such third party with respect thereto and the Company or its Subsidiaries has obtained ownership of, or license to, all Intellectual Property in such work, material or invention by operation of law or by valid assignment. SECTION 3.18. MATERIAL CONTRACTS. (a) Schedule 3.18(a) sets forth all of the following to which the Company or any Subsidiary is a party or by which it is bound: -30- (i) any agreement or commitment that involves the performance of services by it of an amount or value in the aggregate in excess of $100,000; (ii) any agreement, indenture or other instrument which contains restrictions on payment of dividends or the making of any other distribution in respect of its capital stock; (iii) any agreement or commitment to be performed relating to capital expenditures in excess of $100,000 in any calendar year other than those capital expenditures approved and clearly identified as part of the Company's fiscal year 2001 budget (the "2001 BUDGET"), an accurate and complete copy of such budget being attached to Schedule 3.18; (iv) any agreement, indenture or instrument relating to indebtedness for borrowed money or the deferred purchase price of property (excluding trade payables in the ordinary course of business); (v) any loan or advance to or investment in any Person (other than Subsidiaries), or any agreement or commitment relating to the making of any such loan, advance or investment; (vi) any profit-sharing agreement; (vii) any guaranty, suretyship or other contingent liability in respect of any indebtedness or obligation of any Person; (viii) any management service, consulting or any other similar type of agreement, requiring payments by or to the Company or any Subsidiary in the aggregate in excess of $100,000; (ix) any confidentiality, nondisclosure or similar agreement to which the Company or any Subsidiary is a party and in respect of which the Merger could cause a breach of such agreement or could result in a liability to Cirrus or the Company following the Closing; (x) any agreement or commitment limiting the ability of the Company or any of the Subsidiaries to engage in any line of business or to compete with any Person; or -31- (xi) any amendment or supplement in respect of any of the foregoing. (b) Except as set forth on Schedule 3.18(b), each agreement, commitment, indenture, instrument, loan, advance, investment, guarantee, suretyship or contingent liability, including all amendments, modifications and supplements thereto (collectively "CONTRACTS"), is in full force and effect, and (i) there exists no default or event of default or event, occurrence, condition or act (including the consummation of the transactions contemplated hereby) on the part of the Company or any Subsidiary, or to the knowledge of the Company or any Subsidiary on the part of any other party thereto, which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default thereunder; (ii) no approval or consent of, or notice to, any Person is needed in order that each of the foregoing shall continue in full force and effect in accordance with its terms without penalty, acceleration or rights of early termination by reason of the consummation of the transactions contemplated by this Agreement; and (iii) the consummation of the transactions contemplated hereby will not alter in any material respect the rights and obligations of any of the parties to the Contracts. SECTION 3.19. PRODUCTS. Schedule 3.19 lists and describes each of the Products of the Company and the Subsidiaries. Each of the Products has been and is in conformity with all applicable contractual commitments, all express and implied warranties with respect thereto and all legal requirements applicable thereto. If the Company or any Subsidiary obtained, by license, the right to sell, license, develop or otherwise provide any Product under sublicense or other agreement with a third party, this representation and warranty is based solely on the Company's knowledge. The Company and each of the Subsidiaries has no liability for, and to the Company's knowledge no basis exists for, any liability for any replacement, repair or remediation of any Product or for any other damages or refunds in connection with any Product. Schedule 3.19 sets forth a description of all guaranties, warranties and other indemnities to which any of the Products is subject, other than the Company's and any Subsidiary's applicable standard terms and conditions of sale and standard guaranties and warranties, copies of which have been provided to Cirrus. SECTION 3.20 OWNED REAL PROPERTY. Schedule 3.20 attached hereto contains an accurate and complete list of all real property owned by the Company and any of the Subsidiaries. The Company and the Subsidiaries have title to all of their respective real properties, free and clear of all title defects or encumbrances of any nature whatsoever -32- and are not subject to any right of way, covenants, conditions or building use restrictions, exceptions, variances, reservations or limitations of any nature whatsoever that could materially limit the use of such property as currently used, and the fixed and current assets owned by the Company and each of the Subsidiaries include all rights, properties and other assets necessary to permit the Company and each of the Subsidiaries to conduct business in the same manner as their businesses have been conducted prior to the date hereof. SECTION 3.21. LEASES. Schedule 3.21 attached hereto contains an accurate and complete list of all leases to which the Company or any Subsidiary is a party (as lessor or lessee). Each such lease is in full force and effect; all rents and additional rents due to date on each such lease have been paid; in each case, the lessee has been in peaceable possession since the commencement of the original term of such lease and no waiver, indulgence or postponement of the lessee's obligations thereunder has been granted by the lessor. Neither the Company nor any Subsidiary has violated any of the terms or conditions under any such lease in any material respect, and to the knowledge of the Company all of the covenants to be performed by any other party under any such lease have been fully performed and no default by such party exists thereunder. The Company and the Subsidiaries have good and marketable leasehold interests in all leased real property described in each such lease, free and clear of any Encumbrances. All such property is in a state of good maintenance and repair and is adequate and suitable for the purposes for which it is presently being used. SECTION 3.22. INSURANCE. Set forth on Schedule 3.22 attached hereto is a list of all insurance policies which the Company and each of the Subsidiaries maintain with respect to their respective businesses, properties and employees. Such policies are in full force and effect and are free from any right of termination on the part of the insurance carriers. Such policies, with respect to their amounts and types of coverage, are comparable to those typically carried by similarly situated companies in the same or similar businesses. Since January 1, 2001, there has not been any material adverse change in the relationship of the Company or any Subsidiary with any of its insurers or any material increase in any of the premiums payable pursuant to such policies. SECTION 3.23. BOOKS AND RECORDS. All minute books of the Company and each of the Subsidiaries have been made available to Cirrus. The minute books of the Company and the Subsidiaries contain accurate records of all meetings of, and all corporate action taken by (including action taken by written consent), the -33- respective shareholders and Boards of Directors of the Company and each Subsidiary. Neither the Company nor any Subsidiary has any of its records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) (collectively, "BOOKS AND RECORDS") that are not under the exclusive ownership and direct control (including all means of access thereto and therefrom) of the Company or a Subsidiary. SECTION 3.24. AGREEMENTS WITH AFFILIATES. Set forth on Schedule 3.24 is a list of all agreements, arrangements, commitments and understandings, whether written or oral, between the Company and any officer, director or Affiliate of the Company or any of the Subsidiaries. SECTION 3.25. TECHNOLOGY SYSTEMS OPERABILITY. (a) OPERABILITY OF TECHNOLOGY SYSTEMS. All of the computer hardware, computer software, electronic data processing equipment, controllers, microchips embedded in computer or non-computer equipment and any other computerized or electronic equipment or components (collectively, the "TECHNOLOGY SYSTEMS") of the Company and the Subsidiaries are in good working condition, excepting normal wear and tear, and are Year 2000 Compliant. For purposes of this Agreement, the term "YEAR 2000 COMPLIANT" shall mean that the Technology Systems, without human intervention, accurately and completely recognize, receive, record, manipulate, calculate, process, sequence, store, transmit and output or produce, without error or interruption, dates and date-related data from and after 12:00 a.m. on January 1, 2000, time periods that include January 1, 2000 and information that is dependent on or relates to such dates or time periods (including, without limitation, leap year calculations in that same manner and with the same accuracy, functionality, data interaction and performance as when dates or time periods prior to January 1, 2000 are involved) and do not, as a consequence of the change of centuries or of the fact that data from more than one century is being processed, cause an abnormal termination of execution, an endless loop, incorrect values, or invalid results, or otherwise fail to perform accurately, completely and in a timely fashion in accordance with their respective specifications and functionalities. As Year 2000 Compliant, the Technology Systems of the Company and its Subsidiaries are able to store and output date information in a manner that is unambiguous as to Century. -34- (b) NO ADVERSE EFFECT. None of the Technology Systems of the Company or the Subsidiaries, nor any of the Products or services sold or licensed by the Company or the Subsidiaries to third parties has been adversely affected by the onset of the year 2000, nor does the Company or the Subsidiaries have any reason to believe that any such Technology Systems, Products or services will be so adversely affected. (c) STATUS OF SUPPLIERS ET AL. All of the suppliers, licensees, vendors, contractors, distributors and service providers of the Company and the Subsidiaries are Year 2000 Compliant. (d) CONTINGENCY PLANS. The Company and the Subsidiaries have established, and put in place, commercially reasonable contingency plans to address, correct and otherwise attend to in a timely fashion any and all problems that may occur with its Technology Systems and/or supply and distribution systems as a result of (i) a failure of such systems to be Year 2000 Compliant or (ii) such systems otherwise being adversely affected by the onset of the year 2000. (e) NO CLAIMS OR DEMANDS. As of the Closing Date, neither the Company nor any of the Subsidiaries has received any written claims or demands from any third parties asserting that the Products, Technology Systems or supply and distribution systems of the Company or any of the Subsidiaries fail to be Year 2000 Compliant. Neither the Company nor its Subsidiaries know of any valid basis for such a claim or demand. SECTION 3.26. FISCAL 2001 BUDGET. The Fiscal 2001 Budget previously delivered to Cirrus is an accurate and complete copy of such budget, and it has not since been amended or supplemented in any manner. SECTION 3.27. PROJECTIONS. The projections listed in Schedule 3.27 as previously delivered by the Company to Cirrus are based on certain assumptions, estimates and qualifications which the Company's Board of Directors believes to be reasonable. SECTION 3.28. BROKER'S OR FINDER'S FEE. Except as set forth on Schedule 3.28, neither the Company nor any of the Subsidiaries has paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby. -35- SECTION 3.29. COPIES OF DOCUMENTS. The Company has made available for inspection and copying by Cirrus accurate and complete copies of all documents referred to in this Agreement and the Exhibits and Schedules thereto, and all amendments, supplements and waivers thereof. SECTION 3.30. LONG-TERM INDEBTEDNESS. The Company has no long-term indebtedness. SECTION 3.31. DISCLOSURE. The statements made by the Company in the Transaction Documents to which it is a party (including, without limitation, the representations and warranties made by the Company therein in the Schedules and Exhibits thereto), when taken as a whole, do not include or contain any untrue statement of a material fact, and do not omit to state any material fact required to be stated in order for such statements not to be misleading. SECTION 3.32. RELATIONSHIPS. The relationship of the Company and the Subsidiaries after the Effective Time with their present suppliers, customers, licensors, vendors and contractors will not be materially adversely affected as a result of the change of control of the Company and the Subsidiaries pursuant to the Transaction Documents. SECTION 3.33. SHAREHOLDERS' REPRESENTATIVE; AUTHORITY AND VALIDITY. The Shareholders' Representative has the requisite power and authority to execute and deliver the Transaction Documents, as applicable, on behalf of the Shareholders. The execution and delivery of the Transaction Documents by the Shareholders' Representative have been duly authorized and approved by the Shareholders, and no other action on the part of the Shareholders is necessary to authorize the execution and delivery of the Transaction Documents by the Shareholders' Representative. The Transaction Documents as have been executed and delivered by the Shareholders' Representative on or prior to the date hereof have been, and on the Closing Date such other of the Transaction Documents to which the Shareholders' Representative is a party will have been, duly executed and delivered by the Shareholders' Representative and are and will be valid and binding obligations enforceable against the Shareholders in accordance with their terms. -36- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CIRRUS AND ACQUISITION SUB SECTION 4. REPRESENTATIONS AND WARRANTIES OF CIRRUS AND ACQUISITION SUB. Except as set forth in the corresponding sections of the disclosure letter delivered by Cirrus to the Company prior to entering into this Agreement (the "CIRRUS DISCLOSURE LETTER"), Cirrus and Acquisition Sub hereby represent and warrant to the Company as of the date hereof and as of the Closing Date (except as otherwise indicated) as follows: SECTION 4.1. DUE ORGANIZATION, GOOD STANDING AND CORPORATE POWER. Each of Cirrus and Acquisition Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Acquisition Sub has no employees, liabilities, assets (other than cash) or contractual obligations, other than the obligations created by this Agreement. SECTION 4.2. AUTHORIZATION AND VALIDITY OF AGREEMENT. Each of Cirrus and Acquisition Sub has the requisite power and authority to execute and deliver the Transaction Documents to which it is a party, to perform its obligations thereunder and to consummate the transactions contemplated thereby. The execution, delivery and performance of the Transaction Documents to which it is a party, and the consummation by it of the transactions contemplated thereby, will have been duly authorized and approved by it, and no other action on the part of Cirrus and/or Acquisition Sub is necessary to authorize the execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby. The Transaction Documents as have been executed and delivered by Cirrus and Acquisition Sub on or prior to the date hereof have been, and on the Closing Date such other of the Transaction Documents to which Cirrus and/or Acquisition Sub is a party will have been, duly executed and delivered by Cirrus and Acquisition Sub and are and will be valid and binding obligations enforceable against Cirrus and Acquisition Sub, as the case may be, in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and general equitable principles. Cirrus' and the Acquisition Sub's Board of Directors each have (i) approved the Merger, which approval satisfies in full any applicable -37- requirements of the DGCL and CGCL, and (ii) determined that in their opinion the Merger is in the best interests of the stockholders of Cirrus and Acquisition Sub. SECTION 4.3. CAPITALIZATION. The authorized capital stock of Cirrus consists of 280,000,000 shares of Cirrus Common Stock and 5,000,000 shares of preferred stock, of which approximately 73,600,000 shares of Cirrus Common Stock (excluding 6,400,000 treasury shares held by Cirrus) are outstanding on the date of this Agreement. All issued and outstanding shares of Cirrus Common Stock are, and all of the shares of Cirrus Common Stock issuable pursuant to this Agreement when issued as provided herein will be, duly authorized, validly issued, fully paid and nonassessable. SECTION 4.4. CONSENTS AND APPROVALS; NO VIOLATIONS. The execution and delivery of the Transaction Documents to which it is a party by Cirrus and Acquisition Sub and the consummation by them of the transactions contemplated thereby will not: (a) violate or conflict with any provision of the Certificate of Incorporation or Bylaws of Cirrus or Acquisition Sub; (b) violate or conflict with any statute, ordinance, rule, regulation, order or decree of any court or any Governmental Authority applicable to Cirrus or Acquisition Sub or by which any of their respective properties or assets are or may be bound, (c) require any filing with, or permit, consent or approval of, or the giving of any notice to, any Governmental Authority, except, if required, for prior notification and reporting requirements under the HSR Act, or (d) result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default, or result in the creation of any Encumbrance upon any of the properties or assets of the Company or any of the Subsidiaries, or give rise to an obligation, right of termination, cancellation, acceleration, payment or increase of any obligation or a loss of a material benefit, any of the terms, conditions or provisions of any agreement, instrument or other obligation to which Cirrus or Acquisition Sub is a party, or by which any of its properties or assets are or may be bound, except for any such violations, breaches, conflicts, defaults, Encumbrances, increases or losses which, individually or in the aggregate, will not have a material adverse effect on the business, assets, liabilities, operations, results of operations, condition (financial or otherwise) or prospects of Cirrus and Acquisition Sub, taken as a whole or on the ability of Cirrus and Acquisition Sub to consummate the transactions contemplated by the Transaction Documents. -38- SECTION 4.5. BROKER'S OR FINDER'S FEE. Neither Cirrus nor Acquisition Sub has paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby, except for such fees or commissions as are listed in Schedule 4.5. SECTION 4.6 LEGAL PROCEEDINGS. No claim, action, proceeding or investigation is pending before any court, arbitrator or administrative, governmental or regulatory authority or body which seeks to delay or prevent the consummation of the transactions contemplated hereby or which would reasonably be likely to materially and adversely affect or restrict Cirrus' ability to consummate the transactions contemplated hereby. ARTICLE V TAX MATTERS SECTION 5.1. REORGANIZATION QUALIFICATION. The parties hereto intend that the transactions consummated pursuant to this Agreement be treated for federal income tax purposes as a merger which qualifies as a "reorganization" within the meaning of Section 368 of the Code and shall report such transactions in a manner consistent therewith on all federal income tax returns, reports, declarations, claims for refund, or statements (including any schedule or amendment thereto). The parties hereto adopt this Agreement as a "plan of reorganization" within the meaning of Section 354(a)(1) of the Code. SECTION 5.2. COOPERATION WITH TAX MATTERS. Each party hereto shall cooperate to the extent reasonably requested by any other party in connection with the filing of Returns and any audit, litigation or other proceeding involving the Company with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. SECTION 5.3. TRANSFER AND OTHER TAXES. All transfer, documentary, sales, use, stamp, registration and other Taxes and fees (including any penalties and interest) incurred in connection with the payment of the Merger Consideration and the transactions contemplated by this Agreement shall be paid when due by the Shareholders -39- participating in the Merger pursuant to Section 2.2(a), and such Shareholders shall, at their expense, file and cause to be filed all necessary Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees. ARTICLE VI PRE-CLOSING COVENANTS OF THE COMPANY SECTION 6.1. CONDUCT OF BUSINESS PENDING THE EFFECTIVE TIME. Except as permitted or required by this Agreement or otherwise consented to in writing by Cirrus, until the Closing, the Company shall take all action, or refrain from taking any action, necessary to ensure that: (a) Each of the Company and the Subsidiaries: (i) conducts its operations only according to its usual regular and ordinary course of business in substantially the same manner as heretofore conducted, and uses commercially reasonable efforts to preserve intact its business organization, to keep available the services of its current employees and to preserve its present relationships with customers, suppliers and other Persons with which it has a business relationship; (ii) preserves all of its right, title and interest in and to the assets of the Company and each Subsidiary, including, without limitation, its product designs, layouts, drawings, net lists, engineering documentation, user documentation, masks and other manufacturing tools, firmware and software, and test programs, except such of the assets as are consumed in the ordinary course of business consistent with past practice between the date hereof and the Closing Date; (iii) maintains in good operating condition and repair, ordinary wear and tear excepted, all of the tangible property of the Company and each Subsidiary; (iv) maintains in force all insurance in effect on the date of this Agreement; (v) maintains all of the Books and Records consistent with past practices; -40- (vi) operates its business in compliance with all applicable laws, rules and regulations; and (vii) extends trade credit only in the ordinary course of business, consistent with past practice. (b) Neither the Company nor any of the Subsidiaries shall: (i) amend its Articles of Incorporation or Bylaws (or similar constitutive documents); (ii) issue or sell, or authorize the issuance or sale of, any shares of its capital stock or any other securities; (iii) issue or sell, or authorize the issuance or sale of, any securities convertible into, or options, warrants or rights to purchase or subscribe to its capital stock or any other securities; (iv) enter into any arrangement or contract with respect to the issuance or sale of any shares of its capital stock or any other securities, or make any changes in its capital structure; (v) sell or agree to sell or create or agree to create any Encumbrance on any stock or other equity interest owned by it in any other Person; (vi) declare, pay or set aside any dividend or other distribution or payment with respect to, or split, combine, redeem or reclassify, or purchase or otherwise acquire, any shares of its capital stock or other securities, or make any other payments to its shareholders or Affiliates; (vii) enter into any contract or commitment with respect to capital expenditures individually or in the aggregate in excess of $100,000; (viii) acquire any interest in the equity, assets or business of any Person; (ix) except to the extent required under applicable law, rule or regulation, or as permitted or required by this Agreement, increase the compensation or fringe benefits of, or pay any bonuses to, any of its directors, officers or employees or grant any severance or termination pay, or enter into any employment, consulting or severance agreement or arrangement with any present or former director, officer or other -41- employee, or establish, adopt, enter into, amend or terminate any collective bargaining, bonus, profit-sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any of its directors, officers or employees; (x) create any Encumbrance on any of its assets or incur or modify any indebtedness or other liability (other than the incurrence of trade payables in the ordinary course of business) or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for the obligations of any Person, or make any loan or other extension of credit; (xi) purchase or sell any assets other than Products in the ordinary course of business; (xii) enter into any capital lease or lease any of its assets; (xiii) enter into any material contract, transaction or activity; (xiv) pay or set aside any dividend or make or set aside any other distribution with respect to, or redeem, purchase or otherwise acquire, any shares of its capital stock or other securities, or make any other payment to the Shareholders or any Affiliate thereof or of the Company or any Subsidiary; (xv) make or rescind any tax election or settle or compromise any tax liability; (xvi) make any change in its accounting policies or procedures or make any changes in any accounting method or, except upon the written advice of its independent auditors, its system of internal accounting controls; (xvii) except in the ordinary course of business, pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction of claims, liabilities or obligations reflected or reserved against in the Company Financial Statements; -42- (xviii) increase or decrease prices charged to its customers other than in the ordinary course of business; (xix) enter into any contract or transaction with any of its directors, officers, Shareholders or Affiliates, other than as expressly provided in this Agreement; (xx) file or cause to be filed or be a party to any action, suit or proceeding at law or in equity, or any arbitration, or any administrative or other proceeding by or before any Governmental Authority; (xxi) or engage in any new line of business; or (xxii) agree, in writing or otherwise, to take any of the foregoing actions. (c) The Company shall notify Cirrus and Acquisition Sub in writing of any material adverse change since the date hereof in the business, assets, liabilities, operations, results of operations, condition (financial or otherwise) or prospects of the Company or any of the Subsidiaries promptly upon becoming aware thereof. SECTION 6.2. FULL ACCESS AND DISCLOSURE. During the period commencing on the date hereof until the Closing Date, the Company shall, and shall cause each of the Subsidiaries to, afford Cirrus and Acquisition Sub and their respective employees, advisors, accountants, agents and representatives reasonable access during normal business hours to the personnel, properties and Books and Records of the Company and those of the Subsidiaries in order that they may have the opportunity to make reasonable investigations of the affairs of the Company and the Subsidiaries; provided, however, neither the right to make such investigations nor the making of any such investigation shall affect the representations and warranties made in this Agreement or the right of Cirrus and/or Acquisition Sub to enforce them. The Company shall promptly furnish to Cirrus and Acquisition Sub such additional financial and operating data and other information and respond to such inquiries as either of them shall from time to time reasonably request. SECTION 6.3. CONFIDENTIALITY. Until June 30, 2004, the Company and the Shareholders shall, and the Company shall cause the Company's and Subsidiaries' respective officers, directors, other employees, agents, representatives and Affiliates to execute agreements (naming Cirrus as an intended third party beneficiary) obligating -43- them to treat and hold as confidential all non-public information relating to trade secrets, processes, patent and trademark applications, product development, price, customer and supplier lists, pricing and marketing plans, policies and strategies, details of client and consultant contracts, operations methods, product development techniques, business acquisition plans, new personnel acquisition plans and all other non-public information (collectively, "CONFIDENTIAL INFORMATION") with respect to Cirrus and Acquisition Sub; provided that Confidential Information shall not include information that: (i) is as of the date hereof, or subsequently becomes, generally available to the public through no fault of, or breach of any confidentiality obligation by, a party hereto, (ii) the Person to whom such information is disclosed can demonstrate to have had such information in its possession without any breach of any applicable law or regulation or other obligation of confidentiality of such Person or a third party, or (iii) is independently developed by the Person to whom such information is disclosed without the use of any Confidential Information disclosed either in furtherance or in violation hereof. The Company and any Shareholders, and their respective officers, directors, other employees, agents, representatives and Affiliates, may disclose such Confidential Information, if he, she or it becomes legally compelled to disclose such information. In such case, the Person needing to disclose such Confidential Information shall provide Cirrus with prompt written notice of any requirement or effort made by any Person to compel disclosure on such Confidential Information so that Cirrus may, if it desires, seek a protective order or other remedy. The Person compelled to make such disclosure shall exercise its commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Confidential Information, and in any event, only that portion of the Confidential Information which is legally required to be disclosed may be disclosed. Notwithstanding anything to the contrary in this Agreement, the parties acknowledge that remedies at law for any breach of any obligation under this Section 6.3 are inadequate and that in addition thereto the party seeking to enforce this Section 6.3 shall be entitled to equitable relief, including injunction and specific performance, in the event of any such breach. Notwithstanding the foregoing, the obligations of the Company under this Section 6.3 shall cease at the Effective Time. SECTION 6.4. COOPERATION. The Company shall, and the Company shall cause each of the Subsidiaries to: (a) cooperate and use commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to make, or cause to be made, all filings necessary, proper or advisable under applicable laws and regulations, to -44- consummate and make effective the transactions contemplated by this Agreement and the Transaction Documents, including, without limitation, its commercially reasonable efforts to obtain, prior to October 12, 2001, such Permits and Consents as are necessary for consummation of the transactions contemplated by the Transaction Documents; and (b) promptly assist, cooperate and use commercially reasonable efforts to take, or cause to be taken, all appropriate action necessary for the registration of shares of Cirrus Common Stock pursuant to Section 7.4. SECTION 6.5. HSR NOTIFICATION. (a) The Company shall: (i) take promptly all actions necessary to make the filings required of it or any of its Affiliates under any applicable Antitrust Laws in connection with the Transaction Documents and the transactions contemplated thereby; (ii) if requested by Cirrus, comply at the earliest practicable date with any formal or informal request for additional information or documentary material received by it or any of its Affiliates from any Antitrust Authority; and (iii) cooperate with Cirrus in connection with (A) any filing made by them or either of them under applicable Antitrust Laws and (B) resolving any investigation or other inquiry concerning the transactions contemplated by this Agreement initiated by any Antitrust Authority. (b) The Company shall use commercially reasonable efforts to resolve such objections, if any, as may be asserted with respect to the transactions contemplated by this Agreement under any Antitrust Law. Without limiting the generality of the foregoing, "commercially reasonable efforts" as used in this Section 6.5 shall include, if required: -45- (i) filing with the appropriate Antitrust Authorities no later than the fifth (5th) day following the date hereof a Notification and Report Form pursuant to the requirements of the HSR Act or any filings or notification required with respect to the transactions contemplated by this Agreement; (ii) if requested substantially complying with any formal request for additional information or documentation material from an Antitrust Authority within sixty (60) days following the date of its receipt or such other date specified therein; and (iii) cooperating with and not frustrating or impeding Cirrus's strategy or negotiating positions with any Antitrust Authority. (c) The Company shall promptly inform Cirrus of any material communication made to, or received by the Company from, any Antitrust Authority or any other Governmental Authority regarding any of the transactions contemplated by the Transaction Documents. SECTION 6.6. COVENANT TO SATISFY CLOSING CONDITIONS. The Company shall satisfy or cause to be satisfied, on or before October 12, 2001, the conditions to the obligations of Cirrus and Acquisition Sub to consummate the transactions contemplated hereby set forth in Sections 8.1(b), (e), (f), (g) and (m) and shall use commercially reasonable efforts to effect or cause to be effected all such other matters within its control that may be necessary or desirable for the satisfaction of all such other conditions to the obligations of Cirrus to consummate the transactions contemplated hereby. ARTICLE VII PRE-CLOSING COVENANTS OF CIRRUS AND ACQUISITION SUB SECTION 7.1. CONFIDENTIALITY. Until the Effective Time, Cirrus and Acquisition Sub shall, and shall cause their respective officers, directors, other employees, agents, representatives and Affiliates to, treat and hold as confidential all Confidential Information of the Company and the Subsidiaries. Cirrus and Acquisition Sub or any such officers, directors, other employees, agents, representatives and Affiliates may disclose any such Confidential Information if, prior to the Effective Time, he, she or it becomes legally compelled to disclose such information. In -46- such case, Cirrus shall provide the Company with prompt written notice of such requirement so that the Company may, if it desires, seek a protective order or other remedy. Cirrus shall exercise commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Confidential Information, and in any event, Cirrus shall furnish only that portion of the Confidential Information which is legally required to be disclosed. Notwithstanding anything to the contrary in this Agreement, the parties acknowledge that remedies at law for any breach of any obligation under this Section 7.1 are inadequate and that in addition thereto the party seeking to enforce this Section 7.1 shall be entitled to equitable relief, including injunction and specific performance, in the event of any such breach. SECTION 7.2. COOPERATION. Cirrus and Acquisition Sub shall cooperate and use commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to make, or cause to be made, all filings necessary, proper or advisable under applicable laws and regulations, to consummate and make effective the transactions contemplated by the Transaction Documents, including, without limitation, their commercially reasonable efforts to obtain, prior to October 12, 2001, all Permits and Consents as are necessary for consummation of the transactions contemplated by the Transaction Documents. SECTION 7.3. HSR ACT. (a) Cirrus shall: (i) take promptly all actions necessary to make any filings required of it or any of its Affiliates under any applicable Antitrust Laws in connection with the Transaction Documents and the transactions contemplated thereby; (ii) if requested by the Company, comply, at the earliest practicable date with any formal or informal request for additional information or documentary material received by it or any of its Affiliates from any Antitrust Authority; and (iii) cooperate with the Company in connection with (A) any filing made by it under applicable Antitrust Laws and (B) resolving any investigation or other inquiry concerning the transactions contemplated by this Agreement initiated by any Antitrust Authority. -47- (b) Cirrus shall use commercially reasonable efforts to resolve such objections, if any, as may be asserted with respect to the transactions contemplated by this Agreement under any Antitrust Law. Without limiting the generality of the foregoing, "commercially reasonable efforts" as used in this Section 7.3 shall include, if required: (i) filing with the appropriate Antitrust Authorities no later than the fifth (5th) day following the date hereof a Notification and Report Form with respect to the transactions contemplated by this Agreement; and (ii) substantially complying with any formal request for additional information or documentary material from an Antitrust Authorities within sixty (60) days following the date of its receipt or such other date specified therein. (c) Cirrus shall promptly inform the other parties hereto of any material communication made to, or received by Cirrus or Acquisition Sub from, any Antitrust Authority or any other Governmental Authority regarding any of the transactions contemplated by the Transaction Documents. SECTION 7.4. COVENANT TO SATISFY CLOSING CONDITIONS. Cirrus shall satisfy, or cause to be satisfied, on or before October 12, 2001, the conditions to the obligations of the Company to consummate the transactions contemplated hereby set forth in Section 8.2(b), and shall use its best efforts to effect or cause to be effected all such other matters within its control that may be necessary or desirable for the satisfaction of all such other conditions to the obligations of the Company to consummate the transactions contemplated hereby. SECTION 7.5. CIRRUS SECURITIES REGISTRATION OR EXEMPTION. Promptly following the date of this Agreement, Cirrus shall use commercially reasonable efforts, in reliance upon the exemption provided for in Section 3(a)(10) of the Securities Act, to submit an application for a permit authorizing the sale and issuance of shares of Cirrus Common Stock (i) to be issued to the Shareholders pursuant to Section 2.2(a) for resale by the recipients thereof, and (ii) issuable upon exercise of the Assumed Options, pursuant to Section 25121 of the California Corporate Securities Law of 1968, as amended, and to obtain the permit as promptly as practicable after submitting such application. If such permit is not obtained as of the Closing Date, Cirrus shall use reasonable best efforts to register with the United -48- States Securities and Exchange Commission the shares of Cirrus Common Stock (i) to be issued to the Shareholders pursuant to Section 2.2(a) for resale by the recipients thereof, and (ii) issuable upon exercise of the Assumed Options, on one or more registration statements on such forms on which Cirrus may qualify to register, and to have such registration statements declared effective under the Securities Act as promptly as practicable after such filings. ARTICLE VIII CONDITIONS TO CLOSING SECTION 8.1. CONDITIONS TO OBLIGATION OF CIRRUS AND ACQUISITION SUB. The obligations of Cirrus and Acquisition Sub to consummate the transactions contemplated hereby shall be subject to the satisfaction on or prior to the Closing Date of the following conditions precedent: (a) The representations and warranties of the Company made in the Transaction Documents to which it is a party shall be true in all material respects (without regard to any materiality qualifications set forth therein) on the date hereof and on the Closing Date; (b) The Company shall have performed and complied in all material respects with all agreements and covenants required by the Transaction Documents to be performed and complied with by it at or prior to the Closing Date; (c) The Shareholders shall have approved the execution, delivery and performance by the Company of the Transaction Documents to which it is a party; (d) The Principal Shareholders shall have executed and delivered to Cirrus the Voting Rights Agreement together with the irrevocable proxy provided for therein to vote their Company Shares with respect to certain matters; (e) Each of the employees of the Company identified on Schedule 8.1(e) shall have entered into an Employment Agreement with Cirrus in the form attached as Exhibit C, and Harold Liang, Mark Rygh, Ed Miller, -49- Alex Kipnis and Jeff Fratus shall have entered into such Employment Agreement Addenda in the form attached as Exhibit D; (f) There has been no material adverse change in the business, assets, liabilities, operations, results of operations, condition (financial or otherwise) or prospects of the Company or any of the Subsidiaries, and the businesses of the Company and each of the Subsidiaries have been conducted in all material respects only in the ordinary course consistent with past practice and neither the Company nor any of the Subsidiaries has taken any of the actions set forth in Section 6.1(b); (g) omitted; (h) If applicable, the mandatory waiting period under the HSR Act shall have expired or been terminated, and all governmental authorizations, consents, waivers and approvals required in connection with the execution, delivery and performance of this Agreement, including without limitation from the Antitrust Authorities, shall have been duly obtained and shall be in form and substance reasonably satisfactory to Cirrus; (i) No legal action or proceeding shall have been instituted seeking to restrain, prohibit, invalidate or otherwise adversely affect the consummation of the transactions contemplated by any of the Transaction Documents or which, if adversely decided, could materially adversely affect the operation of the business of the Company or Cirrus; (j) No preliminary or permanent injunction or other order by any federal, state or foreign court of competent jurisdiction which prohibits the consummation of the transactions contemplated by any of the Transaction Documents shall have been issued and remain in effect; (k) All Consents and all approvals described in Schedule 8.1(k) shall have been filed, occurred or been obtained and shall be in full force and effect; (l) Cirrus shall have completed, with results satisfactory to Cirrus, due diligence of the Company and the Subsidiaries; -50- (m) The employment agreements between the Company and certain of its employees identified on Schedule 8.1(m) shall have been terminated or expired; (n) Other than as set forth in Schedule 3.3(c), the Company shall have no securities outstanding, including without limitation capital stock, and options or warrants to acquire capital stock or other securities; and (o) The Company shall have provided to Cirrus audited financial statements, reasonably satisfactory to Cirrus, for each of the Company's fiscal years ended December 31, 1998, December 31, 1999 and December 31, 2000. SECTION 8.2. CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company to consummate the transactions contemplated hereby shall be subject to the satisfaction on or prior to the Closing Date of the following conditions precedent: (a) The representations and warranties of Cirrus and Acquisition Sub made in each of the Transaction Documents to which either or both of them are a party shall be true and correct in all respects (without regard to any materiality qualifications set forth therein) on the date hereof and as of the Closing Date; (b) Cirrus and Acquisition Sub shall have performed and complied in all material respects with all agreements and covenants required by any of the Transaction Documents to be performed and complied with by them prior to the Closing Date; (c) The mandatory waiting period under the HSR Act shall have expired or been terminated, and all other Governmental authorizations, consents, waivers and approvals required in connection with the execution, delivery and performance of the Transaction Documents, including, without limitation, from the Antitrust Authorities, shall have been duly obtained and shall be in form and substance reasonably satisfactory to the Company; (d) No legal action or proceeding shall have been instituted or threatened seeking to restrain, prohibit, invalidate or otherwise adversely affect the consummation of the transactions contemplated hereby or by the -51- Transaction Documents or which, if adversely decided, could materially adversely affect the operation of the business of Cirrus or the Company; and (e) No preliminary or permanent injunction or other order by any federal, state or foreign court of competent jurisdiction which prohibits the consummation of the transactions contemplated by any of the Transaction Documents shall have been issued and remain in effect. ARTICLE IX CLOSING DELIVERIES AND ACTIONS SECTION 9.1. CLOSING DELIVERIES AND ACTIONS OF THE COMPANY. (a) At the Closing, the Company shall deliver to Cirrus: (i) a certificate of legal existence and good standing of the Company from the Secretary of State of California; (ii) a certificate of an executive officer of the Company in form reasonably satisfactory to Cirrus certifying that as of the Closing Date the representations and warranties made herein by the Company are true in all respects (without regard to any materiality qualifications set forth therein) and that the Company has performed and complied in all material respects with all agreements and covenants required by any of the Transaction Documents to be performed and complied by it prior to the Closing Date; (iii) a certificate of an executive officer of the Company in form reasonably satisfactory to Cirrus certifying that as of the Closing Date the Company has performed and complied in all respects with all agreements and covenants and conditions required by the Trade Credit Agreement and all other documents delivered by the Company pursuant thereto to be performed and complied with prior to the Closing Date; (iv) a certificate of an executive officer of the Company in form reasonably satisfactory to Cirrus certifying the total amount of the Transaction Expenses paid by the Company prior to Closing and providing in reasonable detail how such amount was calculated; -52- (v) the Escrow Agreement, duly executed by the Company and the Shareholders' Representative on behalf of all of the Shareholders; (vi) an opinion of counsel to the Company addressed to Cirrus dated as of the Closing Date, satisfactory in form and substance to Cirrus with respect to the matters set forth in Exhibit E; (vii) Certificates representing all outstanding Company Shares other than Dissenting Shares; (viii) a copy of the Certificate of Merger to be filed by the Company pursuant to Section 2.1; and (ix) such other documents as Cirrus shall reasonably request consistent with the terms hereof. (b) At the time of the Closing, Acquisition Sub shall file, with the assistance of the Company, its Certificate of Merger pursuant to Section 2.1 with the Secretary of State of the State of California. SECTION 9.2. CLOSING DELIVERIES AND ACTIONS OF CIRRUS AND ACQUISITION SUB. (a) At the Closing, Cirrus and Acquisition Sub shall deliver to the Company (except where otherwise indicated): (i) subject to Section 2.2(d), certificates evidencing shares of Cirrus Common Stock, as provided in the first sentence of Section 2.2(c), shall be delivered to the Shareholders' Representative for delivery to the Shareholders; (ii) cash in lieu of fractional shares of Cirrus Common Stock, pursuant to Section 2.4, by wire transfer to the Shareholders' Representative for delivery to the Shareholders; (iii) a certificate of legal existence and good standing of each of Cirrus and Acquisition Sub from the Secretary of State of the State of Delaware; (iv) a certificate of an executive officer of each of Cirrus and Acquisition Sub in form reasonably satisfactory to the Company certifying that as of the Closing Date the representations and -53- warranties made herein by Cirrus and Acquisition Sub are true in all material respects (without regard to any materiality qualifications set forth therein) and that Cirrus and Acquisition Sub have performed and complied in all material respects with all agreements and covenants required by any of the Transaction Documents to be performed and complied with by them prior to the Closing Date; (v) the Escrow Agreement, duly executed by Cirrus; (vi) the Indemnity Fund as provided in the second sentence of Section 2.2(c), shall be delivered to the Escrow Agent by wire transfer as provided in Schedule 9.2; (vii) the Assumed Options to the Persons entitled thereto as provided in Section 2.2(b); and (viii) an opinion of counsel to Cirrus and Acquisition Sub addressed to the Company dated as of the Closing Date, satisfactory in form and substance to the Company with respect to the matters set forth in Exhibit F; (ix) a copy of the Certificate of Merger to be filed by Acquisition Sub pursuant to Section 2.1; and (x) such other documents as the Company shall reasonably request consistent with the terms hereof. (b) At the time of the Closing, Acquisition Sub shall file with the Secretary of State of the State of Delaware its Certificate of Merger pursuant to Section 2.1. SECTION 9.3. ALL DELIVERIES AND ACTIONS DEEMED SIMULTANEOUS; ESCROW AGREEMENT. All deliveries and actions made at the Closing shall be deemed to have been made or occurred simultaneously irrespective of when made or occurring, and unless all such deliveries and actions have been made or occurred, none shall have been deemed to have been made or occurred, and if made shall be returned to the delivering party or parties, and if occurred shall be canceled. The Closing shall not occur unless the Escrow Agent executes and delivers counterparts of the Escrow Agreement to each of the parties thereto. -54- ARTICLE X POST-CLOSING COVENANTS OF THE COMPANY, THE SHAREHOLDERS AND CIRRUS SECTION 10.1. APPRAISAL RIGHTS. The Company shall give Cirrus and Acquisition Sub prompt notice of any written demands for appraisal, withdrawals of demands for appraisal and any other related instrument received by the Company after the Closing Date, and the Company shall not settle any demand for appraisal at an amount per share in excess of the consideration per share Shareholders shall have received upon conversion of their Company Shares to shares of Cirrus Common Stock pursuant to Section 2. SECTION 10.2. CERTIFIED TAX NUMBERS. The Shareholders' Representative shall, within thirty (30) days from the date of the Escrow Agreement, provide the Escrow Agent with certified tax identification numbers for each of the Shareholders on appropriate forms W-8 or W-9 and such other forms and documents relative to the Indemnity Fund as the Escrow Agent may reasonably request. If the Escrow Agent does not receive such Tax reporting documentation, the Escrow Agent may, to the extent required by the Code, withhold interest and other income earned on the investment of the Indemnity Fund. SECTION 10.3. CONTINUITY OF BUSINESS ENTERPRISE. Cirrus will continue at least one significant historic business line of the Company, or use at least a significant portion of the Company's historic business assets in a business, in each case within the meaning of Reg. Section 1.368-1(d), except that Cirrus may transfer the Company's historic business assets (i) to a corporation that is a member of Cirrus' "qualified group" within the meaning of Reg. Section 1.368-1(d)(4)(ii), or (ii) to a partnership if (A) one or more members of Cirrus' "qualified group" have active and substantial management functions as a partner with respect to the Company's historic business or (B) members of Cirrus' "qualified group" in the aggregate own an interest in the partnership representing a significant interest in the Company's historic business, in each case within the meaning of Reg. Section 1.368-1(d)(4)(iii). SECTION 10.4. EMPLOYEE BONUS PLAN. Cirrus shall take all actions reasonably necessary to establish a $7.0 million dollar retention bonus plan and a $2.0 million additional bonus plan that will go into effect at the Effective Time and that will cover all of the current employees of the Company who become employees of Cirrus or -55- Acquisition Sub as well as new employees of Cirrus or Acquisition Sub that are primarily engaged in work related to the projects of the Company. SECTION 10.5. ASSUMED OPTION SHARES. Cirrus shall take all corporate actions necessary to reserve for issuance a sufficient number of shares of Cirrus Common Stock for delivery upon exercise of all Assumed Options on the terms set forth in Section 2.2(b). ARTICLE XI INDEMNIFICATION SECTION 11.1. SURVIVAL. The representations and warranties of the parties contained in this Agreement (including without limitation obligations with respect to indemnification under this Article XI), the other Transaction Documents and in any certificate delivered pursuant hereto or thereto, shall survive the Closing for a period of eighteen (18) months following the Closing Date, except that the Company's representations and warranties relating to Taxes made in Section 3.15 shall survive for the duration of the statute of limitations applicable thereto; provided, that the delivery of a Claim Notice (as defined in Section 11.3 hereunder) within such eighteen (18) month period shall extend the period of survival applicable to any claim set forth therein through the date such claim is conclusively resolved. SECTION 11.2. INDEMNIFICATION. (a) BY THE SHAREHOLDERS. The Shareholders, jointly and severally, shall indemnify, defend and hold harmless, to the extent provided in Section 11.3, Cirrus, Acquisition Sub, and their respective shareholders, directors, officers and other employees, agents, advisors, successors and assigns ("CIRRUS INDEMNITEES") from and against any and all Losses to the extent such Losses are based upon, arise out of or relate to: (i) any misrepresentation or breach of warranty made by the Company herein; (ii) any failure of the Company or any Shareholder to perform or comply with any of the Company's or Shareholder's obligations under any Transaction Document or any certificate or other document delivered pursuant thereto; -56- (iii) any obligation to any broker or finder employed or alleged to have been employed by or on behalf of the Company or any Shareholder or any Affiliate of either of them; and (iv) as of the Effective Time, the Company having less than one million dollars ($1,000,000) of Working Capital. (b) BY CIRRUS. Cirrus and Acquisition Sub, jointly and severally, shall indemnify, defend and hold harmless the Company and its respective Shareholders, directors, officers and other employees, agents, advisors, successors and assigns (the "COMPANY INDEMNITEES") from and against any and all Losses to the extent such Losses are based upon, arise out of or relate to: (i) any misrepresentation or breach of warranty made by Cirrus or Acquisition Sub herein; (ii) any failure by Cirrus or Acquisition Sub or either of them to perform or comply with any of their obligations under any Transaction Document or certificate or other document delivered pursuant thereto; and (iii) any obligation to any broker or finder employed or alleged to have been employed by or on behalf of Cirrus or Acquisition Sub or any Affiliate of either of them. (c) LOSSES. For purposes of this Agreement, "LOSSES" means any and all liabilities, obligations, losses, damages, deficiencies, demands, claims, fines, penalties, interest, assessments, judgments, actions, proceedings and suits of whatever kind and nature and all costs and expenses relating thereto (including without limitation reasonable attorneys' fees incurred in connection with the investigation, defense and/or prosecution thereof). SECTION 11.3. ASSERTION OF CLAIMS. If any Cirrus Indemnitee or any Company Indemnitee (either, an "INDEMNITEE") believes it has a right to indemnification pursuant to Section 11.2, such Indemnitee (and in the case of any Shareholder, the Shareholders' Representative) shall provide notice in writing thereof ("CLAIM NOTICE") to the Escrow Agent with a copy to the Shareholders' Representative or to Cirrus (either, an "INDEMNITOR"), as the case may be. The Claim Notice shall set forth in reasonable detail the nature of the claim for which indemnification is -57- sought, the factual basis of such claim and a good faith estimate of the dollar value of the Losses for which indemnification is sought. No such estimate shall have any effect on the extent to which Cirrus or the Shareholders, as the case may be, shall have an obligation to indemnify an Indemnitee. All claims made against and paid out of the Indemnity Fund to the Cirrus Indemnitees shall be made and paid in accordance herewith and with the terms of the Escrow Agreement. SECTION 11.4. NOTICE OF AND RIGHT TO DEFEND THIRD PARTY CLAIMS. Promptly upon becoming aware of the commencement of any suit, action or proceeding by a third party in respect of which indemnification may be sought under this Article XI, the Indemnitee shall provide notice in writing to the Indemnitor with respect thereto pursuant to Section 11.3. The failure by such Indemnitee to so notify promptly such Indemnitor of any claim with respect to such suit, action or proceeding shall not relieve such Indemnitor from any liability which it may have to such Indemnitee in connection therewith, except to the extent such Indemnitor has been prejudiced by such omission. If a Claim Notice is given in connection with any such suit, action or proceeding commenced against an Indemnitee, the Indemnitor shall be entitled to participate therein, and, to the extent that it may wish, to assume the defense or conduct the settlement thereof; provided, however, that the Shareholders shall have no right to assume the defense or conduct the settlement of any suit, action or proceeding if the amount claimed by the plaintiff(s) therein, as alleged in the complaint or any amended complaint or as determined by any Cirrus Indemnitee in good faith after seeking advice of counsel exceeds the amount then remaining in the Indemnity Fund. The Shareholders' Representative may, at no expense to the Cirrus Indemnittees or the Company, continue to observe the defense or settlement of any such suit, action or proceeding. After notice from the Indemnitor to the Indemnitee of its election to so assume the defense, conduct or settlement thereof, the Indemnitor will not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense, conduct or settlement thereof following such notice. The Indemnitee shall cooperate in all reasonable aspects with the Indemnitor in connection with any such claim assumed by the Indemnitor and shall make available to the Indemnitor all pertinent information under the Indemnitee's control that is pertinent to the claim. SECTION 11.5. LIMITATIONS OF LIABILITY. -58- (a) BASKET. No amount shall be payable by an Indemnitor (or if such Indemnitor is the Shareholders, all of the Shareholders collectively) to an Indemnitee with respect to indemnification of claims for misrepresentation or breach of warranty pursuant to this Article XI unless and until the aggregate amount of such claims required to be indemnified by the Indemnitor pursuant hereto exceeds one hundred thousand dollars ($100,000), in which case the Indemnitor shall be liable to the Indemnitee for the entire amount of all such claims, not to exceed: (i) in the case of such claims made against the Shareholders, the aggregate amount in the Indemnity Fund from time to time, except that no such limitation shall apply in the event of any claims by Cirrus or Acquisition Sub relating to fraud by the Company and its Subsidiaries, and their respective Shareholders, directors, officers and other employees, agents, advisors, successors and assigns; and (ii) in the case of such claims made against Cirrus, fifteen percent (15%) of the Merger Consideration in the aggregate, except that no such limitation shall apply in the event of any claims by the Company or the Shareholders relating to fraud by Cirrus and Acquisition Sub, and their respective shareholders, directors, officers and other employees, agents, advisors, successors and assigns. (b) INSURANCE. The amount of any Losses indemnifiable pursuant to this Article XI shall be reduced by the amount of any insurance proceeds received by the Indemnitee in respect of such claim (and if such proceeds are received following an indemnification payment in respect of the relevant claim, the Indemnitee shall pay to the Indemnitor an amount equal to the lesser of (i) the amount of such proceeds and (ii) the amount of any indemnification payments made by the Indemnitor in respect of the relevant claim). (c) NO PUNITIVE OR CONSEQUENTIAL DAMAGES. An Indemnitee may not recover punitive damages or consequential, indirect or special damages in any claim made for indemnification or otherwise with respect to the Transaction Documents and the transactions contemplated thereby. (d) DUTY TO MITIGATE LOSSES. Nothing herein shall be deemed to relieve any Indemnitee hereto from any duty to mitigate any Losses under applicable law. -59- (e) NO DOUBLE RECOVERY. No Indemnitee shall be entitled to be indemnified more than once under this Agreement for the same claim. (f) SOLE REMEDY. This Article XI shall provide for the sole remedy for any misrepresentation or breach or warranty or breach of covenant or other agreement in this Agreement, except in the case of fraud or as provided in Article XII. SECTION 11.6. SHAREHOLDERS' REPRESENTATIVE. No individual Shareholder may directly assert any of his, her, or its rights under this Article XI. Any rights to indemnification or defend any third party claims by a Shareholder must be asserted or conducted solely through the Shareholders' Representative. ARTICLE XII CERTAIN CONTINGENCIES SECTION 12.1. CERTAIN CONTINGENCIES. Notwithstanding anything in Article XI to the contrary, in the event that: (a) the Voting Rights Agreement is not executed by the Principal Shareholders and the Company and delivered to Cirrus within two (2) business days from the date of this Agreement; and (b) (i) prior to the Effective Time, the Company has breached in any material respect any representation, warranty, covenant or other agreement contained in the Transaction Documents; (ii) prior to the Effective Time, the Board of Directors of the Company (or any committee thereof) shall have withdrawn, modified, conditioned, qualified or amended its recommendation to approve and adopt the Merger; (iii) prior to the Effective Time, the Shareholders shall have voted against approval and adoption of the Merger; or -60- (iv) prior to October 12, 2001, the Shareholders shall have failed to approve and adopt the Merger, then Cirrus and Acquisition Sub shall have no further obligation to perform and comply with the Transaction Documents and the Company shall promptly pay Cirrus in immediately available funds the amount of three million dollars ($3,000,000) for its out-of-pocket expenses (including, without limitation, printing fees, filing fees, fees and expenses of its legal and financial advisors and all fees and expenses payable to any financing sources and lost profits related to the transactions contemplated hereby). Such payment shall not relieve the Company or the Shareholders from their continuing obligations pursuant to Section 6.3. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.1. EXPENSES. Cirrus agrees to pay the Company's transaction expenses directly and exclusively associated with the Merger up to a maximum of one million five hundred thousand dollars ($1,500,000), less any payments that have been made by the Company prior to the Closing ("TRANSACTION EXPENSES"). Any amount in excess of one million five hundred thousand dollars ($1,500,000) will remain the responsibility of and shall be paid by the Shareholders. For purposes of this Section 13.1, Transaction Expenses shall be limited to the fees and disbursements of counsel, investment bankers, accountants and any other advisors or consultants incurred directly and exclusively in connection with the Merger. SECTION 13.2. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered (return receipt requested) or mailed by certified mail (return receipt requested) or by nationally recognized courier service or by facsimile transmission upon electronic confirmation of receipt thereof during normal business hours at the following addresses (or at such other address for a party as shall be specified by like notice). The date a notice shall be deemed provided shall be the date of the return receipt requested if provided by U.S. Mail, the date of delivery if personally delivered or delivered by a nationally recognized courier service or the date of electronic confirmation if by facsimile transmission: -61- If to the Company, to: LuxSonor Semiconductors, Inc. 3358 Gateway Boulevard Fremont, CA 94538 Attention: Harold Liang Telephone: (510) 683-4668 Facsimile Number: (510) 683-4669 with a copy to: Heller, Ehrman, McAuliffe & White LLP 275 Middlefield Road Menlo Park, CA 94025 Attention: Lucas S. Chang, Esq. Telephone: (650) 324-7100 Facsimile: (650) 324-6060 If to the Shareholders' Representative, to: Harold Liang 275 Middlefield Road Menlo Park, CA 94025-3506 Telephone: (650)324-7000 Facsimile Number: (650) 324-6097 If to Cirrus or Acquisition Sub, to: Cirrus Logic, Inc. 4210 South Industrial Drive Austin, TX 78744 Attention: Steven D. Overly, Esq. Telephone: (512) 912-3234 Facsimile Number: (512) 912-3136 with a copy to: White & Case LLP 1155 Avenue of the Americas New York, NY 10036-6700 Attention: Neal F. Grenley, Esq. Telephone: (212) 819-8200 Facsimile Number: (212) 354-8113 SECTION 13.3. DISPUTE RESOLUTION. Any controversy, dispute or claim arising out of or relating to the Transaction Documents, or the breach or termination thereof, which has not been settled by negotiation within thirty (30) days following written notice by one party to one or more other parties of the existence of such dispute, -62- controversy or claim, shall be finally settled by arbitration under the Commercial Arbitration Rules of the American Arbitration Association ("AAA") by three arbitrators. In such event, the claimant will deliver a written notice to the respondent(s) and the AAA initiating arbitration and naming an arbitrator. Within twenty (20) days after receipt of such arbitration notice, the respondent(s) shall name an arbitrator. Within twenty (20) days from the naming of the two arbitrators, the two arbitrators shall name a third arbitrator. If there are multiple claimants and/or multiple respondents, all claimants and/or all respondents shall attempt to agree upon naming their respective arbitrator. If the claimants or respondents, as the case may be, fail to name their respective arbitrator, or if the two arbitrators fail to name a third arbitrator, or if within twenty (20) days after any arbitrator shall resign or otherwise cease to serve as such a replacement arbitrator is not named by the party that originally named such arbitrator, such arbitrator as to which agreement cannot be reached or as to which a timely appointment is not made shall be named by the AAA. The place of arbitration shall be Austin, Texas. The award of the arbitrators may be entered in any court of competent jurisdiction. The costs of the arbitration shall be shared by the disputing parties equally. SECTION 13.4. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the Schedules and Exhibits hereto) (i) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them, with respect to the subject matter hereof, and (ii) shall not be assigned by operation of law or otherwise. SECTION 13.5. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas without giving effect to the provisions thereof relating to conflicts of law. SECTION 13.6. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. SECTION 13.7. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not effect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. -63- SECTION 13.8. INVESTIGATION. The representations and warranties contained herein or in the certificates or other documents delivered at or prior to the Closing shall not be deemed waived or otherwise affected by any investigation made by any party hereto. SECTION 13.9. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by or on behalf of the parties hereto. SECTION 13.10. THIRD PARTY BENEFICIARIES. This Agreement is for the exclusive benefit of the parties and their heirs, personal representatives, successors and permitted assigns, and is not intended to create any rights or obligations in any Person not a party hereto except as provided in Article XI as to the rights of Cirrus Indemnitees and Company Indemnitees to indemnification pursuant to Article XI. [SIGNATURES ON NEXT PAGE] -64- IN WITNESS WHEREOF, Cirrus, Acquisition Sub, the Company and the Shareholders' Representative have executed this Agreement, or caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first written above. CIRRUS LOGIC, INC. By /s/ STEVEN D. OVERLY --------------------------------------------- Name: Steven D. Overly Title: Senior Vice President, Administration, and General Counsel TARGET ACQUISITION CORPORATION By /s/ STEVEN D. OVERLY --------------------------------------------- Name: Steven D. Overly Title: Vice President, Secretary LUXSONOR SEMICONDUCTORS, INC. By /s/ HAROLD LIANG --------------------------------------------- Name: Harold Liang Title: President/CEO [SHAREHOLDERS' REPRESENTATIVE], as attorney-in-fact on behalf of the Shareholders By /s/ HAROLD LIANG --------------------------------------------- Name: Harold Liang Title: President/CEO -65- EX-2.2 4 d91953ex2-2.txt AGREEMENT OF MERGER-SHAREWAVE, INC. EXHIBIT 2.2 AGREEMENT OF MERGER DATED JULY 18, 2001 AMONG CIRRUS LOGIC, INC., TARGET I ACQUISITION CORPORATION, SHAREWAVE, INC. AND SHAREHOLDERS' REPRESENTATIVE AGREEMENT OF MERGER AGREEMENT OF MERGER (this "AGREEMENT"), dated July 18, 2001, by and among Cirrus Logic, Inc., a Delaware corporation ("CIRRUS"), Target I Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Cirrus ("ACQUISITION SUB"), ShareWave, Inc., a Delaware corporation (the "COMPANY"), and Peter Bodine (the "SHAREHOLDERS' REPRESENTATIVE") solely as to Sections 11.2, 11.3, 11.4, 11.5, 11.6, 13.2, 13.3 13.4, 13.5, 13.6, 13.7 and 13.9. W I T N E S S E T H: WHEREAS, Cirrus desires to acquire the Company and Company desires to be acquired by Cirrus; and WHEREAS, it is intended that the acquisition be consummated through a merger of the Acquisition Sub with and into the Company, with the Company being the surviving entity, pursuant to the terms and conditions of this Agreement (the "MERGER") and that such transaction be treated for federal income tax purposes as a "reorganization" within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE"); and WHEREAS, the Board of Directors of the Company has unanimously (i) determined that the Merger is advisable and is fair to, and in the best interest of, the Company and its stockholders, (ii) adopted and approved the Merger and this Agreement, and (iii) resolved to recommend that the stockholders of the Company (the "SHAREHOLDERS") adopt and approve the Merger and this Agreement; and WHEREAS, Cirrus and Acquisition Sub are unwilling to enter into this Agreement unless Shareholders holding in the aggregate at least a majority (50.1%) of the outstanding shares of the Company Common Stock, which Shareholders shall include Amar Ghori, Bob Bennett, John White, Geoffrey Bland and James Schraith and at least a majority (50.1%) of each series of the Company Preferred Stock (cumulatively, the "COMPANY SHARES") (the "PRINCIPAL SHAREHOLDERS") concurrently with the execution and delivery of this Agreement, enter into a voting agreement with Cirrus (the "VOTING RIGHTS AGREEMENT") pursuant to which such Principal Shareholders agree to vote all Company Shares owned by such Principal Shareholders in favor of the Merger. NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE I DEFINITIONS, INTERPRETATION AND CONSTRUCTION SECTION 1.1 DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "24/7" shall have the meaning set forth in Section 3.17(k). "2001 BUDGET" shall have the meaning set forth in Section 3.18(a)(iii). "AAA" shall have the meaning set forth in Section 13.3. "ACQUISITION SUB" shall have the meaning set forth in the Preamble. "AFFILIATE" of any Person means any Person directly or indirectly controlling, controlled by, or under common control with, such Person; provided that, for the purposes of this definition, "control" (including with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and polices of such Person, whether through the ownership of voting securities or partnership interests, by contract or otherwise. "AGGREGATE Liquidation PREFERENCE" means the sum of (a) the product obtained by multiplying $1.79 by the aggregate number of shares of Series D Preferred Stock that are issued and outstanding immediately prior to the Effective Time and (b) the product obtained by multiplying $2.191362 by the aggregate number of shares of Series E Preferred Stock that are issued and outstanding immediately prior to the Effective Time, but in no event may such sum exceed the Merger Consideration. "AGREEMENT" shall have the meaning set forth in the Preamble. "ANTITRUST AUTHORITY" means the Federal Trade Commission, the Antitrust Division of the United States Department of Justice, the attorneys general of the several states of the United States and any other Governmental Authority having jurisdiction with respect to the transactions contemplated hereby pursuant to applicable Antitrust Laws. "ANTITRUST LAWS" means the Sherman Act, as amended, the Clayton Act, as amended, the HSR Act, the Federal Trade Commission Act, as amended and all other federal, state and foreign statutes, rules, regulations, orders, decrees, administrative and judicial doctrines, and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade. "ASSUMED OPTIONS" shall have the meaning set forth in Section 2.2(b). -3- "AVERAGE CLOSING PRICE" shall mean the average closing price per share of Cirrus Common Stock on the NASDAQ National Market for the ten (10) consecutive trading days ending on the second trading day prior to the signing of this Agreement. "BOOKS AND RECORDS" shall have the meaning set forth in Section 3.23. "BUSINESS DAY" means any day except Saturday, Sunday and any day which, in the State of California or Texas, shall be a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close. "CALIFORNIA PERMIT" shall have the meaning set forth in Section 7.6. "CERTIFICATES" means the stock certificates representing the Company Shares. "CERTIFICATE OF MERGER" shall have the meaning set forth in Section 2.1. "CGCL" means the California General Corporation Law. "CIRRUS" shall have the meaning set forth in the Preamble. "CIRRUS COMMON STOCK" means the common stock of Cirrus, par value $0.001 per share. "CIRRUS DISCLOSURE LETTER" shall have the meaning set forth in Section 4. "CIRRUS INDEMNITEES" shall have the meaning set forth in Section 11.2(a). "CLAIM NOTICE" shall have the meaning set forth in Section 11.3. "CLOSING" shall have the meaning set forth in Section 2.11. "CLOSING DATE" shall have the meaning set forth in Section 2.11. "CLOSING CONSIDERATION" shall have the meaning set forth in Section 11.5(a)(ii)(A). "COBRA" shall have the meaning set forth in Section 3.13(f). "CODE" shall have the meaning set forth in the Recitals. "COMMERCIAL SOFTWARE RIGHTS" means packaged commercially available software programs that are generally available to the public through retail dealers in computer software. "COMPANY" shall have the meaning set forth in the Preamble. "COMPANY COMMON STOCK" means the common stock of the Company, par value $0.001 per share. "COMPANY DISCLOSURE LETTER" shall have the meaning set forth in Section 3. -4- "COMPANY FINANCIAL STATEMENTS" shall have the meaning set forth in Section 3.6. "COMPANY INDEMNITEES" shall have the meaning set forth in Section 11.2(b). "COMPANY PREFERRED STOCK" means the Series A, B, C, D, and E preferred stock of the Company, par value $0.001 per share. "COMPANY SHARES" shall have the meaning set forth in the Recitals. "CONFIDENTIAL INFORMATION" shall have the meaning set forth in Section 6.3. "CONSENTS" shall have the meaning set forth in Section 3.5. "CONTRACTS" shall have the meaning set forth in Section 3.18(b). "DISCLOSURE DOCUMENTS" shall have the meaning set forth in Section 7.6. "DISSENTING SHARES" shall have the meaning set forth in Section 2.3. "DGCL" means the Delaware General Corporation Law. "EFFECTIVE TIME" shall have the meaning set forth in Section 2.1. "EMPLOYEE BENEFIT PLANS" shall have the meaning set forth in Section 3.13(a). "EMPLOYMENT AGREEMENT" shall have the meaning set forth in Section 8.1(e). "EMPLOYMENT AGREEMENT ADDENDA" means the certain addenda to the Employment Agreements between Cirrus and the Key Employees, as described in Section 8.1(e). "ENCUMBRANCE" shall mean any claim, lien, pledge, option, charge, easement, security interest, mortgage, deed of trust, right-of-way, encumbrance or adverse interest of any kind. "ERISA" shall have the meaning set forth in Section 3.13(a). "ESCROW" shall have the meaning set forth in Section 2.2(d). "ESCROW AGENT" shall have the meaning set forth in the Escrow Agreement. "ESCROW AGREEMENT" shall mean that certain escrow agreement dated as of the Closing Date duly executed by Cirrus, the Shareholders' Representative on behalf of the Shareholders and the Escrow Agent, in substantially the form attached hereto as Exhibit I. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. -5- "EXCHANGE RATIO" shall be equal to the quotient obtained by dividing (x) the Merger Consideration minus the Aggregate Liquidation Preference by (y) the Fully Diluted Shares, and then (z) dividing such quotient by the Average Closing Price. "FAIRNESS HEARING" shall have the meaning set forth in Section 7.6. "FULLY DILUTED SHARES" shall mean the total number of outstanding Company Shares (except Series D Preferred Stock and Series E Preferred Stock), immediately prior to the Closing Date, calculated on a fully diluted, fully converted basis as though all convertible debt and equity securities and vested and unvested outstanding options had been converted or exercised. Fully Diluted Shares shall not include warrants. "FORMER PLANS" shall have the meaning set forth in Section 3.13(c). "GAAP" means U.S. generally accepted accounting principles consistently applied, as in effect from time to time. "GOVERNMENTAL AUTHORITY" shall mean (i) the United States of America or any other country or nation, (ii) any state, commonwealth, territory or possession of the United States of America or any other country or nation, and any political subdivision thereof, including counties, municipalities and the like, and (iii) any agency, authority or instrumentality of any of the foregoing, including any court, tribunal, department, bureau, commission or board. "HEARING DOCUMENTS" shall have the meaning set forth in Section 7.6. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "INDEMNIFIABLE DAMAGES" shall have the meaning set forth in Section 2.2(d). "INDEMNIFIABLE DAMAGES INSURANCE" shall have the meaning set forth in Section 2.2(d). "INDEMNIFIABLE DAMAGES INSURANCE PREMIUM" shall have the meaning set forth in Section 2.2(d). "INDEMNITEE" shall have the meaning set forth in Section 11.3. "INDEMNITOR" shall have the meaning set forth in Section 11.3. "INDEMNITY FUND" shall have the meaning set forth in Section 2.2(d). "INTELLECTUAL PROPERTY" means property described in any of the following categories: (i) domestic and foreign patents and patent applications; (ii) trademarks, service marks and other indicia of origin, pending trademark and service mark registrations, and intent-to-use registrations or similar reservations of marks; (iii) registered copyrights and mask works and applications for registration thereof; (iv) Internet domain name applications and reservations therefor; (v) URL's and the corresponding Internet sites (including any content of material -6- accessible or displayed thereon which is owned by the Company); and (vi) confidential information not otherwise listed in (i)-(v) above, including, without limitation, inventions (whether or not patentable), invention disclosures, moral and economic rights of authors and inventors (however denominated), technical data, customer lists, corporate and business names, trade names, trade dress, brand names, know how, formulae, methods (whether or not patentable), designs, processes, procedures, technology, source codes, object codes, computer software programs, databases, data collectors, technology, and other proprietary information or material of any type owned by the Company or used in connection with the business of the Company (and all derivatives, improvements and refinements of any of the foregoing whether or not recorded) together with all goodwill associated with any of the foregoing, and all agreements and other rights relating to intellectual property used by the Company. "IRS" shall have the meaning set forth in Section 3.13(j). "KEY EMPLOYEES" shall have the meaning set forth in Section 2.2(e). "KEY SHAREHOLDER GROUP" shall have the meaning set forth in Section 11.5(a)(ii)(B). "LIQUIDATION PREFERENCES" means with respect to Series D and Series E of the Company Preferred Stock the quotient (calculated to the forth decimal place) obtained by dividing (a) $1.79 for Series D and $2.191362 for Series E by (b) the Average Closing Price. "LOAN" shall mean a fully secured, one hundred eighty (180) day term loan of up to five million dollars ($5,000,000) to be extended by Cirrus to the Company, with an interest rate equal to the prime rate as published in The Wall Street Journal from time to time, plus three percent (3%), and documented by a promissory note, loan agreement, and security agreement in substantially the forms attached hereto as Exhibits A-1, A-2, and A-3, respectively. "LOSSES" shall have the meaning set forth in Section 11.2(c). "MATERIAL ADVERSE EFFECT" shall have the meaning set forth in Section 3.1. "MERGER" shall have the meaning set forth in the Recitals. "MERGER CONSIDERATION" means ninety-two million dollars ($92,000,000), as adjusted for the Indemnifiable Damages Insurance Premium as provided in Section 2.2(d), for Transaction Expenses as provided in Section 13.1 and for any outstanding principal and accrued unpaid interest under the Loan at the time of the Closing as provided in Section 7.5. "OPTION PLAN" shall have the meaning set forth in Section 2.2(b). "PERMITS" shall have the meaning set forth in Section 3.11(b). "PERSON" means a natural person, partnership, joint venture, corporation, trust, limited liability company, unincorporated organization, group, entity or Governmental Authority. "PRINCIPAL SHAREHOLDERS" shall have the meaning set forth in the Recitals. -7- "PRODUCTS" means all products and services sold, licensed, developed or otherwise provided by the Company to customers or other third parties, or supported or tested by the Company. "REQUIRED DEDUCTIBLE" shall have the meaning set forth in Section 2.2(d). "RETURNS" shall have the meaning set forth in Section 3.15(a). "SEC" means the Securities and Exchange Commission. "SEC DOCUMENTS" shall have the meaning set forth in Section 4.6. "SECOND OPINION" shall have the meaning set forth in Section 8.2(f). "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. "SERIES D PREFERRED STOCK" means the Series D preferred stock of the Company. "SERIES E PREFERRED STOCK" means the Series E preferred stock of the Company. "SERVER" shall have the meaning set forth in Section 3.17(k). "SHAREHOLDERS" shall have the meaning set forth in the Recitals. "SHAREHOLDERS' REPRESENTATIVE" shall have the meaning set forth in the Preamble. "SITES" shall have the meaning set forth in Section 3.17(k). "SUBSIDIARY" means any Person in which the Company owns or controls, directly or indirectly, at least a majority in voting power of the outstanding equity securities or other interests, or any Person of which the Company is a general partner or has an equivalent or similar power or role to direct or cause the direction of the management and policies of such Person. "SURVIVING CORPORATION" shall have the meaning set forth in Section 2.1. "TAX REPRESENTATION LETTERS" shall have the meaning set forth in Section 7.7. "TAX SURVIVAL PERIOD" shall have the meaning set forth in Section 11.1. "TAXES" means all taxes, assessments, charges, duties, fees, levies or other governmental charges including, without limitation, all federal, state, local, foreign and other income, franchise, profits, capital gains, capital stock, transfer, sales, use, occupation, property, excise, severance, windfall profits, stamp, license, payroll, withholding and other taxes, assessments, charges, duties, fees, levies or other governmental charges of any kind whatsoever (whether payable directly or by withholding and whether or not requiring the filing of any return), all estimated taxes, deficiency assessments, additions to tax, penalties and interest and includes any liability -8- for such amounts as a result of being a member of a combined, consolidated, unitary or affiliated group. "TECHNOLOGY SYSTEMS" shall have the meaning set forth in Section 3.25(a). "TERMINATION FEE" shall have the meaning set forth in Section 12.1. "THIRD PARTY CLAIM" shall have the meaning set forth in Section 11.4. "TRANSACTION DOCUMENTS" means this Agreement, the Escrow Agreement, the Voting Rights Agreement, the Employment Agreements, the Employment Agreement Addenda, and the various other agreements, certificates, and documents provided for herein and therein. "TRANSACTION EXPENSES" shall have the meaning set forth in Section 13.1. "URL" means Uniform Resource Locator. "VOTING RIGHTS AGREEMENT" shall have the meaning set forth in the Recitals. "YEAR 2000 COMPLIANT" shall have the meaning set forth in Section 3.25(a). SECTION 1.2 INTERPRETATION. Unless the context otherwise requires: (a) references to a party shall include such party's heirs, successors and permitted assigns and transferees of such party's rights and/or obligations; (b) references to this Agreement or any other agreement, document or instrument is a reference to this Agreement or that other agreement, document or instrument as amended, varied, novated or substituted from time to time; provided that such amendment, variance, novation or substitution is approved in accordance with the respective agreement, document or instrument. (c) references to Sections, Schedules and Exhibits are to sections, schedules and exhibits to this Agreement; (d) headings are included for convenience only and shall not affect the interpretation of this Agreement; (e) words importing the singular number shall include the plural and vice versa, and words importing any gender shall include all genders; and (f) "including" means including, without limitation. SECTION 1.3. CONSTRUCTION. No rule of construction shall be applied to the disadvantage of a party because that party was responsible for or participated in the preparation of this Agreement or any part of it. -9- ARTICLE II THE MERGER SECTION 2.1. THE MERGER. On the terms and subject to the conditions set forth in this Agreement, Acquisition Sub shall merge with and into the Company (with such merger referred to herein as the Merger) at the Effective Time (as defined in this Section 2.1). From and after the Effective Time, the separate corporate existence of Acquisition Sub shall cease and the Company shall continue as the surviving corporation in the Merger (the "SURVIVING CORPORATION"). The "EFFECTIVE TIME" shall be the time as is specified in the certificate of merger in substantially the form attached hereto as Exhibit B (the "CERTIFICATE OF MERGER") and other appropriate documents prepared in accordance with the relevant provisions of the DGCL and filed by Acquisition Sub with the Secretary of State of the State of Delaware. The Merger shall have the effects of a merger as set forth in the DGCL. The Surviving Corporation shall continue to be governed by the laws of the State of Delaware, and the separate corporate existence of the Surviving Corporation with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. Without limiting the generality of the foregoing, all the properties, rights, privileges, powers and franchises of the Company and the Acquisition Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and the Acquisition Sub shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.2. CONVERSION AND ASSUMPTION OF COMPANY SECURITIES. (a) COMPANY SHARES. At the Effective Time, by virtue of the Merger and without any action on the part of any party, each share of the Company Shares issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares and shares held in the Company's treasury), shall be converted into and represent the right to receive such number of shares of Cirrus Common Stock as set forth in Sections 2.2(a)(i), (a)(ii) and (a)(iii) below and as set forth more specifically on Schedule 2.2 to be delivered at the Closing pursuant to Section 9.1(a)(vii): (i) Each share of Series E Preferred Stock issued and outstanding immediately prior to the Effective Time, if any (other than Dissenting Shares and shares held in the Company's treasury) shall be converted into and represent the right to receive that number of shares of Cirrus Common Stock as shall equal the Liquidation Preference of the Series E Preferred Stock; (ii) Each share of Series D Preferred Stock issued and outstanding immediately prior to the Effective Time, if any (other than Dissenting Shares and shares held in the Company's treasury) shall be converted into and represent the right to receive that number of shares of Cirrus Common Stock as shall equal the Liquidation Preference of the Series D Preferred Stock; (iii) Each share of Company Common Stock and Company Preferred Stock (other than Series D Preferred Stock and Series E Preferred Stock) issued and outstanding -10- immediately prior to the Effective Time, if any (other than Dissenting Shares and shares held in the Company's treasury) shall be converted into and represent the right to receive that number of shares of Cirrus Common Stock as equals the Exchange Ratio; provided, however, that the aggregate value of such shares of Cirrus Common Stock (valued at the Average Closing Price) into which the shares of Series D Preferred Stock and Series E Preferred Stock will be converted into pursuant to Sections 2.2(a)(i) and (ii) shall not exceed the Merger Consideration. (b) COMPANY OPTIONS. At the Effective Time, each issued and outstanding option to purchase or otherwise acquire Company Shares (whether or not vested) ("ASSUMED OPTIONS") issued pursuant to the Company's 1996 Flexible Stock Incentive Plan (the "OPTION PLAN") shall be assumed by Cirrus in connection with the Merger. Each Assumed Option so assumed by Cirrus under this Agreement shall continue to have, and be subject to, the same terms and conditions as in place immediately prior to the Effective Time (including, without limitation, any vesting schedule or repurchase rights, but not taking into account any acceleration thereof provided for in the Option Plan or the option agreements issued pursuant to such Option Plan resulting from the Merger, except the acceleration of vesting for the directors, advisory board members and president of the Company and one consultant (Goldrush Communications) which shall be taken into account), except that (i) each Assumed Option to purchase one share of the Company Common Stock will be exercisable for that number of shares of Cirrus Common Stock equal to the Exchange Ratio and (ii) the per share exercise price for the shares of Cirrus Common Stock issuable upon exercise of such Assumed Option will be equal to the quotient determined by dividing: (A) the exercise price per Company Share at which such Assumed Option was exercisable immediately prior to the Effective Time by (B) the Exchange Ratio. No Assumed Option as so converted shall be exercisable for a fractional share of Cirrus Common Stock and the number of shares of Cirrus Common Stock for which all Assumed Options to be delivered to the optionees thereof pursuant to Section 9.2(a)(vii) shall be exercisable shall be rounded down to the nearest whole number of shares of Cirrus Common Stock. (c) MECHANICS OF EXCHANGE. (i) After the Effective Time, each Shareholder (other than holders of Dissenting Shares) will be entitled to receive and, upon surrender to Cirrus of one or more Certificates representing Company Common Stock and/or Company Preferred Stock and a duly executed letter of transmittal as described below, Cirrus shall be obligated, as soon as practicable after receipt of such Certificates and executed letters of transmittal, to deliver certificates representing that number of shares of Cirrus Common Stock into which the shares of Company Common Stock and/or Company Preferred Stock held by the Shareholders are converted pursuant to Section 2.2(a), less the number of shares of Cirrus Common Stock to be delivered to the Escrow Agent pursuant to Section 2.2(d). The shares of Cirrus Common Stock into which the shares of Company Common Stock and/or Company Preferred Stock convert in the Merger shall be deemed to have been issued at the Effective Time. -11- (ii) As soon as reasonably practicable after the Effective Time and in no event no later than fifteen (15) business days after the Effective Time, Cirrus shall mail to each holder of record of capital stock of the Company: (A) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss to the Certificates evidencing shares of capital stock of the Company, as appropriate, shall pass, only upon delivery of such Certificates to Cirrus and shall be in such form and have such other provisions as Cirrus may reasonably specify that are not inconsistent with the terms of this Agreement); and (B) instructions for use in effecting the surrender of the Certificates evidencing shares of capital stock of the Company, as appropriate, in exchange for certificates evidencing shares of Cirrus Common Stock. (iii) In the event that any Certificate evidencing shares of capital stock of the Company shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed, Cirrus will issue or cause to be issued in exchange for such lost, stolen or destroyed Certificate the shares of Cirrus Common Stock into which the shares of capital stock of the Company represented by such Certificate may be converted in accordance with Section 2.2(a). When authorizing such issuance in exchange therefor, Cirrus may require the owner of such lost, stolen or destroyed Certificate to give Cirrus such form of indemnity, as Cirrus shall reasonably direct, against any claim that may be made against Cirrus with respect to the Certificate alleged to have been lost, stolen or destroyed. (iv) Cirrus may, at its option, meet its obligations under this Section 2.2(c) through a bank or trust company or other entity selected by Cirrus to act as exchange agent in connection with the Merger. (d) INDEMNITY FUND. Cirrus shall deliver at the Closing that number of shares of Cirrus Common Stock (valued at the Average Closing Price) representing fifteen percent (15%) of the Merger Consideration into which the Company Shares are converted pursuant to Section 2.2(a) (including all dividends, distributions or earnings attributable thereto, but excluding the cash payment for fractional shares pursuant to Section 2.3, collectively, the "INDEMNITY FUND") to the Escrow Agent, which shall be held in escrow (the "ESCROW") subject to the Escrow Agreement as the sole recourse for the Shareholders' indemnity obligations under this Agreement. Such shares shall be deducted from the number of shares otherwise deliverable to each Shareholder on a pro rata basis among all Shareholders. At the Company's option, prior to Closing, Cirrus and Acquisition Sub shall cooperate in good faith with the Company to provide insurance ("INDEMNIFIABLE DAMAGES INSURANCE") which will cover Cirrus Indemnitees for Losses for which the Cirrus Indemnitees would otherwise be entitled to indemnification pursuant to Section 11.2(a) ("INDEMNIFIABLE DAMAGES"). If Indemnifiable Damages Insurance reasonably satisfactory to Cirrus and the Company is obtained at or prior to the Closing, then: (i) the Shareholders (except holders of Series D Preferred Stock and Series E Preferred Stock) shall only -12- be required to deposit with the Escrow Agent an amount of the Merger Consideration equivalent to such Shareholder's proportionate share of the Required Deductible (as defined below) which shall constitute the Indemnity Fund and the balance of the Merger Consideration shall be paid to the Shareholders at Closing in accordance with the conversion calculations set forth Section 2.2(a) and the procedures set forth in the first sentence of Section 2.2(c)(i); and (ii) the premiums paid by Cirrus for such Indemnifiable Damages Insurance (the "INDEMNIFIABLE DAMAGES INSURANCE PREMIUM") shall be deducted from the Merger Consideration. "REQUIRED DEDUCTIBLE" shall mean a deductible amount of Indemnifiable Damages to be borne by any of the Cirrus Indemnitees before such indemnitees are able to collect under the Indemnifiable Damages Insurance. In accordance with the terms of the Escrow Agreement, on the date fifteen months following the Closing Date (or, if such date is not on a Business Day, the first Business Day thereafter), the Escrow Agent will deliver all shares of Cirrus Common Stock remaining in the Indemnity Fund to the Shareholders in proportionate amounts reflecting the number of shares of Cirrus's Common Stock initially withheld from each Shareholder and originally delivered to the Escrow Agent pursuant to this Section 2.2(d) at the addresses listed on the Company's stock records or to an address or account designated by any such Shareholder to the Escrow Agent in writing at least ten (10) Business Days prior to such date. Subject to and in accordance with the terms of the Escrow Agreement, the Escrow Agent may withhold from such delivery the equivalent of any amounts then in dispute relating to indemnification obligations arising under this Agreement, provided that the withheld amount, to the extent not applied in satisfaction of indemnification obligations, shall be delivered to the Shareholders as described above promptly upon resolution of such dispute. (e) HOLDBACK FROM KEY EMPLOYEES' MERGER CONSIDERATION. Notwithstanding anything in this Section 2.2 to the contrary, each of Bob Bennett and Amar Ghori (collectively, the "KEY EMPLOYEES") shall receive only fifty percent (50%) of the shares of Cirrus Common Stock to which they are entitled pursuant to the first sentence of Section 2.2(c)(i). The Key Employees shall be entitled to receive the remaining fifty percent (50%) of the shares of Cirrus Common Stock to which they would otherwise be entitled pursuant to Section 2.2(c)(i) as provided in their respective Employment Agreement Addenda delivered to Cirrus pursuant to Section 8.1(e). (f) TREASURY STOCK. Each Company Share held in the Company's treasury immediately prior to the Effective Time shall be canceled and retired without payment of any consideration therefor. (g) ACQUISITION SUB STOCK. Each share of common stock of the Acquisition Sub issued and outstanding immediately prior to the Effective Time shall be converted into and thereafter evidence one share of common stock of the Surviving Corporation. (h) RESTRICTIONS ROLLOVER. If any Company Shares outstanding immediately prior to the Effective Time are subject to a repurchase option, risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with the Company, then, except to the extent otherwise provided in such agreement, the shares of Cirrus Common Stock issued in exchange for such Company Shares will also be subject to the same repurchase -13- option, risk of forfeiture or other condition, and the certificates representing such shares of Cirrus Common Stock may be marked with an appropriate legend to such effect. (i) ADJUSTMENTS IN CIRRUS COMMON STOCK. If subsequent to the date of this Agreement but prior to the Effective Time, the outstanding shares of Cirrus Common Stock shall have been increased, decreased, changed into or exchanged for a different number of kind of shares or securities through recapitalization, reorganization, reclassification, stock dividend, stock split, reverse stock split or other like changes in Cirrus' capitalization, then an appropriate and proportionate adjustment shall be made to the Average Closing Price and Exchange Ratio. SECTION 2.3. DISSENTING SHARES. (a) For purposes of this Agreement, "DISSENTING SHARES" means Company Shares held as of the Effective Time by a Shareholder who has not voted such Company Shares in favor of this Agreement and the Merger and with respect to which appraisal rights shall have been duly demanded and perfected in accordance with Section 262 of the DGCL or Section 1300 of the CGCL, and not effectively withdrawn or forfeited prior to the Effective Time. Dissenting Shares shall not be converted into or represent the right to receive the Merger Consideration, unless such Shareholder shall have forfeited such Shareholder's right to appraisal under the DGCL or CGCL or withdrawn, with the consent of the Company, such Shareholder's demand for appraisal. If such Shareholder has so forfeited or withdrawn such Shareholder's right to appraisal of Dissenting Shares, then (i) as of the occurrence of such event, such Shareholder's Dissenting Shares shall cease to be Dissenting Shares and shall be converted into and represent the right to receive the Merger Consideration in respect of such Company Shares pursuant to Section 2.2(a), and (ii) promptly following the occurrence of such event, Cirrus shall cause to be delivered to such Shareholder a certificate representing such percentage of the shares of Cirrus Common Stock to which such Shareholder is entitled pursuant to Section 2.2. (b) APPRAISAL NOTICE. The Company shall give Cirrus and Cirrus shall give the Company (i) prompt notice of any written demands for appraisal of any Company Shares, withdrawals of such demands, and any other instruments that relate to such demands received by the Company and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under the DGCL. Cirrus shall be solely responsible for the payment of any amounts due in respect of such Dissenting Shares pursuant to the DGCL or CGCL, provided that Cirrus shall not, except with the prior written consent of the Shareholders' Representative, make any payments with respect to any demands for appraisal of Company Shares or offer to settle or settle any such demands in excess of the amount of Merger Consideration attributable to the Dissenting Shares. If and to the extent that the Dissenting Shares receive an appraised value in excess of the amount of the Merger Consideration such dissenting Shareholder would otherwise be entitled pursuant to Section 2.2(a) (valued at the Average Closing Price) and Cirrus is required to pay such excess, then Cirrus shall be reimbursed for such excess amount from the Indemnity Fund in accordance with the terms of the Escrow Agreement. SECTION 2.4. FRACTIONAL SHARES. No certificates or script representing fractional shares of Cirrus Common Stock shall be issued to Shareholders upon conversion of Company Shares into shares of Cirrus Common Stock in the Merger, and such Shareholders shall not be entitled to any voting rights, rights to receive any dividends or distributions or other rights as a stockholder -14- of Cirrus with respect to any fractional shares of Cirrus Common Stock. In lieu of any such fractional shares, Cirrus shall transfer to each Shareholder, otherwise entitled to receive a fraction of a share of Cirrus Common Stock (after aggregating all fractional shares of Cirrus Common Stock to which such Shareholder otherwise would be entitled) in the Merger, cash (rounded to the nearest whole cent) without interest, in an amount equal to the product obtained by multiplying such fraction by the Average Closing Price. SECTION 2.5. DIVIDENDS. No dividends or other distributions with respect to shares of Cirrus Common Stock with a record date on or after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the Cirrus Common Stock represented thereby by reason of the conversion of shares of Company Shares pursuant to Section 2.2(a) hereof and no cash payment in lieu of fractional shares of Cirrus Common Stock shall be paid to any such holder pursuant to Section 2.4 hereof until such Certificate is surrendered in accordance with this Agreement or an affidavit of lost Certificate delivered in accordance with Section 2.2(c)(iii). Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid, without interest, to the Person in whose name the shares of Cirrus Common Stock represented by such certificate are registered at the time of such surrender, the amount of any cash payable in lieu of fractional shares of Cirrus Common Stock to which such holder is entitled pursuant to Section 2.4 hereof and the proportionate amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to shares of Cirrus Common Stock. SECTION 2.6. WITHHOLDING RIGHTS. Cirrus shall be entitled to deduct and withhold from the consideration otherwise payable to any Person pursuant to this Article II such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign laws relating to Taxes. To the extent that amounts are so withheld by Cirrus, such amounts shall be treated for all purposes of this Agreement as having been paid to the Shareholders in respect of which such deduction and withholding was made by Cirrus. Such withholding may be made from any transfer of shares of Cirrus Common Stock otherwise required to be made pursuant to Sections 2.2(a), (b), (c) and (d) or in respect of any such withholding requirement applicable to payment of cash otherwise required to be made pursuant to such Sections or Section 2.4. SECTION 2.7. NO FURTHER RIGHTS. From and after the Effective Time, other than shares of the common stock of the Surviving Corporation created pursuant to Section 2.2(g), no Company Shares shall be deemed to be outstanding, and holders of Certificates shall cease to have any rights with respect thereto, except as provided herein or by law. The stock transfer books of the Company shall be closed immediately upon the Effective Time and there shall be no further registration of transfers of Company Shares thereafter on the records of the Company. On or after the Effective Time, any Certificates presented to Cirrus for any reason (except Dissenting Shares) shall be exchanged for the applicable portion of the Merger Consideration with respect to the Company Shares represented thereby (including any cash in lieu of fractional shares). SECTION 2.8. ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION. The Certificate of Incorporation of the Company as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation. At the Effective Time, the -15- Certificate of Incorporation of the Company shall be amended and restated to be substantially identical to the Certificate of Incorporation of Acquisition Sub as in effect immediately prior to the Effective Time. SECTION 2.9. BYLAWS OF THE SURVIVING CORPORATION. The Bylaws of Company as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation. At the Effective Time, the Bylaws of the Company shall be amended and restated to be substantially identical to the Bylaws of Acquisition Sub as in effect immediately prior to the Effective Time. SECTION 2.10. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors and officers of the Surviving Corporation from and after the Effective Time shall be as set forth in Schedule 2.10, each to hold such office, subject to the applicable provisions of the Articles of Incorporation and Bylaws of the Surviving Corporation, until their respective successors shall be duly elected or appointed and qualified. SECTION 2.11. CLOSING. The closing of the transactions contemplated by this Agreement (the "CLOSING"), shall take place at 10:00 A.M. at the offices of White & Case LLP, 3000 El Camino Real, 5 Palo Alto Square, 10th Floor, Palo Alto, CA 94306 on the earlier to occur of September 28, 2001, or two (2) Business Days after the last of the conditions set forth in Article VIII hereof is satisfied or waived, other than those conditions that by their nature are to be satisfied at the Closing, or at such other date, time or place as the parties hereto shall agree in writing. The date on which the Closing shall occur is herein referred to as the "CLOSING DATE." If the Closing shall not occur on or before September 28, 2001, then the parties shall have no further obligation to consummate the transactions contemplated by this Agreement or otherwise to perform as provided therein, except that (i) all rights of the parties theretofore accrued hereunder shall remain unaffected and shall be enforceable as provided herein, and (ii) the obligations of the Company and the Shareholders provided for in Section 6.3 and the obligations of Cirrus and Acquisition Sub provided for in Section 7.1 shall continue in force until June 1, 2004. SECTION 2.12. ADDITIONAL ACTION. The Surviving Corporation may, at any time after the Effective Time, take any action, including executing and delivering any document, in the name and on behalf of either or both of the Company and the Acquisition Sub reasonably necessary in order to consummate the transactions contemplated by this Agreement, provided that no actions may be taken by Cirrus or the Surviving Corporation directly or on behalf of the Company that could reasonably and foreseeably cause the Merger not to be treated for federal income tax purposes as a merger which qualifies as a "reorganization" within the meaning of Section 368 of the Code. -16- ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in the disclosure letter delivered by the Company to Cirrus prior to entering into this Agreement (the "COMPANY DISCLOSURE LETTER"), the Company hereby represents and warrants to Cirrus and Acquisition Sub as of the date hereof and as of the Closing Date (except as otherwise indicated) as follows: SECTION 3.1. DUE ORGANIZATION, GOOD STANDING AND CORPORATE POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Company is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the failure to be so qualified, or licensed, individually or in the aggregate, would be reasonably likely to have a material adverse effect on the business, assets, liabilities, operations, results of operations, condition (financial or otherwise) or prospects of the Company, taken as a whole, or on the ability of the Company to consummate the transactions contemplated by the Transaction Documents (a "MATERIAL ADVERSE EFFECT"). The Company has, prior to the date of this Agreement, made available to Cirrus complete and correct copies of the Certificate of Incorporation and Bylaws (or similar constitutive documents) for the Company. SECTION 3.2. AUTHORIZATION AND VALIDITY OF AGREEMENT. The Company has the requisite power and authority to execute and deliver the Transaction Documents to which it is a party, to perform its obligations thereunder and to consummate the transactions contemplated thereby. The execution, delivery and performance of the Transaction Documents to which the Company is a party, and the consummation by it of the transactions contemplated thereby, have been duly authorized and approved by the Company's Board of Directors, and no other action on the part of the Company, other than the approval of the transactions contemplated hereby (including the Merger) by the Shareholders in accordance with applicable law, is necessary to authorize the execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby. Such of the Transaction Documents as have been executed and delivered by the Company on or prior to the date hereof have been, and on the Closing Date such other of the Transaction Documents to which the Company is a party will have been, duly executed and delivered by the Company and are and will be valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and general equitable principles. -17- SECTION 3.3. CAPITALIZATION. (a) The Company has an authorized capitalization consisting of (i) 60,000,000 shares of Company Common Stock of which [8,762,886] shares of Company Common Stock are outstanding as of the date of this Agreement; and (ii) 33,428,371 shares of Company Preferred Stock of which 1,520,000 shares are designated as Series A, 2,100,000 shares are designated as Series B, 8,050,639 are designated as Series C, 14,000,000 are designated as Series D and 7,757,732 are designated as Series E, of which respectively 1,520,000, 2,011,365, 8,050,639, 14,000,000 and 7,757,732 shares are outstanding as of the date of this Agreement. All outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and non-assessable. Other than options to acquire [9,009,357] shares of Company Common Stock granted under the Option Plan, and warrants to acquire 62,727 shares of Company Common Stock, there are no outstanding subscriptions, options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements or commitments, contingent or otherwise, providing for the purchase, redemption, acquisition, retirement, issuance or sale by the Company of any shares of capital stock of the Company or other securities exchangeable or convertible into capital stock of the Company, and there are no stock appreciation rights or phantom stock plans outstanding with respect to the capital stock of the Company. There are no rights, agreements, restrictions or Encumbrances (including without limitation, preemptive rights, rights of first refusal, rights of first offer, proxies, voting agreements, voting trusts, registration rights agreements or stockholders' agreements), whether or not the Company is a party thereto, on or with respect to the Company Shares, pursuant to any provision of any applicable law, contract or otherwise, on or with respect to the purchase, sale or voting of any shares of capital stock, whether outstanding or issuable upon conversion, exchange or exercise of any other security, of the Company. The Company has no outstanding bonds, debentures, notes or other obligations, the holders of which have the right to vote (or which are convertible into or exercisable for securities the holders of which have the right to vote). (b) The stock register of the Company accurately records: (i) the name and address of each Person owning Company Shares and (ii) the certificate number of each Certificate evidencing such Company Shares, the number of shares evidenced by each such certificate, the date of issuance thereof and, in the case of cancellation of such Certificate, the date of cancellation. (c) The number of Company Shares set forth opposite the name of each Shareholder on Schedule 3.3(c) are owned of record and beneficially solely by such Shareholder free and clear of all Encumbrances. SECTION 3.4. SUBSIDIARIES. The Company has no Subsidiaries. SECTION 3.5. CONSENTS AND APPROVALS; NO VIOLATIONS. The execution and delivery by the Company of the Transaction Documents to which it is a party and the consummation by the Company of the transactions contemplated thereby will not: (a) violate or conflict with any provision of the Certificate of Incorporation or Bylaws (or similar constitutive documents) of the Company; (b) violate or conflict with any statute, ordinance, rule, regulation, order or decree of any court or Governmental Authority applicable to the Company or by which any of its properties or assets are or may be bound; (c) require any filing with, or permit, consent or approval of, or the giving of any notice to, any Governmental Authority or other Person ("CONSENTS"); or (d) -18- result in a violation or breach of, conflict with or constitute (with or without due notice or lapse of time or both) a default under, or result in the creation of any Encumbrance upon any of the properties or assets of the Company under, or give rise to any obligation, right of termination, cancellation, acceleration, payment or increase of any obligation or loss of a material benefit under, any of the terms, conditions or provisions of any agreement, instrument or other obligation to which the Company is a party, or by which it or any of its properties or assets are or may be bound, except for any such violations, breaches, conflicts, defaults, Encumbrances, increases or losses which, individually or in the aggregate, will not have a Material Adverse Effect. SECTION 3.6. COMPANY FINANCIAL STATEMENTS. The Company has, prior to the date of this Agreement, made available to Cirrus true and complete copies of the Company's audited year-end balance sheet for each of the Company's fiscal years ended December 31, 1998, December 31, 1999 and December 31, 2000 and the Company's unaudited balance sheet as of May 31, 2001, and the related audited and unaudited statements of operations of the Company for such fiscal years, respectively, and the unaudited statement of operations for the five-month period ended May 31, 2001 (the "COMPANY FINANCIAL STATEMENTS"). The Company Financial Statements present fairly the consolidated and unconsolidated financial position of the Company as of the dates thereof and the results of its operations for the periods then ended in accordance with GAAP consistently applied. SECTION 3.7. NO FORESEEABLE CHANGE. Since January 1, 2001, there have been no changes with respect to the Company, or its business that could individually or in the aggregate have a Material Adverse Effect, other than changes in general economic and business conditions that do not relate specifically to the Company. SECTION 3.8. ABSENCE OF CERTAIN CHANGES. Since January 1, 2001, (a) there has been no material adverse change in the business, assets, liabilities, operations, results of operations, condition (financial or otherwise) or prospects of the Company, and (b) the business of the Company has been conducted in all material respects only in the ordinary course consistent with past practice. Since May 31, 2001, the Company has not taken any of the actions set forth in Section 6.1(b). SECTION 3.9. TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, valid and marketable title to, or, in the case of leased properties and assets, valid leasehold interests in, (a) all of its tangible properties and assets (real and personal), including, without limitation, all the properties and assets reflected in the most recent balance sheet contained in the Company Financial Statements, except for properties and assets which have been sold or otherwise disposed of in the ordinary course of business after the date of such balance sheet, and (b) none of the tangible properties and assets purchased by the Company since such date is subject to any Encumbrance. Schedule 3.9 sets forth a complete and accurate list of all of the Company's tangible property that is used in the Company's businesses as of May 31, 2001 except for properties and assets which have been sold or otherwise disposed of in the ordinary course of business after such date. SECTION 3.10. ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. All accounts receivable of the Company, whether reflected in the Company Financial Statements or otherwise, represent sales -19- actually made in the ordinary course of business, and are current and collectible net of any reserves shown on the Company Financial Statements (which reserves are adequate and were calculated consistent with the Company's ordinary business practice). All accounts payable of the Company, whether reflected in the Company Financial Statements or otherwise, have been duly and properly paid in accordance with their terms, consistent with the prevailing practice between the Company and the relevant trade creditor. SECTION 3.11. COMPLIANCE WITH LAWS. (a) LAWS AND DECREES. The Company is in compliance with all applicable federal, state, local and foreign statutes, laws, regulations, orders, judgments and decrees, except for failures to comply or violations which, individually or in the aggregate, have not had, and will not have, a Material Adverse Effect. (b) APPROVALS AND LICENSES. The Company holds, to the extent required by applicable law, all permits, approvals, licenses, authorizations, certificates, rights, exemptions and orders from Governmental Authorities (the "PERMITS") that are required for the operation of the business of the Company as now conducted, and there has not occurred any default under any such Permit, except for any which, individually or in the aggregate, have not had, and will not have, a Material Adverse Effect. SECTION 3.12. LITIGATION. To the best of the Company's knowledge, other than appeals to the Board of Patent Appeals and interferences in the ordinary course of patent prosecution, there is no action, suit, proceeding at law or in equity, or any arbitration or any administrative or other proceeding by or before (or any investigation by) any Governmental Authority, pending or threatened against or affecting the Company , or any of its properties or rights. The Company is not subject to any judgment, order or decree entered in any action, suit or proceeding. SECTION 3.13. EMPLOYEE BENEFIT PLANS. (a) PLANS. Schedule 3.13 sets forth an accurate and complete list of each domestic and foreign employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations thereunder ("ERISA"), whether or not subject to ERISA, and each stock option, stock appreciation right, restricted stock, stock purchase, stock unit, performance share, incentive, bonus, profit-sharing, savings, deferred compensation, health, medical, dental, life insurance, disability, accident, supplemental unemployment or retirement, employment, severance or salary or benefits continuation or fringe benefit plan, program, arrangement, agreement or commitment maintained by the Company or any Affiliate thereof (including, for this purpose and for the purpose of all of the representations in this Section 3.13, any predecessors to the Company or its Affiliates and all employers (whether or not incorporated) that would be treated together with the Company and/or any such Affiliate as a single employer (within the meaning of Section 414 of the Code) or to which the Company or any Affiliate thereof contributes (or has any obligation to contribute)), has any liability or is a party (collectively, the "EMPLOYEE BENEFIT PLANS"). No Employee Benefit Plan is subject to Title IV of ERISA or the minimum funding standards of Section 302 of ERISA or Section 412 of the Code. The Company has never maintained or contributed to, or had any -20- obligation to contribute to (or borne any liability with respect to) any "multiple employer plan" (within the meaning of the Code or ERISA) or any "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA). (b) STATUS OF PLANS. Each Employee Benefit Plan (including any related trust) is in substantial compliance with the requirements of all applicable laws, including, without limitation, ERISA and the Code, and has at all times been maintained and operated in substantial compliance with its terms and the requirements of all applicable laws, including, without limitation, ERISA and the Code. No complete or partial termination of any Employee Benefit Plan has occurred or is expected to occur. The Company has no commitment, intention or understanding to create, modify or terminate any Employee Benefit Plan. Except as required to maintain the tax-qualified status of any Employee Benefit Plan intended to qualify under Section 401(a) of the Code, no condition or circumstance exists that could reasonably be expected to prevent the amendment or termination of any Employee Benefit Plan. No event has occurred and no condition or circumstance has existed that could reasonably be expected to result in a material increase in the benefits under or the expense of maintaining any Employee Benefit Plan from the level of benefits or expense incurred for the most recent fiscal year ended thereof. (c) NO LIABILITIES. There are no liabilities or obligations under any Employee Benefit Plan or any such plan, program, arrangement, agreement or commitment previously maintained by the Company or any Affiliate (or any other entity described in Section 3.13(a)) ("FORMER PLANS") with respect to which Cirrus could have any liability or obligation (including any successor liability under the Code or ERISA). The Company has not incurred any liability for any tax or excise tax arising under Chapter 43 of the Code, and no event has occurred and no condition or circumstance has existed that could reasonably be expected to give rise to any such liability. There are no actions, suits, claims or disputes pending, or, to the best knowledge and belief of the Company, threatened, anticipated or expected to be asserted against or with respect to any Employee Benefit Plan or the assets of any such plan (other than routine claims for benefits and appeals of denied routine claims). No civil or criminal action brought pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA is pending, or to the Company's knowledge, threatened, anticipated, or expected to be asserted against the Company or any fiduciary of any Employee Benefit Plan, in any case with respect to any Employee Benefit Plan. No Employee Benefit Plan or any fiduciary thereof has been the direct or indirect subject of an audit, investigation or examination by any governmental or quasi-governmental agency. (d) CONTRIBUTIONS. Full payment has been timely made of all amounts which the Company is required, under applicable law or under any Employee Benefit Plan or any agreement relating to any Employee Benefit Plan to which the Company is a party, to have paid as contributions or premiums thereto as of the last day of the most recent fiscal year of such Employee Benefit Plan ended prior to the date hereof. All such contributions and/or premiums have been fully deducted for income tax purposes and no such deduction has been challenged or disallowed by any governmental entity, and to the best knowledge and belief of the Company no event has occurred and no condition or circumstance has existed that could give rise to any such -21- challenge or disallowance. The Company has made adequate provision for reserves to meet contributions and premiums and any other liabilities that have not been paid or satisfied because they are not yet due under the terms of any Employee Benefit Plan, applicable law or related agreements. Benefits under all Employee Benefit Plans are as represented and have not been increased subsequent to the date as of which documents have been provided. (e) TAX QUALIFICATION. Each Employee Benefit Plan and each trust established in connection with any Employee Benefit Plan intended to be qualified under Sections 401(a) and 501(a) of the Code, respectively, as currently in effect, has been determined to be so qualified by the Internal Revenue Service or still has a remaining period of time under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for and to make any amendments necessary to obtain such a favorable determination. (f) COBRA. The Company has complied with all obligations arising in connection with the transactions contemplated by this Agreement under Part 6 of Subtitle B of Title I or ERISA and Section 4980B of the Code ("COBRA") except to the extent that any failure to comply will not, or could not reasonably be expected to, result in a material liability. (g) NO OTHER BENEFITS. No Employee Benefit Plan provides for post-employment or retiree health, life insurance or other welfare benefits (except to the extent required by COBRA or comparable state law). The Company has no unfunded liabilities pursuant to any Employee Benefit Plan that is not intended to be qualified under Section 401(a) of the Code. No Employee Benefit Plan holds as an asset any interest in any annuity contract, guaranteed investment contract or any other investment or insurance contract, policy or instrument issued by an insurance company that, to the knowledge of the Company, are or may be the subject of bankruptcy, conservatorship, insolvency, liquidation, rehabilitation or similar proceedings. (h) NO TRIGGERING EVENT. The execution of this Agreement and the consummation of the transactions contemplated hereby do not constitute a triggering event under any Employee Benefit Plan, policy, arrangement, statement, commitment or agreement, which (either alone or upon the occurrence of any additional or subsequent event) will or may result in any payment, "parachute payment" (as such term is defined in Section 280G of the Code), severance, bonus, retirement or job security or similar-type benefit, or increase any benefits or accelerate the payment or vesting of any benefits to any employee or former employee or director of the Company or its Affiliates. (i) NO SEVERANCE BENEFIT. No Employee Benefit Plan provides for the payment of severance, termination, change in control or similar-type payments or benefits. (j) DOCUMENTS. The Company has delivered to Cirrus true and complete copies of all material documents in connection with each Employee Benefit Plan, if any, including, without limitation: (i) all Employee Benefit Plans as in effect on the date hereof, together with all amendments thereto, including, in the case of any Employee Benefit Plan not set forth in writing, a written description thereof; (ii) all current summary plan descriptions, summaries of material modifications, and material communications, and (iii) the annual report on Internal Revenue Service ("IRS") Form 5500-series, including any attachments thereto, for the last year. -22- SECTION 3.14. EMPLOYMENT RELATIONS AND AGREEMENTS. (i) The Company is in compliance in all material respects with all federal, state, foreign, or other applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and has not and is not engaged in any unfair labor practice; (ii) no representation question with respect to any collective bargaining agreement or similar agreement exists respecting the employees of the Company; and (iii) the Company has not experienced any unfair labor practice charge or complaint, strike, slowdown, stoppage or other labor dispute or difficulty during the last three years. No employee of the Company is covered by a collective bargaining agreement. SECTION 3.15. TAXES. (a) TAX RETURNS. The Company has timely filed with the appropriate taxing authorities all federal, state and other returns, statements, forms and reports for Taxes ("RETURNS") that are required to be filed by, or with respect to, the Company on or prior to the Closing Date. The Returns (including any schedule or attachment thereto or any amendment thereof) reflect all liability for Taxes of the Company for the periods covered thereby. The Company is not the beneficiary of any extension of time within which to file any Return. The Company has not received written notice of any claim made by any jurisdiction where the Company does not file Returns, that the Company is or may be subject to taxation by that jurisdiction. (b) PAYMENT OF TAXES. The Company has timely paid all Taxes that are currently due and payable except for those for which adequate reserves have been made on the Company Financial Statements. (c) OTHER TAX MATTERS. (i) The Company has not been the subject of an audit or other examination of Taxes by any Governmental Authority with respect to any taxable period for which the statute of limitations has not expired, and the Company has not received any written notices with respect to such taxable periods relating to any issue which could affect the Tax liability of the Company that has not been resolved or paid in full. (ii) The Company has not been included as a member in any "consolidated," "unitary" or "combined" Return (other than Returns which include only the Company) with respect to Taxes for any taxable period for which the statute of limitations has not expired. (iii) All Taxes which the Company is or has been required by law to withhold or collect have been duly withheld or collected, and have been timely paid over to the proper authorities to the extent due and payable. (iv) There are no tax sharing, allocation, indemnification or similar agreements or arrangements in effect as between the Company, or any predecessor or Affiliate of any -23- of them and any other party under which Cirrus or the Company could be liable for any Taxes of any Person. (v) The Company has not been required to include in income any adjustment pursuant to Section 481 or any similar provision of the Code or any other corresponding applicable tax laws by reason of a voluntary change in accounting method initiated by the Company, and the Company has not received written notice that the Internal Revenue Service or any other taxing authority has initiated or proposed any such adjustment or change in accounting method. (vi) The Company (A) has not entered into an agreement or waiver extending any statute of limitations relating to the payment or collection of Taxes of the Company or agreed to any extension of time with respect to a Tax assessment or deficiency, or (B) except as provided in Section 3.15(b) above, is not presently contesting the Tax liability of the Company. (vii) No election under 341(f) of the Code has been made to treat the Company as a consenting corporation, as defined in Section 341(f) of the Code. (viii) The Company has not made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate it to make any payments, that will not be deductible under Section 280G of the Code. (ix) The Company has not redeemed any Company Shares in a manner that would cause the transactions contemplated hereby to fail to qualify as a reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. The Company has not redeemed any Company Shares or made any distributions, and no Person related to the Company within the meaning of Treasury Regulation Section 1.368-1(e)(3)(i)(B) has acquired any Company Shares, in a manner that would cause the transactions contemplated hereby to violate the continuity of interest requirement set forth in Treasury Regulation Section 1.368-1(e). (x) The Company operates at least one significant historic business line, or owns at least a significant portion of its historic business assets, in each case within the meaning of Section 1.368-1(d). SECTION 3.16. LIABILITIES. Except as set forth in the balance sheet dated as of May 31, 2001, the Company has no outstanding claims, liabilities or indebtedness, contingent or otherwise, other than liabilities not exceeding $25,000 to trade creditors incurred subsequent to the date of such balance sheet in the ordinary course of business -24- not involving borrowings by the Company. The Company is not in default in respect of the terms or conditions of any indebtedness. SECTION 3.17. INTELLECTUAL PROPERTY. (a) REGISTRATIONS. Schedule 3.17(a) is a complete list of all Intellectual Property used or held for use in the business of the Company (except for unregistered copyrights, know how and trade secrets). To the extent indicated on Schedule 3.17(a), the Intellectual Property listed on Schedule 3.17(a) has been duly registered in, filed in or issued by the United States Patent and Trademark Office, United States Copyright Office or Network Solutions, Inc., the appropriate government or officially recognized offices in the various states of the United States and the appropriate government or officially recognized offices of other jurisdictions (foreign and domestic), and each such registration, filing and issuance (i) has not been abandoned, canceled or otherwise compromised (except for amendments made in the ordinary course of patent prosecution and indications of the availability of licenses under one or more of the Company's patents and/or patent applications) and (ii) remains in full force and effect as of the Closing Date. Copies of all items of Intellectual Property which have been reduced to writing or other tangible form (including, without limitation accurate and complete copies of all related licenses, and amendments and modifications thereto) have been delivered or made available to Cirrus; specifically all patent files and other files relating to intellectual property maintained by the Company's outside patent counsel, Blakely, Sokoloff, Taylor & Zafman LLP, were made available to Cirrus and its outside counsel, White & Case LLP, at the office of Blakely, Sokoloff, Taylor and Zafman LLP on June 12, 2001 through June 15, 2001. (b) LICENSES. Schedule 3.17(b) sets forth all licenses to which the Company is a party, whether as licensor, licensee, or otherwise with respect to any of the Intellectual Property, other than Commercial Software Rights. To the extent any Intellectual Property is used under license in the business of the Company, no notice of a material default has been sent or received by the Company under any such license which remains uncured, and except as indicated on Schedule 3.17(b), the execution, delivery or performance of the Company's obligations hereunder will not result in such a default. Each such license agreement (other than Commercial Software Rights) is a legal, valid and binding obligation of the Company and each of the other parties thereto, enforceable in accordance with the terms thereof and the transactions contemplated by this Agreement will not breach the terms thereof. (c) NO INFRINGEMENT. The Company owns or is licensed to use, all of the Intellectual Property, free and clear of any Encumbrances without obligation to pay any royalty or any other fees with respect thereto. The Company's use of the Intellectual Property (including, without limitation, the manufacturing, marketing, licensing, sale or distribution of product and the general condition and operations of the business of the Company) does not violate, infringe, misappropriate or misuse any intellectual property rights of any third party. The Company has the exclusive right to file, prosecute and maintain all applications and registrations with respect to the Intellectual Property. Other than the payment of patent application filing, issue, maintenance, annuity or other prosecution fees in the ordinary course, there are no actions that must be taken or payments that must be made by the Company within 180 days following the Closing Date that, if -25- not taken, will adversely affect the Intellectual Property or the right of the Company to use same as where used as of the Closing Date. (d) DISCLOSURE REQUIREMENTS. The Company has used all necessary and commercially reasonable efforts to comply with all applicable disclosure requirements in the application for and maintenance of any patent, trademark or copyright of the Company. (e) FEES AND FILINGS. Each item of the Intellectual Property is valid and subsisting and each registration, filing or issuance has been maintained effective by the Company through making all requisite filings, renewals and/or related maintenance payments in connection with such Intellectual Property and filing of all necessary documents and certificates in connection with such Intellectual Property 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 preserving such Intellectual Property and maintaining the Company's interest therein. (f) NO NOTICE OF INFRINGEMENT. Except as indicated in Schedule 3.17(f) as of the Closing Date, the Company has not received any written notice of any claim, threat of claim, nor any correspondence that might, directly or indirectly, imply the existence of a claim, from any Person relating to the right of the Company to use any of the Intellectual Property. The Intellectual Property set forth in Schedule 3.17 constitutes all the intellectual property necessary to operate the business of the Company as of the Closing Date in the manner in which it is presently operated. (g) NO PENDING CLAIMS. Except as indicated in Schedule 3.17(g), there are no pending or threatened claims, in writing or otherwise, by any Person: (i) of unfair competition or trade practices by the Company under the laws of any jurisdiction applicable to the Company; (ii) challenging the right of the Company to use any Intellectual Property or indicating that the failure to take a license would result in such a claim; (iii) alleging any violation, infringement, misuse or misappropriation by the Company of Intellectual Property owned by any Person; or (iv) assertion of any opposition, interference, invalidity, termination, abandonment, unenforceability, or other infirmity of any Intellectual Property. To the best knowledge of the Company, the Company does not know of any valid basis for such claims. Moreover, the Company has not made any claim in writing of a violation, infringement, misuse or misappropriation by any Person (including, without limitation, any employee or former employee of the Company) of its rights to, or in connection with, any Intellectual Property, which claim is pending. The Company has not entered into any agreement to indemnify any other Person against any charge of infringement of any Intellectual Property, other than indemnification provisions contained in purchase orders or license agreements arising in the ordinary course of business. (h) NO UNFAIR COMPETITION. The operation of the businesses of the Company as such business currently is conducted, including the Company's design, development, manufacture, marketing and sale of the products or services of the Company (including without limitation, products currently under development) have not and does not infringe, misuse or misappropriate the rights of any third party. -26- (i) NO PROCEEDINGS. To the knowledge of the Company, there are no interferences, oppositions or other contested proceedings, either pending or threatened, in the United States Copyright Office, the United States Patent and Trademark Office, or any other Governmental Authority relating to any pending application with respect to the Company's Intellectual Property. Other than one or more appeals in the ordinary course of patent prosecution, there is no proceeding or action pending before any tribunal (including the United States Patent and Trademark office or equivalent authority anywhere in the world), or threatened, that relates to any Intellectual Property of the Company. (j) NO IMPEDIMENTS TO PATENTS. The Company is not barred by its own action from seeking patents on material patentable inventions of the Company by "on sale" or similar bars to patentability or by failure to apply for a patent on such inventions within the time required under the laws of any applicable jurisdiction. Where practical, the Company has pursued foreign patent protection and in such cases, the Company is not barred by its own action or inaction from seeking patents on material patentable inventions of the Company under the laws of the respective foreign jurisdictions. (k) SITES AND SERVERS. For the twelve month period prior to the Closing Date, the Internet domain names and URL's constituting part of the Company's Intellectual Property (together with any content and other materials accessible and/or displayed thereon, the "SITES") direct and resolve to the appropriate Internet protocol addresses and are and have been maintained and accessible to Internet users on those certain computers used by the Company to make the Sites so accessible (the "SERVER") approximately twenty-four (24) hours per day, seven (7) days per week ("24/7") and have been operational for downloading content from the Server on a 24/7 basis. The Company has fully operational back-up copies of the Sites (and all related software, databases and other information), made from the current versions of the Sites as accessible to Internet users on the Server (and copied directly therefrom). Such back-up copies have been kept in a safe and secure environment, fit for the back-up of media, and are not located at the same location as the Server. (l) CONFIDENTIALITY. The Company has taken all necessary and reasonable steps required under the circumstances to protect and preserve the confidentiality of all proprietary non-public information relating to the Intellectual Property constituting part of or relating to intellectual property of other Persons provided to the Company. All use and/or disclosure of such information to any third party (other than (i) to competent regulators, accountants and counsel in each instance acting in their professional capacities, or (ii) pursuant to competent judicial or equivalent order) has been pursuant to the terms of a written agreement between such third parties and the Company. The Company has not breached any agreements of non-disclosure or confidentiality or is currently alleged or claimed to have done so. (m) WRITTEN AGREEMENTS. To the extent any work, invention or material has been developed or created by a third party exclusively for the Company, the Company has entered into and maintains a written agreement with such third party with respect thereto and the Company has obtained ownership of, or license to, all Intellectual Property in such work, material or invention by operation of law or by valid assignment. -27- SECTION 3.18. MATERIAL CONTRACTS. (a) Schedule 3.18 sets forth all of the following to which the Company is a party or by which it is bound: (i) any agreement or commitment that involves the performance of services by it of an amount or value in the aggregate in excess of $100,000; (ii) any agreement, indenture or other instrument which contains restrictions on payment of dividends or the making of any other distribution in respect of its capital stock; (iii) any agreement or commitment to be performed relating to capital expenditures in excess of $100,000 in any calendar year other than those capital expenditures approved and clearly identified as part of the Company's fiscal year 2001 budget (the "2001 BUDGET"), an accurate and complete copy of such budget being attached to Schedule 3.18; (iv) any agreement, indenture or instrument relating to indebtedness for borrowed money or the deferred purchase price of property (excluding trade payables in the ordinary course of business); (v) any loan or advance to or investment in any Person, or any agreement or commitment relating to the making of any such loan, advance or investment; (vi) any profit-sharing agreement; (vii) any guaranty, suretyship or other contingent liability in respect of any indebtedness or obligation of any Person; (viii) any management service, consulting or any other similar type of agreement, requiring payments by or to the Company in the aggregate in excess of $100,000; (ix) any confidentiality, nondisclosure or similar agreement to which the Company is a party and in respect of which the Merger could cause a breach of such agreement or could result in a liability to Cirrus or the Company following the Closing; (x) any agreement or commitment limiting the ability of the Company to engage in any line of business or to compete with any Person; or (xi) any amendment or supplement in respect of any of the foregoing. (b) Each agreement, commitment, indenture, instrument, loan, advance, investment, guarantee, suretyship or contingent liability, including all amendments, modifications and supplements thereto (collectively "CONTRACTS"), is in full force and effect, and (i) there exists no default or event of default or event, occurrence, condition or act (including the consummation of the transactions contemplated hereby) on the part of the Company, or to the knowledge of the Company on the part of any other party thereto, which, with the giving of notice, the lapse of -28- time or the happening of any other event or condition, would become a default or event of default thereunder; (ii) no approval or consent of, or notice to, any Person is needed in order that each of the foregoing shall continue in full force and effect in accordance with its terms without penalty, acceleration or rights of early termination by reason of the consummation of the transactions contemplated by this Agreement; and (iii) the consummation of the transactions contemplated hereby will not alter in any material respect the rights and obligations of any of the parties to the Contracts. SECTION 3.19. PRODUCTS. Schedule 3.19 lists and describes each of the Products of the Company. Each of the Products has been and is in conformity with all applicable contractual commitments, all express and implied warranties with respect thereto and all legal requirements applicable thereto. If the Company obtained, by license, the right to sell, license, develop or otherwise provide any Product under sublicense or other agreement with a third party, this representation and warranty is based solely on the Company's knowledge. The Company has no liability for, and to the Company's knowledge no basis exists for, any liability for any replacement, repair or remediation of any Product or for any other damages or refunds in connection with any Product. Schedule 3.19 sets forth a description of all guaranties, warranties and other indemnities to which any of the Products is subject, other than the Company's applicable standard terms and conditions of sale and standard guaranties and warranties, copies of which have been provided to Cirrus. SECTION 3.20 OWNED REAL PROPERTY. The Company does not own any real property. SECTION 3.21. LEASES. Schedule 3.21 attached hereto contains an accurate and complete list of all leases to which the Company is a party (as lessor or lessee). Each such lease is in full force and effect; all rents and additional rents due to date on each such lease have been paid; in each case, the lessee has been in peaceable possession since the commencement of the original term of such lease and no waiver, indulgence or postponement of the lessee's obligations thereunder has been granted by the lessor. The Company has not violated any of the terms or conditions under any such lease in any material respect, and to the knowledge of the Company all of the covenants to be performed by any other party under any such lease have been fully performed and no default by such party exists thereunder. The Company has good and marketable leasehold interests in all leased real property described in each such lease, free and clear of any Encumbrances. All such property is in a state of good maintenance and repair and is adequate and suitable for the purposes for which it is presently being used. SECTION 3.22. INSURANCE. Set forth on Schedule 3.22 attached hereto is a list of all insurance policies which the Company maintains with respect to its businesses, properties and employees. Such policies are in full force and effect and are free from any right of termination on the part of the insurance carriers. Such policies, with respect to their amounts and types of coverage, are comparable to those typically carried by similarly situated companies in the same or similar businesses. Since January 1, 2001, there has not been any material adverse change in the relationship of the Company with any of its insurers or any material increase in any of the premiums payable pursuant to such policies. -29- SECTION 3.23. BOOKS AND RECORDS. All minute books of the Company have been made available to Cirrus. The minute books of the Company contain accurate records of all meetings of, and all corporate action taken by (including action taken by written consent), the Shareholders and Board of Directors of the Company. The Company does not have any of its records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) (collectively, "BOOKS AND RECORDS") that are not under the exclusive ownership and direct control (including all means of access thereto and therefrom) of the Company. SECTION 3.24. AGREEMENTS WITH AFFILIATES. Set forth on Schedule 3.24 is a list of all agreements, arrangements, commitments and understandings, whether written or oral, between the Company and any officer, director or Affiliate of the Company. SECTION 3.25. TECHNOLOGY SYSTEMS OPERABILITY. (a) OPERABILITY OF TECHNOLOGY SYSTEMS. All of the computer hardware, computer software, electronic data processing equipment, controllers, microchips embedded in computer or non-computer equipment and any other computerized or electronic equipment or components (collectively, the "TECHNOLOGY SYSTEMS") of the Company are in good working condition and are Year 2000 Compliant. For purposes of this Agreement, the term "YEAR 2000 COMPLIANT" shall mean that the Technology Systems, without human intervention, accurately and completely recognize, receive, record, manipulate, calculate, process, sequence, store, transmit and output or produce, without material error or interruption, dates and date-related data from and after 12:00 a.m. on January 1, 2000, time periods that include January 1, 2000 and information that is dependent on or relates to such dates or time periods (including, without limitation, leap year calculations in that same manner and with the same accuracy, functionality, data interaction and performance as when dates or time periods prior to January 1, 2000 are involved) and do not, as a consequence of the change of centuries or of the fact that data from more than one century is being processed, cause an abnormal termination of execution, an endless loop, incorrect values, or invalid results, or otherwise fail to perform accurately, completely and in a timely fashion in accordance with their respective specifications and functionalities, except where such failure does not have a Material Adverse Effect. (b) NO ADVERSE EFFECT. None of the Technology Systems of the Company, nor any of the Products or services sold or licensed by the Company to third parties has been adversely affected by the onset of the year 2000. (c) CONTINGENCY PLANS. The Company has established, and put in place, commercially reasonable contingency plans to address, correct and otherwise attend to in a timely fashion any and all material problems that may occur with its Technology Systems and/or supply and distribution systems as a result of (i) a failure of such systems to be Year 2000 Compliant or (ii) such systems otherwise being adversely affected by the onset of the year 2000. (d) NO CLAIMS OR DEMANDS. As of the Closing Date, the Company has not received any written claims or demands from any third parties asserting that the Products, Technology -30- Systems or supply and distribution systems of the Company fail to be Year 2000 Compliant. The Company does not know of any valid basis for such a claim or demand. SECTION 3.26. FISCAL 2001 BUDGET. The Fiscal 2001 Budget previously delivered to Cirrus is an accurate and complete copy of such budget, and it has not since been amended or supplemented in any manner. SECTION 3.27. BROKER'S OR FINDER'S FEE. The Company has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby. SECTION 3.28. COPIES OF DOCUMENTS. The Company has made available for inspection and copying by Cirrus accurate and complete copies of all documents referred to in this Agreement and the Exhibits and Schedules thereto, and all amendments, supplements and waivers thereof. SECTION 3.29. DISCLOSURE. The statements made by the Company in the Transaction Documents to which it is a party (including, without limitation, the representations and warranties made by the Company therein in the Schedules and Exhibits thereto), when taken as a whole, do not include or contain any untrue statement of a material fact and do not omit to state any material fact required to be stated in order for such statements not to be misleading. SECTION 3.30. RELATIONSHIPS. To the Company's knowledge, the relationship of the Company with its present suppliers, customers, licensors, vendors and contractors will not be materially adversely affected as a result of the Merger of the Company pursuant to the Transaction Documents. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CIRRUS AND ACQUISITION SUB SECTION 4. REPRESENTATIONS AND WARRANTIES OF CIRRUS AND ACQUISITION SUB. Except as set forth in the corresponding sections of the disclosure letter delivered by Cirrus to the Company prior to entering into this Agreement (the "CIRRUS DISCLOSURE LETTER"), Cirrus and Acquisition Sub hereby represent and warrant to the Company as of the date hereof and as of the Closing Date (except as otherwise indicated) as follows: SECTION 4.1. DUE ORGANIZATION, GOOD STANDING AND CORPORATE POWER. Each of Cirrus and Acquisition Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. -31- SECTION 4.2. AUTHORIZATION AND VALIDITY OF AGREEMENT. Each of Cirrus and Acquisition Sub has the requisite power and authority to execute and deliver the Transaction Documents to which it is a party, to perform its obligations thereunder and to consummate the transactions contemplated thereby. The execution, delivery and performance of the Transaction Documents to which it is a party, and the consummation by it of the transactions contemplated thereby, will have been duly authorized and approved by its respective Board of Directors and stockholders, if required, and no other action on the part of Cirrus and/or Acquisition Sub is necessary to authorize the execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby. The Transaction Documents as have been executed and delivered by Cirrus and Acquisition Sub on or prior to the date hereof have been, and on the Closing Date such other of the Transaction Documents to which Cirrus and/or Acquisition Sub is a party will have been, duly executed and delivered by Cirrus and Acquisition Sub and are and will be valid and binding obligations enforceable against Cirrus and Acquisition Sub, as the case may be, in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and general equitable principles. SECTION 4.3. CAPITALIZATION. The authorized capital stock of Cirrus consists of 280,000,000 shares of Cirrus Common Stock and 5,000,000 shares of preferred stock, of which approximately 73,600,000 shares of Cirrus Common Stock (excluding 6,400,000 treasury shares held by Cirrus) are outstanding on the date of this Agreement. All issued and outstanding shares of Cirrus Common Stock are, and all of the shares of Cirrus Common Stock issuable pursuant to this Agreement when issued as provided herein will be, duly authorized, validly issued, fully paid and nonassessable. SECTION 4.4. CONSENTS AND APPROVALS; NO VIOLATIONS. The execution and delivery of the Transaction Documents to which it is a party by Cirrus and Acquisition Sub and the consummation by them of the transactions contemplated thereby will not: (a) violate or conflict with any provision of the Certificate of Incorporation or Bylaws of Cirrus or Acquisition Sub; (b) violate or conflict with any statute, ordinance, rule, regulation, order or decree of any court or any Governmental Authority applicable to Cirrus or Acquisition Sub or by which any of their respective properties or assets are or may be bound, (c) require any filing with, or permit, consent or approval of, or the giving of any notice to, any Governmental Authority, except, if required, for prior notification and reporting requirements under the HSR Act, or (d) result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default, or result in the creation of any Encumbrance upon any of the properties or assets of Cirrus or any of its subsidiaries, or give rise to an obligation, right of termination, cancellation, acceleration, payment or increase of any obligation or a loss of a material benefit, any of the terms, conditions or provisions of any agreement, instrument or other obligation to which Cirrus or Acquisition Sub is a party, or by which any of its properties or assets are or may be bound, except for any such violations, breaches, conflicts, defaults, Encumbrances, increases or losses which, individually or in the aggregate, will not have a material adverse effect on the business, assets, liabilities, operations, results of operations, condition (financial or otherwise) or prospects of Cirrus and Acquisition Sub, taken as a whole or on the ability of Cirrus and Acquisition Sub to consummate the transactions contemplated by the Transaction Documents. -32- SECTION 4.5. BROKER'S OR FINDER'S FEE. Neither Cirrus nor Acquisition Sub has paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated hereby, except for such fees or commissions as are listed in Schedule 4.5. SECTION 4.6. SEC DOCUMENTS, FINANCIAL STATEMENTS. Since June 1, 2000, Cirrus has timely filed (within applicable extension periods) all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act (all of the foregoing filed since June 1, 2000 and prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to as the "SEC DOCUMENTS"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act or the Securities Act, as the case may be, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein, in light of the circumstances under which they were made, not misleading. The financial statements of Cirrus (including, in each case, any notes and schedules thereto) included in the SEC Documents (a) were prepared from the books and records of Cirrus and its subsidiaries, (b) comply as to form in all material respects with all applicable accounting requirements and the rules and regulations of the SEC with respect thereto, (c) are in conformity with GAAP, applied on a consistent basis (except in the case of unaudited statements, as permitted by the rules and regulations of the SEC) and (d) fairly present, in all material respects, the consolidated financial position of Cirrus and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments which were not and are not expected to be, individually or in the aggregate, material in amount). Except as set forth in the SEC Documents filed from June 1, 2000 through the date of this Agreement, and except for liabilities and obligations incurred in the ordinary course of business since the date of the most recent consolidated balance sheet included in the SEC Documents, neither Cirrus nor any of its subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) except for those that would not, individually or in the aggregate, reasonably be expected to have a materially adverse effect on the financial condition or operating results of Cirrus. SECTION 4.7 DISCLOSURE. The statements made by Cirrus in the Transaction Documents to which it is a party (including, without limitation, the representations and warranties made by Cirrus therein in the Schedules and Exhibits thereto), when taken as a whole, do not include or contain any untrue statement of a material fact and do not omit to state any material fact required to be stated in order for such statements not to be misleading. SECTION 4.8. OWNERSHIP OF ACQUISITION SUB; NO PRIOR ACTIVITIES. As of the date hereof and the Effective Time, except for obligations or liabilities incurred in connection with its incorporation or organization and the transactions contemplated by the Transaction Documents and except for the Transaction Documents, any other agreements or arrangements contemplated by this Agreement, Acquisition Sub has not and will not have incurred, directly or indirectly, through any subsidiary or affiliate, any obligations or liabilities or engaged in any business -33- activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. SECTION 4.9. LITIGATION. There is no action, suit, proceeding or claim pending or threatened, to the knowledge of Cirrus or any of its subsidiaries, or any of their respective directors or officers (in their capacities as such), that could have a material adverse effect on Cirrus or any of its subsidiaries. There is no judgment, decree or order against Cirrus or any of its subsidiaries, that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by the Transaction Documents. ARTICLE V TAX MATTERS SECTION 5.1. REORGANIZATION QUALIFICATION. The parties hereto intend that the transactions consummated pursuant to this Agreement be treated for federal income tax purposes as a merger which qualifies as a "reorganization" within the meaning of Section 368 of the Code, and shall report such transactions in a manner consistent therewith on all federal income tax returns, reports, declarations, claims for refund, or statements (including any schedule or amendment thereto). The parties hereto adopt this Agreement as a "plan of reorganization" within the meaning of Section 354(a)(1) of the Code. SECTION 5.2. COOPERATION WITH TAX MATTERS. Each party hereto shall cooperate to the extent reasonably requested by any other party in connection with the filing of Returns and any audit, litigation or other proceeding involving the Company with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. SECTION 5.3. TRANSFER AND OTHER TAXES. All transfer, documentary, sales, use, stamp, registration and similar Taxes and fees (including any penalties and interest) incurred in connection with the transactions contemplated hereby shall be paid when due by the Shareholders receiving Merger Consideration, and such Shareholders shall, at their expense, file and cause to be filed all necessary Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and similar Taxes and fees. ARTICLE VI PRE-CLOSING COVENANTS OF THE COMPANY -34- SECTION 6.1. CONDUCT OF BUSINESS PENDING THE EFFECTIVE TIME. Except as permitted or required by this Agreement or otherwise consented to in writing by Cirrus, until the Closing, the Company shall take all action, or refrain from taking any action, necessary to ensure that: (a) The Company: (i) conducts its operations only according to its usual regular and ordinary course of business in substantially the same manner as heretofore conducted, and uses its best efforts to preserve intact its business organization, to keep available the services of its current employees and to preserve its present relationships with customers, suppliers and other Persons with which it has a business relationship; (ii) preserves all of its right, title and interest in and to the assets of the Company, including, without limitation, its product designs, layouts, drawings, net lists, engineering documentation, user documentation, masks and other manufacturing tools, firmware and software, and test programs, except such of the assets as are consumed in the ordinary course of business consistent with past practice between the date hereof and the Closing Date; (iii) maintains in good operating condition and repair, ordinary wear and tear excepted, all of the tangible property of the Company; (iv) maintains in force all insurance in effect on the date of this Agreement; (v) maintains all of the Books and Records consistent with past practices; (vi) operates its business in compliance with all applicable laws, rules and regulations; and (vii) extends trade credit only in the ordinary course of business, consistent with past practice. (b) The Company shall not: (i) amend its Certificate of Incorporation or Bylaws (or similar constitutive documents); (ii) issue or sell, or authorize the issuance or sale of, any shares of its capital stock or any other securities, other than the issuance of shares of capital stock upon the exercise of outstanding options or warrants which are included in the definition of Fully Diluted Shares; (iii) issue or sell, or authorize the issuance or sale of, any securities convertible into, or options, warrants or rights to purchase or subscribe to its capital stock or any other securities; provided that the Company may issue or sell or authorize the issuance or sale of options to employees, directors and consultants pursuant to the Company's Option -35- Plan in amounts and on terms consistent with past practices and at exercise prices as mutually agreed by the Company and Cirrus or as otherwise set forth on Schedule 6.1(b)(iii); (iv) enter into any arrangement or contract with respect to the issuance or sale of any shares of its capital stock or any other securities, or make any changes in its capital structure, except for the taking of the Loan; (v) sell or agree to sell or create or agree to create any Encumbrance on any stock or other equity interest owned by it in any other Person; (vi) declare, pay or set aside any dividend or other distribution or payment with respect to, or split, combine, redeem or reclassify, or purchase or otherwise acquire, any shares of its capital stock or other securities, or make any other payments to its stockholders or Affiliates; (vii) enter into any contract or commitment with respect to capital expenditures individually or in the aggregate in excess of $100,000; (viii) acquire any interest in the equity, assets or business of any Person, except as otherwise permitted by Section 6.1(b)(xi); (ix) except to the extent required under applicable law, rule or regulation, or as permitted or required by this Agreement, or otherwise in the ordinary course of business in accordance with past practices, increase the compensation or fringe benefits of, or pay any bonuses to, any of its directors, officers or employees or grant any severance or termination pay, or enter into any employment, consulting or severance agreement or arrangement with any present or former director, officer or other employee, or establish, adopt, enter into, amend or terminate any collective bargaining, bonus, profit-sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any of its directors, officers or employees; (x) create any Encumbrance on any of its assets or incur or modify any indebtedness or other liability (other than the incurrence of trade payables in the ordinary course of business) or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for the obligations of any Person, or make any loan or other extension of credit, other than the Loan from Cirrus to the Company pursuant to Section 7.5 hereof; (xi) purchase or sell any assets other than Products in the ordinary course of business; (xii) enter into any capital lease or lease any of its assets; (xiii) enter into any material contract, transaction or activity; -36- (xiv) pay or set aside any dividend or make or set aside any other distribution with respect to, or redeem, purchase or otherwise acquire, any shares of its capital stock or other securities, or make any other payment to the Shareholders or any Affiliate thereof or of the Company, other than in connection with the cancellation of warrants to purchase up to 62,727 shares of Company Common Stock/Preferred Stock provided that the repurchase of such warrants shall not exceed $70,000 in the aggregate; (xv) make or rescind any tax election or settle or compromise any tax liability; (xvi) make any change in its accounting policies or procedures or make any changes in any accounting method or, except upon the written advice of its independent auditors, its system of internal accounting controls; (xvii) except in the ordinary course of business, pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction of claims, liabilities or obligations reflected or reserved against in the Company Financial Statements; (xviii) increase or decrease prices charged to its customers other than in the ordinary course of business; (xix) enter into any contract or transaction with any of its directors, officers, Shareholders or Affiliates, other than as expressly provided in this Agreement; (xx) file or cause to be filed or be a party to any action, suit or proceeding at law or in equity, or any arbitration, or any administrative or other proceeding by or before any Governmental Authority; (xxi) engage in any new line of business; or (xxii) agree, in writing or otherwise, to take any of the foregoing actions. (c) The Company shall notify Cirrus and Acquisition Sub in writing of any material adverse change since the date hereof in the business, assets, liabilities, operations, results of operations, condition (financial or otherwise) or prospects of the Company promptly upon becoming aware thereof. SECTION 6.2. FULL ACCESS AND DISCLOSURE. Subject to Section 7.1, during the period commencing on the date hereof until the Closing Date, the Company shall afford Cirrus and Acquisition Sub and their respective employees, advisors, accountants, agents and representatives reasonable access during normal business hours to the personnel, properties and Books and Records of the Company in order that they may have the opportunity to make reasonable investigations of the affairs of the Company; provided, however, neither the right to make such investigations nor the making of any such investigation shall affect the representations and warranties made in this Agreement or the right of Cirrus and/or Acquisition Sub to enforce them. The Company shall promptly furnish to Cirrus and Acquisition Sub such additional -37- financial and operating data and other information and respond to such inquiries as either of them shall from time to time reasonably request. SECTION 6.3. CONFIDENTIALITY Until June 30, 2004, the Company shall, and the Company shall cause the Company's Shareholders, officers, directors, other employees, agents, representatives and Affiliates to treat and hold as confidential all non-public information relating to trade secrets, processes, patent and trademark applications, product development, price, customer and supplier lists, pricing and marketing plans, policies and strategies, details of client and consultant contracts, operations methods, product development techniques, business acquisition plans, new personnel acquisition plans and all other non-public information (collectively, "CONFIDENTIAL INFORMATION") with respect to Cirrus and Acquisition Sub; provided that Confidential Information shall not include information that: (i) is as of the date hereof, or subsequently becomes, generally available to the public through no fault of, or breach of any confidentiality obligation by, a party hereto, (ii) the Person to whom such information is disclosed can demonstrate to have had such information in its possession without any breach of any applicable law or regulation or other obligation of confidentiality of such Person or a third party, or (iii) is independently developed by the Person to whom such information is disclosed without the use of any Confidential Information disclosed either in furtherance or in violation hereof. The Company and any Shareholders, and their respective officers, directors, other employees, agents, representatives and Affiliates, may disclose such Confidential Information, if he, she or it becomes legally compelled to disclose such information. In such case, the Person needing to disclose such Confidential Information shall provide Cirrus with prompt written notice of any requirement or effort made by any Person to compel disclosure on such Confidential Information so that Cirrus may, if it desires, seek a protective order or other remedy. The Person compelled to make such disclosure shall exercise its best efforts to obtain assurances that confidential treatment will be accorded such Confidential Information, and in any event, only that portion of the Confidential Information which is legally required to be disclosed may be disclosed. Notwithstanding anything to the contrary in this Agreement, the parties acknowledge that remedies at law for any breach of any obligation under this Section 6.3 are inadequate and that in addition thereto the party seeking to enforce this Section 6.3 shall be entitled to equitable relief, including injunction and specific performance, in the event of any such breach. Notwithstanding the foregoing, the obligations of the Company under this Section 6.3 shall cease at the Effective Time. SECTION 6.4. COOPERATION AND BEST EFFORTS. The Company shall: (a) cooperate and use its best efforts to take, or cause to be taken, all appropriate action, and to make, or cause to be made, all filings necessary, proper or advisable under applicable laws and regulations, to consummate and make effective the transactions contemplated by this Agreement and the Transaction Documents, including, without limitation, its reasonable best efforts to obtain, prior to September 28, 2001, such Permits and Consents as are necessary for consummation of the transactions contemplated by the Transaction Documents; and (b) promptly assist, cooperate and use its best efforts to provide all appropriate information requested by Cirrus in connection with Cirrus' preparation and filing of an -38- Application for Qualification of Securities by Permit and the related Fairness Hearing as described in and pursuant to Section 7.6. SECTION 6.5. REGULATORY MATTERS. The Company shall promptly: (i) take all actions necessary to make the filings with any Antitrust Authority or any other Governmental Authority required of it or any of its Affiliates under any applicable laws in connection with the Transaction Documents and the transactions contemplated thereby, and (ii) inform Cirrus of any material communication made to, or received by the Company from, any Antitrust Authority or any other Governmental Authority regarding any of the transactions contemplated by the Transaction Documents. SECTION 6.6. COVENANT TO SATISFY CLOSING CONDITIONS. The Company shall satisfy or cause to be satisfied, on or before September 28, 2001, the conditions to the obligations of Cirrus and Acquisition Sub to consummate the transactions contemplated hereby set forth in Section 8.1(n) and shall use its best efforts to effect or cause to be effected all such other matters within its control that may be necessary or desirable for the satisfaction of all such other conditions to the obligations of Cirrus to consummate the transactions contemplated hereby. SECTION 6.7. BEST EFFORTS. The Company and the Shareholders shall promptly assist, cooperate and use their best efforts to provide all appropriate information requested by Cirrus necessary for the registration or exemption of shares of Cirrus Common Stock pursuant to Section 7.6. SECTION 6.8. DELIVERY OF TAX REPRESENTATION LETTERS. The Company shall use its best efforts to, prior to Closing, execute and deliver to Morrison & Foerster, LLP or any other legal firm delivering the opinion that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code a tax representation letter in a form reasonably acceptable to such legal firm and necessary to render the opinion provided for in Section 8.2(f). ARTICLE VII PRE-CLOSING COVENANTS OF CIRRUS AND ACQUISITION SUB SECTION 7.1. CONFIDENTIALITY. Until the Effective Time (or if the Merger does not close, until June 30, 2004) Cirrus and Acquisition Sub shall, and shall cause their respective officers, directors, other employees, agents, representatives and Affiliates to, treat and hold as confidential all Confidential Information of the Company. Cirrus and Acquisition Sub or any such officers, directors, other employees, agents, representatives and Affiliates may disclose any such Confidential Information if, prior to the Effective Time, he, she or it becomes legally -39- compelled to disclose such information. In such case, Cirrus shall provide the Company with prompt written notice of such requirement so that the Company may, if it desires, seek a protective order or other remedy. Cirrus shall exercise its best efforts to obtain assurances that confidential treatment will be accorded such Confidential Information, and in any event, Cirrus shall furnish only that portion of the Confidential Information which is legally required to be disclosed. Notwithstanding anything to the contrary in this Agreement, the parties acknowledge that remedies at law for any breach of any obligation under this Section 7.1 are inadequate and that in addition thereto the party seeking to enforce this Section 7.1 shall be entitled to equitable relief, including injunction and specific performance, in the event of any such breach. SECTION 7.2. COOPERATION AND BEST EFFORTS. Cirrus and Acquisition Sub shall cooperate and use their best efforts to take, or cause to be taken, all appropriate action, and to make, or cause to be made, all filings necessary, proper or advisable under applicable laws and regulations, to consummate and make effective the transactions contemplated by the Transaction Documents, including, without limitation, their reasonable best efforts to obtain, prior to September 1, 2001, all Permits and Consents as are necessary for consummation of the transactions contemplated by the Transaction Documents. SECTION 7.3. REGULATORY MATTERS. Cirrus and Acquisition Sub shall promptly: (i) take all actions necessary to make the filings with any Antitrust Authority or any other Governmental Authority required of them or any of their Affiliates under any applicable laws in connection with the Transaction Documents and the transactions contemplated thereby; and (ii) inform the Company of any material communication made to, or received by Cirrus or Acquisition Sub from, any Antitrust Authority or any other Governmental Authority regarding any of the transactions contemplated by the Transaction Documents. SECTION 7.4. COVENANT TO SATISFY CLOSING CONDITIONS. Cirrus shall satisfy, or cause to be satisfied, on or before September 28, 2001, the conditions to the obligations of the Company to consummate the transactions contemplated hereby set forth in Section 8.2(b), and shall use its best efforts to effect or cause to be effected all such other matters within its control that may be necessary or desirable for the satisfaction of all such other conditions to the obligations of the Company to consummate the transactions contemplated hereby. SECTION 7.5. LOAN COMMITMENT. If the Closing has not occurred as of July 16, 2001, upon the Company's written request, Cirrus shall tender the Loan to the Company on the terms provided in the definition of "Loan" contained in this Agreement. All outstanding principal and accrued unpaid interest under the Loan shall be deducted from the Merger Consideration at the Closing. SECTION 7.6. CIRRUS SECURITIES REGISTRATION OR EXEMPTION. All parties hereto acknowledge that Cirrus intends to issue Cirrus Common Stock to the Shareholders pursuant to -40- an exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) of the Securities Act, and that in order to qualify for such exemption Cirrus must apply to the California Commissioner of Corporations for a permit (the "CALIFORNIA PERMIT"), which may only be issued after a public hearing on the fairness of the terms and conditions of the Merger (the "FAIRNESS HEARING"). As promptly as reasonably practicable after the signing of this Agreement, Cirrus, with the full cooperation and assistance of the Company, shall prepare an Application for Qualification of Securities by Permit under a related Notice of Hearing and other disclosure materials (the "DISCLOSURE DOCUMENTS") to be supplied to the Shareholders of the Company in connection with the transactions contemplated hereby (collectively, the "HEARING DOCUMENTS"). As promptly as reasonably practicable after the signing of this Agreement, Cirrus shall cause to be filed, with the full cooperation of the Company, the Disclosure Documents and the Hearing Documents with the California Department of Corporations and request a hearing on the fairness of the Merger pursuant to Section 25132 of the California Corporate Securities Law of 1968, as amended. Cirrus shall use its best efforts to prepare and file the Disclosure Documents and Hearing Documents with the California Department of Corporations within fifteen (15) days after the date of this Agreement. Cirrus and the Company will thereafter endeavor in good faith to obtain a finding of fairness and the issuance of a California Permit to such effect by the California Department of Corporations as a result of such Fairness Hearing, but they shall in no event be required to alter the terms of the Merger in order to obtain such finding and issuance. All parties hereto shall proceed expeditiously and cooperate fully in making available all information necessary to complete the California Permit application and to participate as may be necessary or appropriate at the Fairness Hearing. If a California Permit is not obtained, then as promptly as reasonably practicable after the denial of the California Permit, or upon the determination by the Company and Cirrus that a California Permit will not likely be obtained, the Company and Cirrus shall prepare, and Cirrus shall file with the SEC a Registration Statement on Form S-4 (or such other form or successor form as shall be appropriate), which complies in form with applicable SEC requirements and shall use its best efforts to cause the Registration Statement to become effective as soon thereafter as practicable. SECTION 7.7. DELIVERY OF TAX REPRESENTATION LETTERS. Each of Cirrus and Acquisition Sub shall use its best efforts to, prior to Closing, execute and deliver to Morrison & Foerster, LLP or any other legal firm delivering the opinion that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code a tax representation letter in a form reasonably acceptable to such legal firm and necessary to render the opinion provided for in Section 8.2(f) (collectively with the tax representation letter described in Section 6.8, the "TAX REPRESENTATION LETTERS"). ARTICLE VIII CONDITIONS TO CLOSING SECTION 8.1. CONDITIONS TO OBLIGATION OF CIRRUS AND ACQUISITION SUB. The obligations of Cirrus and Acquisition Sub to consummate the transactions contemplated hereby shall be -41- subject to the satisfaction or written waiver by Cirrus on or prior to the Closing Date of the following conditions precedent: (a) The representations and warranties of the Company made in the Transaction Documents to which it is a party shall be true in all material respects (without regard to any materiality qualifications set forth therein) on the date hereof and on the Closing Date; (b) The Company shall have performed and complied in all material respects with all agreements and covenants required by the Transaction Documents to be performed and complied with by it at or prior to the Closing Date; (c) The Shareholders shall have approved the execution, delivery and performance by the Company of the Transaction Documents to which it is a party; (d) The Principal Shareholders shall have executed and delivered to Cirrus the Voting Rights Agreement together with the irrevocable proxy provided for therein to vote their Company Shares with respect to certain matters; (e) Each of the employees of the Company identified on Schedule 8.1(e) shall have entered into an Employment Agreement with Cirrus in the form attached as Exhibit C, (each an "EMPLOYMENT AGREEMENT") and each of the Key Employees shall have entered into such Employment Agreement Addenda in substantially the form attached as Exhibit D (each an "ADDENDUM"); (f) [omitted]; (g) [omitted]; (h) All authorizations, consents, waivers and approvals required from Governmental Authorities in connection with the execution, delivery and performance of this Agreement, including without limitation from the Antitrust Authorities, shall have been duly obtained and shall be in form and substance reasonably satisfactory to Cirrus; (i) No legal action or proceeding shall have been instituted or threatened seeking to restrain, prohibit, invalidate or otherwise adversely affect the consummation of the transactions contemplated by any of the Transaction Documents or which, if adversely decided, could materially adversely affect the operation of the business of the Company or Cirrus; (j) No preliminary or permanent injunction or other order by any federal, state or foreign court of competent jurisdiction which prohibits the consummation of the transactions contemplated by any of the Transaction Documents shall have been issued and remain in effect; (k) All Consents and all approvals described in Schedule 8.1(k) shall have been filed, occurred or been obtained and shall be in full force and effect; (l) [omitted]; -42- (m) The employment and severance agreements between the Company and certain of its employees identified on Schedule 8.1(m) shall have been terminated or expired; and (n) The Company shall have no securities outstanding, including without limitation capital stock and options or warrants to acquire capital stock or other securities, other than Company Common Stock, Company Preferred Stock and Assumed Options and the Loan (to the extent such Loan is deemed a security). SECTION 8.2. CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company to consummate the transactions contemplated hereby shall be subject to the satisfaction written waiver by the Company on or prior to the Closing Date of the following conditions precedent: (a) The representations and warranties of Cirrus and Acquisition Sub made in each of the Transaction Documents to which either or both of them are a party shall be true and correct in all material respects (without regard to any materiality qualifications set forth therein) on the date hereof and as of the Closing Date; (b) Cirrus and Acquisition Sub shall have performed and complied in all material respects with all agreements and covenants required by any of the Transaction Documents to be performed and complied with by them prior to the Closing Date; (c) All authorizations, consents, waivers and approvals required from Governmental Authorities in connection with the execution, delivery and performance of the Transaction Documents, including, without limitation, from the Antitrust Authorities, shall have been duly obtained and shall be in form and substance reasonably satisfactory to the Company; (d) No legal action or proceeding shall have been instituted or threatened seeking to restrain, prohibit, invalidate or otherwise adversely affect the consummation of the transactions contemplated hereby or by the Transaction Documents or which, if adversely decided, could materially adversely affect the operation of the business of Cirrus or the Company; (e) No preliminary or permanent injunction or other order by any federal, state or foreign court of competent jurisdiction which prohibits the consummation of the transactions contemplated by any of the Transaction Documents shall have been issued and remain in effect; and (f) The Company shall have received the opinion of Morrison & Foerster LLP (or another legal firm acceptable to the Company) to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. The issuance of such opinion shall be conditioned on the receipt by such legal firm of Tax Representation Letters reasonably acceptable to such legal firm from each of Cirrus, Acquisition Sub and the Company. Each such Tax Representation Letter shall be dated on or before the date of such opinion and shall not have been withdrawn or modified in any material respect. If at any time on or prior to September 1, 2001, the Company has not been advised in writing by its counsel, Morrison & Foerster LLP, that it is able to satisfy the condition set forth in this Section 8.2(f) then Cirrus may require that the -43- Company seek an opinion from another legal firm reasonably acceptable to the Company that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code ("SECOND OPINION"). The Company shall promptly use its best efforts to engage new legal counsel to issue the Second Opinion upon the reasonable request of Cirrus. If the Company is unable to obtain an opinion as described in this Section 8.2(f) at or prior to September 28, 2001, then this condition will not be satisfied. ARTICLE IX CLOSING DELIVERIES AND ACTIONS SECTION 9.1. CLOSING DELIVERIES AND ACTIONS OF THE COMPANY. (a) At the Closing, the Company shall deliver to Cirrus: (i) a certificate of legal existence and good standing of the Company from the Secretary of State of Delaware; (ii) a certificate of an executive officer of the Company in form reasonably satisfactory to Cirrus certifying that as of the Closing Date the representations and warranties made herein by the Company are true in all material respects (without regard to any materiality qualifications set forth therein) and that the Company has performed and complied in all material respects with all agreements and covenants required by any of the Transaction Documents to be performed and complied by it prior to the Closing Date; (iii) the Escrow Agreement, duly executed by the Company and the Shareholders' Representative on behalf of all of the Shareholders; (iv) an opinion of counsel to the Company addressed to Cirrus dated as of the Closing Date, satisfactory in form and substance to Cirrus with respect to the matters set forth in Exhibit F; (v) a certificate of an executive officer of the Company in form reasonably satisfactory to Cirrus certifying the total amount of the Transaction Expenses and providing in reasonable detail how such amount was calculated; (vi) a certificate listing the names and mailing addresses of and the number of shares of Cirrus Common Stock to be received by each such holder of Company Shares in accordance with this Agreement; (vii) Schedule 2.2 (conversion schedule) as described in Section 2.2; and (viii) such other documents as Cirrus shall reasonably request consistent with the terms hereof. -44- (b) At the time of the Closing, the Company shall assist, if required, Acquisition Sub in filing with the Secretary of State of the State of Delaware the Certificate of Merger pursuant to Section 2.1. SECTION 9.2. CLOSING DELIVERIES AND ACTIONS OF CIRRUS AND ACQUISITION SUB. (a) At the Closing, Cirrus and Acquisition Sub shall deliver to the Company (except where otherwise indicated): (i) subject to Section 2.2(e), certificates evidencing shares of Cirrus Common Stock (not including however, the shares of Common Stock comprising the Indemnity Fund as provided in Section 2.2(d)) into which the shares of the Company Common Stock and/or Company Preferred Stock are converted pursuant to Section 2.2(a), as provided in the first sentence of Section 2.2(c)(i), shall be delivered to the Shareholders; (ii) cash in lieu of fractional shares of Cirrus Common Stock, pursuant to Section 2.4, by wire transfer or check to the Shareholders; (iii) a certificate of legal existence and good standing of each of Cirrus and Acquisition Sub from the Secretary of State of the State of Delaware; (iv) a certificate of an executive officer of each of Cirrus and Acquisition Sub in form reasonably satisfactory to the Company certifying that as of the Closing Date the representations and warranties made herein by Cirrus and Acquisition Sub are true in all material respects (without regard to any materiality qualifications set forth therein) and that Cirrus and Acquisition Sub have performed and complied in all material respects with all agreements and covenants required by any of the Transaction Documents to be performed and complied with by them prior to the Closing Date; (v) the Escrow Agreement, duly executed by Cirrus; (vi) shares of Cirrus Common Stock comprising the Indemnity Fund as provided in Section 2.2(d), shall be delivered to the Escrow Agent; (vii) the Assumed Options to the Persons entitled thereto as provided in Section 2.2(b); (viii) an opinion of counsel to Cirrus and Acquisition Sub addressed to the Company dated as of the Closing Date, satisfactory in form and substance to the Company with respect to the matters set forth in Exhibit G; (ix) a copy of the Certificate of Merger to be filed by Acquisition Sub pursuant to Section 2.1; -45- (x) written evidence of the amount of principal and interest due under the Loan that will be deducted from the Merger Consideration; and (xi) such other documents as the Company shall reasonably request consistent with the terms hereof. (b) At the time of the Closing, Acquisition Sub shall file with the Secretary of State of the State of Delaware the Certificate of Merger pursuant to Section 2.1. SECTION 9.3. ALL DELIVERIES AND ACTIONS DEEMED SIMULTANEOUS; ESCROW AGREEMENT. All deliveries and actions made at the Closing shall be deemed to have been made or occurred simultaneously irrespective of when made or occurring, and unless all such deliveries and actions have been made or occurred, none shall have been deemed to have been made or occurred, and if made shall be returned to the delivering party or parties, and if occurred shall be canceled. The Closing shall not occur unless the Escrow Agent executes and delivers counterparts of the Escrow Agreement to each of the parties thereto. ARTICLE X POST-CLOSING COVENANTS OF THE COMPANY, THE SHAREHOLDERS AND CIRRUS SECTION 10.1. APPRAISAL RIGHTS. The Company shall give Cirrus and Acquisition Sub prompt notice of any written demands for appraisal, withdrawals of demands for appraisal and any other related instrument received by the Company after the Closing Date, and the Company shall not settle any demand for appraisal at an amount per share in excess of the amount per share (valued at the Average Closing Price) that the Shareholders exercising such appraisal rights would have received upon conversion of their Company Shares to shares of Cirrus Common Stock pursuant to Section 2.2(a). SECTION 10.2. CERTIFIED TAX NUMBERS. The Shareholders' Representative shall, within thirty (30) days from the date of the Escrow Agreement, provide the Escrow Agent with certified tax identification numbers for each of the Shareholders on appropriate forms W-8 or W-9 and such other forms and documents relative to the Indemnity Fund as the Escrow Agent may reasonably request. If the Escrow Agent does not receive such Tax reporting documentation, the Escrow Agent may, to the extent required by the Code, withhold interest and other income earned on the investment of the Indemnity Fund. SECTION 10.3. CONTINUITY OF BUSINESS ENTERPRISE. Cirrus will cause the Company to continue at least one significant historic business line of the Company, or cause the Company to use at least a significant portion of the Company's historic business assets in a business, in each case within the meaning of Reg. Section 1.368-1(d), except that Cirrus may transfer the Company's historic business assets (i) to a corporation that is a member of Cirrus' "qualified group" within the meaning of Reg. Section 1.368-1(d)(4)(ii), or (ii) to a partnership if (A) one or -46- more members of Cirrus' "qualified group" have active and substantial management functions as a partner with respect to the Company's historic business or (B) members of Cirrus' "qualified group" in the aggregate own an interest in the partnership representing a significant interest in the Company's historic business, in each case within the meaning of Reg. Section 1.368-1(d)(4)(iii) ; provided, however, that Cirrus, its subsidiaries and the Surviving Company will not (X) cause the Surviving Company to transfer its assets in a manner that could violate the requirement of Section 368(a)(2)(E)(i) of the Code or (Y) take any other action which could reasonably and foreseeably cause the Merger not to be treated for federal income tax purposes as a merger which qualifies as a "reorganization" within the meaning of Section 368 of the Code. SECTION 10.4. ASSUMED OPTION SHARES. Cirrus shall take all corporate actions necessary to reserve for issuance a sufficient number of shares of Cirrus Common Stock for delivery upon exercise of all Assumed Options on the terms set forth in Section 2.2(b). SECTION 10.5. ADDITIONAL ACTIONS AND DOCUMENTS. The parties shall execute and deliver such further documents and instruments and shall take such other further actions as may be required or appropriate to carry out the intent and purposes of this Agreement. ARTICLE XI INDEMNIFICATION SECTION 11.1. SURVIVAL. The representations and warranties of the parties contained in this Agreement (including without limitation obligations with respect to indemnification under this Article XI), the other Transaction Documents and in any certificate delivered pursuant hereto or thereto, shall survive the Closing for a period of fifteen (15) months following the Closing Date, except that the Company's representations and warranties relating to Taxes made in Section 3.15 shall survive until the earlier of March 15, 2004 or the expiration of the statute of limitations applicable thereto (the "TAX SURVIVAL PERIOD"); provided, that the delivery of a Claim Notice (as defined in Section 11.3 hereunder) within such fifteen (15) month period shall extend the period of survival applicable to any claim set forth therein through the date such claim is conclusively resolved. SECTION 11.2. INDEMNIFICATION. (a) BY THE COMPANY. Subject to Section 11.5, the Shareholders, severally and pro rata based upon each Shareholder's proportionate share of the Cirrus Common Stock actually received by the Shareholders as Merger Consideration, shall indemnify, defend and hold harmless, to the extent provided in Section 11.3, Cirrus, Acquisition Sub, and their respective stockholders, directors, officers and other employees, agents, advisors, successors and assigns ("CIRRUS INDEMNITEES") from and against any and all Losses to the extent such Losses are based upon, arise out of or relate to: (i) any misrepresentation or breach of warranty made by the Company herein; -47- (ii) any failure of the Company to perform or comply with any of the Company's obligations under any Transaction Documents, provided that Cirrus Indemnities shall have no right to indemnification under this Section 11.2(a) with respect to any breach or failure by any Shareholder to perform his or her obligations under any employment agreement or Addendum to Employment Agreement, and any cause of action arising as a result of such breach or failure to perform shall be asserted only in a separate action by Cirrus Indemnitees that is independent of this Section 11.2(a); (iii) any obligation to any broker or finder employed or alleged to have been employed by or on behalf of the Company or any Affiliate of thereof in connection with the transactions contemplated hereby; and (iv) any Losses based upon or arising out of any claim by any Shareholder or on behalf of any Shareholder for any actions of the Shareholders' Representative taken in accordance with the terms of this Agreement, including any claim that any act of or decision not to act by the Shareholders' Representative taken in accordance with the terms of this Agreement does not bind such Shareholder to the indemnification obligations set forth in this Article XI. (b) BY CIRRUS. Cirrus and Acquisition Sub, jointly and severally, shall indemnify, defend and hold harmless the Company and its respective Shareholders, directors, officers and other employees, agents, advisors, successors and assigns (the "COMPANY INDEMNITEES") from and against any and all Losses to the extent such Losses are based upon, arise out of or relate to: (i) any misrepresentation or breach of warranty made by Cirrus or Acquisition Sub herein; (ii) any failure by Cirrus or Acquisition Sub or either of them to perform or comply with any of their obligations under any Transaction Document or certificate or other document delivered pursuant thereto; and (iii) any obligation to any broker or finder employed or alleged to have been employed by or on behalf of Cirrus or Acquisition Sub or any Affiliate of either of them in connection with the transactions contemplated hereby. (c) LOSSES. For purposes of this Agreement, "LOSSES" means any and all liabilities, obligations, losses, damages, deficiencies, demands, claims, fines, penalties, interest, assessments, judgments, actions, proceedings and suits of whatever kind and nature and all costs and expenses relating thereto (including without limitation reasonable attorneys' fees incurred in connection with the investigation, defense and/or prosecution thereof). SECTION 11.3. ASSERTION OF CLAIMS. If any Cirrus Indemnitee or any Company Indemnitee (either, an "INDEMNITEE") believes it has a right to indemnification pursuant to Section 11.2, such Indemnitee (and in the case of any Shareholder, the Shareholders' Representative) shall provide notice in writing thereof ("CLAIM NOTICE") to the Escrow Agent with a copy to the Shareholders' Representative or to Cirrus (either, an "INDEMNITOR"), as the -48- case may be. The Claim Notice shall set forth in reasonable detail the nature of the claim for which indemnification is sought, the factual basis of such claim and a good faith estimate of the dollar value of the Losses for which indemnification is sought. No such estimate shall have any effect on the extent to which Cirrus or the Shareholders, as the case may be, shall have an obligation to indemnify an Indemnitee. All claims made against and paid out of the Indemnity Fund to the Cirrus Indemnitees shall be made and paid in accordance herewith and with the terms of the Escrow Agreement. SECTION 11.4. NOTICE OF AND RIGHT TO DEFEND THIRD PARTY CLAIMS. (a) THIRD PARTY CLAIMS PROCEDURE. Promptly upon becoming aware of the commencement of any suit, action or proceeding by a third party within fifteen (15) months of the Effective Date (except for claims relating to Taxes, in which case the Tax Survival Period shall apply) in respect of which indemnification may be sought under this Article XI (each a "THIRD PARTY CLAIM"), the Indemnitee shall provide notice in writing to the Indemnitor with respect thereto pursuant to Section 11.3. The failure by such Indemnitee to so notify promptly such Indemnitor of any claim with respect to such suit, action or proceeding shall not relieve such Indemnitor from any liability which it may have to such Indemnitee in connection therewith, except to the extent such Indemnitor has been prejudiced by such omission or such notice is received more than fifteen (15) months after the Effective Date (except for claims relating to Taxes, in which case the Tax Survival Period shall apply). If a Claim Notice is given in connection with any Third Party Claim commenced against an Indemnitee, the Indemnitor shall be entitled to participate therein, and, to the extent that it may wish, to assume the defense or conduct the settlement thereof; provided however, that if the Indemnitor fails to notify the Indemnitee of the Indemnitor's intent to assume the defense of a Third Party Claim against the Indemnitee within twenty (20) days of the delivery of the Claim Notice or such notice states that the Indemnitor elects not to defend against the Third Party Claim, then the Indemnitee shall assume the defense of the Third Party Claim by all appropriate proceedings in its judgement and reasonable discretion, which proceedings will be diligently prosecuted by the Indemnitee to a final conclusion or settled at the discretion of the Indemnitee (with the consent of the Indemnitor, which consent will not be unreasonably withheld). (b) EXCESS CLAIMS PROCEDURE. Notwithstanding Section 11.4(a) above, upon written notice to the Shareholders' Representative, the Cirrus Indemnitees shall have the right to assume the defense of any Third Party Claim if the amount claimed by the plaintiff(s) therein, as alleged in the complaint or any amended complaint or as determined by any Cirrus Indemnitee in good faith after seeking advice of counsel exceeds the amount then remaining in the Indemnity Fund (except to the extent the indemnification sought hereunder for such Third Party Claim is based upon a claim by a Cirrus Indemnitee for fraud pursuant to the provisions of Section 11.5(a)(ii) for which the Shareholders would have indemnification obligations pursuant to such Section 11.5(a)(ii) ("EXCESS CLAIM") and to defend such Excess Claim by all appropriate proceedings in Cirrus Indemnitees' judgement and reasonable discretion, which proceedings will be diligently prosecuted by the Cirrus Indemnitees to a final conclusion or settled at the discretion of the Cirrus Indemnitees (with the consent of the Shareholders' Representative, which consent will not be unreasonably withheld). In such event, the Cirrus Indemnitees shall have full control of the defense and proceedings of any such Excess Claim, provided that the Shareholders' -49- Representative may file, at the sole cost and expense of the Shareholders, any motion, answer, or other pleading that the Shareholders' Representative may deem necessary or appropriate to protect the interests of the Shareholders and that is not prejudicial to the interests of the Cirrus Indemnitees; and provided further that if requested by the Shareholders' Representative, the Cirrus Indemnitees shall consult and cause their counsel to consult, at the sole cost and expense of the Shareholders, with the Shareholders' Representative and its counsel with respect to the status of such Excess Claim, contesting any such Excess Claim or making any counterclaim or cross-claim against any Person (other than the Indemnitees or Indemnitors). The Shareholders' Representative may participate in, but not control, any defense or settlement of any proceedings or settlement negotiations with respect to any Excess Claim the defense of which is assumed by the Cirrus Indemnitees pursuant to this Section 11.4(b) and the Shareholders will bear the costs and expenses of the Shareholders' Representative with respect thereto. If the Cirrus Indemnitees fail to notify the Shareholders' Representative of their intent to assume the defense of an Excess Claim within twenty (20) days of the delivery of the Claim Notice or such notice states that the Cirrus Indemnitees elect not to defend against the Excess Claim, then the Shareholders shall take full control over the defense of such Excess Claim by all appropriate proceedings in their judgment and reasonable discretion, which proceeding will be diligently prosecuted by the Shareholders' Representative to a final conclusion or settlement at the discretion of the Shareholders' Representative (with the consent of the Cirrus Indemnitees, which consent will not be unreasonably withheld). (c) CERTAIN EXPENSES AND COOPERATION. Subject to Sections 11.4(a) and (b), after notice by the Indemnitor to the Indemnitee of the Indemnitor's election to assume the defense, conduct or settlement of any Third Party Claim or Excess Claim, the Indemnitor will not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such defense, conduct or settlement thereof following such notice. The Indemnitee shall cooperate in all reasonable aspects with the Indemnitor in connection with any Third Party Claim or Excess Claim assumed by the Indemnitor and shall make available to the Indemnitor all information under the Indemnitee's control that is pertinent to the claim. SECTION 11.5. LIMITATIONS OF LIABILITY. (a) BASKET AND LIMITS ON LIABILITY. (i) Subject to Section 11.5(a)(ii) and (iii) below, no amount shall be payable by an Indemnitor (or if such Indemnitor is the Shareholders, all of the Shareholders collectively) to an Indemnitee with respect to any claims for indemnification pursuant to this Article XI (including claims for breaches of Section 3.15 relating to Taxes) unless and until the aggregate amount of such claims required to be indemnified by the Indemnitor pursuant hereto exceeds one hundred thousand dollars ($100,000), in which case the Indemnitor shall be liable to the Indemnitee for the entire amount of all such claims, not to exceed: (A) in the case of such claims made against the Shareholders, the aggregate amount in the Indemnity Fund from time to time; and -50- (B) in the case of such claims made against Cirrus, fifteen percent (15%) of the Merger Consideration in the aggregate. (ii) Notwithstanding the foregoing, the Shareholders shall be jointly and severally liable for Losses of any Cirrus Indemnitee based upon, arising out of or relating to fraud by the Company to the extent such Losses exceed the amount then remaining in the Indemnity Fund, provided that: (A) no Shareholder shall be liable for any amount in excess of the value (based upon the Average Closing Price) of the proportionate amount of Cirrus Common Stock actually received by such Shareholder at the Effective Time (the "CLOSING CONSIDERATION"). If the Escrow Period has expired at the time a claim for Losses relating to fraud is made and the Indemnity Fund has been distributed to the Shareholders pursuant to the Escrow Agreement, any such funds distributed to and received by the Shareholders shall be included in the term Closing Consideration for purposes of this Section 11.5(a)(ii)(A); and (B) in the event of claims to recover Losses relating to fraud, and where the Indemnity Fund is insufficient to satisfy such Losses, the Cirrus Indemnitees shall assert any such claim against at least all of the Shareholders listed on Schedule 11.5 attached hereto (the "KEY SHAREHOLDER GROUP"). Notwithstanding anything to the contrary, as among the Key Shareholder Group, no Shareholder shall be liable for any Losses in excess of the such Shareholder's pro rata portion of the Losses (which is equal to the Losses multiplied by such Shareholder's proportionate share of the Closing Consideration received by the Key Shareholder Group as a whole), not to exceed the amount set forth in subsection (A) above of this Section 11.5(a)(ii). (iii) Each Shareholder's liability for indemnification for claims relating to Taxes based upon a breach of Section 3.15 occurring after the expiration of the fifteen (15) month term of the Indemnity Fund and prior to the expiration of the Tax Survival Period shall be limited to the value (based upon the Average Closing Price) of the proportionate amount of Cirrus Common Stock actually received by such Shareholder out of the Indemnity Fund upon the expiration of the Escrow Period pursuant to the Escrow Agreement. (b) SATISFACTION OF LIABILITIES. The Shareholders, at their option, may satisfy any indemnification obligations for fraud in excess of the Indemnity Fund (or in the cases of Taxes, after expiration of the fifteen (15) month indemnification period) with cash or shares of Cirrus Common Stock. Each share of Cirrus Common Stock received in the Merger that is used to satisfy an indemnification obligation shall be valued at the Average Closing Price. (c) KEY EMPLOYEES. Any shares of Cirrus Common Stock received by a Key Employee which have been relinquished or cancelled in connection with any agreement between Cirrus and such Key Employee shall not be included for purposes of determining such Key Employee's indemnity obligations as a Shareholder under this Article XI. -51- (d) INSURANCE. The amount of any Losses indemnifiable pursuant to this Article XI shall be reduced by: (i) to the extent that such Indemnitee actually realizes, by reason of such Losses, any Tax benefit that is not offset by any corresponding adjustment of the Tax attributes of such Indemnitee or any of his or her assets (e.g., any Tax deduction available to such Indemnitee in respect of such Losses will not be deemed to result in a Tax benefit to such Indemnitee to the extent that such deduction results in a decrease in such Indemnitee's Tax basis in any securities or other assets); (ii) the amount of any insurance proceeds received by the Indemnitee in respect of such claim (and if such proceeds are received following an indemnification payment in respect of the relevant claim, the Indemnitee shall pay to the Indemnitor an amount equal to the lesser of (x) the amount of such proceeds and (y) the amount of any indemnification payments made by the Indemnitor in respect of the relevant claim). (e) NO PUNITIVE OR CONSEQUENTIAL DAMAGES. An Indemnitee may not recover punitive damages or consequential, indirect or special damages in any claim made for indemnification or otherwise with respect to the Transaction Documents and the transactions contemplated thereby. (f) DUTY TO MITIGATE LOSSES. Nothing herein shall be deemed to relieve any Indemnitee hereto from any duty to mitigate any Losses under applicable law. (g) NO DOUBLE RECOVERY. No Indemnitee shall be entitled to be indemnified more than once under this Agreement for the same claim. (h) SOLE REMEDY. This Article XI and the Indemnity Fund described herein shall provide for the sole remedy for any misrepresentation or breach of warranty or breach of covenant or other agreement in this Agreement, the Escrow Agreement or any certificate or document delivered pursuant thereto except in the case of (a) fraud in which case Section 11.5(a)(ii) shall apply, (b) a termination of this Agreement as provided in Article XII in which case such Article XII shall apply, or (c) claims relating to Taxes, in which case the representations under Section 3.15 shall survive for the Tax Survival Period and the Losses associated with Taxes shall be capped at the value of the Indemnity Fund at the termination of the 15 month indemnity period based upon the Average Closing Price of the shares of Cirrus Common Stock placed in the Indemnity Fund. SECTION 11.6. SHAREHOLDERS' REPRESENTATIVE. (a) Peter Bodine shall be constituted and appointed as the agent and attorney-in-fact (the "Shareholders Representative") for each Shareholder for and on behalf of the Shareholders to (i) give and receive notices and communications, (ii) authorize delivery to Cirrus of shares of Cirrus Common Stock from the Indemnity Fund in satisfaction of claims by Cirrus Indemnitees and object to such deliveries, (iii) authorize any and all actions on behalf of the Shareholders related to the payment or allocation of the Indemnity Fund, (iv) agree to, negotiate, enter into -52- settlements and compromises of, and comply with orders of courts with respect to Losses, and (v) take all actions necessary or appropriate in the judgment of the Shareholders' Representative for the accomplishment of the foregoing or implementation of any provision of this Agreement for which the Shareholders' Representative is authorized by the Shareholders, including, without limitation, to conduct, negotiate and settle any arbitration under Section 13.3 with respect to Losses. Such agency may be changed by the Shareholders from time to time upon not less than thirty (30) days prior written notice to Cirrus; provided that the Shareholders' Representative may not be removed unless holders of a majority in interest of the Indemnity Fund agree to such removal and to the identity of the substituted agent. Any vacancy in the position of the Shareholders' Representative may be filled by approval of the holders of a majority in interest of the Indemnity Fund, provided that if the holders of a majority in interest in the Indemnity Fund are not able fill a vacancy prior to the effective date of the resignation or removal of the Shareholders Representative, then Geoffrey Bland shall act as the Shareholders' Representative, until a successor can be appointed in accordance with this Section 11.6(a). No bond shall be required of the Shareholders' Representative, and the Shareholders' Representative shall not receive compensation for his services (although he will be reimbursed for reasonable costs and expenses in accordance with Section 11.6(e) below). Notices or communications to or from the Shareholders' Representative shall constitute notice to or from each of the Shareholders. (b) The Shareholders' Representative shall not be liable for any act done or omitted hereunder as Shareholders' Representative while acting in good faith and in the exercise of reasonable judgment. The Shareholders shall severally indemnify the Shareholders' Representative and hold the Shareholders' Representative harmless against any loss, liability or expense incurred without negligence or bad faith on the part of the Shareholders' Representative and arising out of or in connection with the acceptance or administration of the Shareholders' Representative's duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Shareholders' Representative. (c) A decision, act, consent or instruction of the Shareholders' Representative shall constitute a decision of all the Shareholders and shall be final, binding and conclusive upon each of them, and Cirrus, the Escrow Agent and any arbitrator handling disputes under this Article XI may rely upon any such decision, act, consent or instruction of the Shareholders' Representative as being the decision, act, consent or instruction of each Shareholder. Cirrus, the Escrow Agent and any arbitrator handling disputes under this Article XI are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Shareholders' Representative. (d) No individual Shareholder may directly assert any of his, her, or its rights under this Article XI. Any rights to indemnification or defend any third party claims by a Shareholder must be asserted or conducted solely through the Shareholders' Representative. (e) During the Escrow Period (as defined in the Escrow Agreement), Shareholders' Representative may be reimbursed up to $20,000 from the Escrow Fund for reasonable and actual expenses incurred by Shareholders' Representative in performing his duties hereunder and under the Escrow Agreement upon delivery of a certificate setting forth such expenses to the Escrow Agent and Cirrus. After the expiration of the Escrow Period, Shareholders' -53- Representative shall be reimbursed (but only after all amounts owed to Cirrus pursuant to this Article XI as implemented by Section 5.1 of the Escrow Agreement have been paid to Cirrus) for any additional reasonable and actual expenses for which Shareholders' Representative has not received reimbursement, prior to distribution of the Escrow Funds to the Shareholders in accordance with the Escrow Agreement. ARTICLE XII CERTAIN CONTINGENCIES SECTION 12.1. CERTAIN CONTINGENCIES. Notwithstanding anything in Article XI to the contrary, if: (a) prior to the Effective Time, the Company has breached in any material respect any representation, warranty, covenant or other agreement contained in the Transaction Documents, other than (i) a breach caused by the affirmative actions of a third party and not otherwise in the Company's control; or (ii) a breach resulting from any court or governmental or regulatory agency, authority or body enacting, promulgating or issuing any statute, rule, regulation, ruling, writ or injunction, or taking any other action, restraining, enjoining or otherwise prohibiting the transactions contemplated hereby; (b) prior to the Effective Time, the Board of Directors of the Company (or any committee thereof) shall have withdrawn, or materially and adversely modified, conditioned, qualified or amended its recommendation to approve and adopt the Merger, unless such modification, condition, qualification or amendment was requested by Cirrus; (c) prior to the Effective Time, the Shareholders shall have voted against approval and adoption of the Merger; or (d) prior to September 28, 2001, Shareholders holding in the aggregate at least a majority (50.1%) of the outstanding shares of the Company Common Stock and each class of the Company Preferred Stock shall have failed to approve and adopt the Merger; then Cirrus and Acquisition Sub shall have no further obligation to perform and comply with the Transaction Documents (except for continued compliance with Section 7.1) and the Company shall promptly pay Cirrus in immediately available funds the amount of three million dollars ($3,000,000) for its out-of-pocket expenses (including, without limitation, printing fees, filing fees, fees and expenses of its legal and financial advisors and all fees and expenses payable to any financing sources and lost profits related to the transactions contemplated hereby) (the "TERMINATION FEE"). Notwithstanding the foregoing, if the Company's failure to obtain the approval of the Shareholders pursuant to 12.1(d) is caused in whole or in part by Cirrus' failure to timely obtain a California Permit or file with the SEC a Registration Statement on Form S-4 (or such other form or successor form as shall be appropriate) pursuant to Section 7.6 hereof, then the Company shall have no further obligation to perform or comply with the Transaction -54- Documents (except continued compliance with Section 6.3) and the Company shall have no obligation to pay the Termination Fee. The Termination Fee shall constitute the sole and exclusive remedy of Cirrus and Acquisition Sub with respect to the Company's and Shareholders failure to meet the contingencies contained in this Section 12.1. Such payment shall relieve the Company and Shareholders of all obligations under the Transaction Documents, provided that it shall not relieve the Company or the Shareholders from continued compliance with Section 6.3. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.1. EXPENSES. Upon consummation of the Merger, legal, accounting, financial advisory, consulting and other fees and expenses incurred by the Company in connection with the Merger in excess of one million dollars ($1,000,000) (the "TRANSACTION EXPENSES") shall be deducted by Cirrus from the portion of the Merger Consideration payable pursuant to the first sentence of Section 2.2(c). Notwithstanding anything to the contrary in this Section 13.1, if Cirrus purchases insurance to fund any portion of the Indemnity Fund, pursuant to Section 2.2(d), then the full amount of the premiums for such insurance shall be deducted from the Merger Consideration in accordance with Section 2.2(d). SECTION 13.2. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered (return receipt requested) or mailed by certified mail (return receipt requested) or by nationally recognized courier service or by facsimile transmission upon electronic confirmation of receipt thereof during normal business hours at the following addresses (or at such other address for a party as shall be specified by like notice). The date a notice shall be deemed provided shall be the date of the return receipt requested if provided by U.S. Mail, the date of delivery if personally delivered or delivered by a nationally recognized courier service or the date of electronic confirmation if by facsimile transmission: If to the Company, to: ShareWave, Inc. 5175 Hillsdale Circle El Dorado Hills, CA 95752 Attention: Rob Van Tuyle Telephone: (916) 939-9400 Facsimile Number: (916) 939-9434 with a copy to: Morrison & Foerster LLP 755 Page Mill Road Palo Alto, CA 94304 -55- Attention: Paul L. Lion, III, Esq. / Amie Peters, Esq. Telephone: (650) 813-5882 Facsimile: (650) 494-0792 If to the Shareholders or Shareholders' Representative, to: c/o APV Technology Partners 2370 Watson Court, Ste. 200 Palo Alto, CA 94303 Attention: Peter Bodine Telephone: (650) 327-7871 Facsimile Number: (650) 327-7631 with a copy to: Morrison & Foerster LLP (see above address) In the event notice needs to be given to the alternative Shareholders' Representative pursuant to Section 11.6, to: c/o Wedbush Morgan 1000 Wilshire Blvd. Los Angeles, CA 90017 Attention: Geoffrey Bland Telephone: (213) 688-8082 Facsimile Number: (213) 688-6649 with a copy to: Morrison & Foerster LLP (see above address) If to Cirrus or Acquisition Sub, to: Cirrus Logic, Inc. 4210 South Industrial Drive Austin, TX 78744 Attention: Steven D. Overly, Esq. Telephone: (512) 912-3234 Facsimile Number: (512) 912-3136 with a copy to: White & Case LLP 1155 Avenue of the Americas New York, NY 10036-6700 Attention: Neal F. Grenley, Esq. -56- Telephone: (212) 819-8200 Facsimile Number: (212) 354-8113 SECTION 13.3. DISPUTE RESOLUTION. Any controversy, dispute or claim arising out of or relating to the Transaction Documents, or the breach or termination thereof, which has not been settled by negotiation within thirty (30) days following written notice by one party to one or more other parties of the existence of such dispute, controversy or claim, shall be finally settled by arbitration under the Commercial Arbitration Rules of the American Arbitration Association ("AAA") by three arbitrators. In such event, the claimant will deliver a written notice to the respondent(s) and the AAA initiating arbitration and naming an arbitrator. Within twenty (20) days after receipt of such arbitration notice, the respondent(s) shall name an arbitrator. Within twenty (20) days from the naming of the two arbitrators, the two arbitrators shall name a third arbitrator. If there are multiple claimants and/or multiple respondents, all claimants and/or all respondents shall attempt to agree upon naming their respective arbitrator. If the claimants or respondents, as the case may be, fail to name their respective arbitrator, or if the two arbitrators fail to name a third arbitrator, or if within twenty (20) days after any arbitrator shall resign or otherwise cease to serve as such a replacement arbitrator is not named by the party that originally named such arbitrator, such arbitrator as to which agreement cannot be reached or as to which a timely appointment is not made shall be named by the AAA. The place of arbitration shall be New York, New York. The award of the arbitrators may be entered in any court of competent jurisdiction. SECTION 13.4. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the Schedules and Exhibits hereto) (i) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them, with respect to the subject matter hereof, and (ii) shall not be assigned by operation of law or otherwise by any party. SECTION 13.5. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas without giving effect to the provisions thereof relating to conflicts of law. SECTION 13.6. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. SECTION 13.7. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not effect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. SECTION 13.8. INVESTIGATION. The representations and warranties contained herein or in the certificates or other documents delivered at or prior to the Closing shall not be deemed waived or otherwise affected by any investigation made by any party hereto. -57- SECTION 13.9. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by or on behalf of the parties hereto. No waiver or consent shall be binding except in a writing signed by the party making the waiver or giving the consent. SECTION 13.10. THIRD PARTY BENEFICIARIES. This Agreement is for the exclusive benefit of the parties and their heirs, personal representatives, successors and permitted assigns, and is not intended to create any rights or obligations in any Person not a party hereto except as provided in Article XI as to the rights of Cirrus Indemnitees and Company Indemnitees to indemnification pursuant to Article XI and the Shareholders' rights pursuant to Sections 1.1, 2.2, 2.4, 2.5 and 11.2(b). [SIGNATURES ON NEXT PAGE] -58- IN WITNESS WHEREOF, Cirrus, Acquisition Sub, the Company and the Shareholders' Representative have executed this Agreement, or caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first written above. CIRRUS LOGIC, INC. By /s/ STEVEN D. OVERLY ---------------------------------- Name: Steven D. Overly Title: Sr. VP, Administration & General Counsel TARGET I ACQUISITION CORPORATION By /s/ STEVEN D. OVERLY ---------------------------------- Name: Title: SHAREWAVE, INC. By /s/ ERIC J. OCHILTREE ---------------------------------- Name: Eric J. Ochiltree Title: President & CEO SHAREHOLDERS' REPRESENTATIVE, Solely as to Sections 11.2 - 11.6, 13.2 - 13.7 and 13.9 By /s/ PETER BODINE ---------------------------------- PETER BODINE -59- EX-2.3 5 d91953ex2-3.txt AMENDMENT NO. 1 TO MERGER AGREEMENT DATED 7/18/01 EXHIBIT 2.3 AMENDMENT NO. 1, dated as of September 27, 2001 (this "AMENDMENT") to the Agreement of Merger (the "AGREEMENT"), dated July 18, 2001, by and among Cirrus Logic, Inc., a Delaware corporation ("CIRRUS"), Target I Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Cirrus ("ACQUISITION SUB"), ShareWave, Inc., a Delaware corporation (the "COMPANY"), and Peter Bodine (the "SHAREHOLDERS REPRESENTATIVE"). All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to such terms in the Agreement. W I T N E S S E T H: WHEREAS, the parties hereto have entered into the Agreement and the parties hereto wish to amend the Agreement as herein provided; NOW THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, the parties hereto agree as follows: 1. Section 2.2(d) of the Agreement is hereby amended by inserting the following new paragraph after the second sentence thereof: In the event that any shares of Cirrus Common Stock held in Escrow are initially withheld from Shareholders which, subsequent to the Effective Time, demand appraisal rights pursuant to Section 262 of the DGCL or Section 1300 of the CGCL within the time periods specified in such statutes and such appraisal rights have not been forfeited or withdrawn prior to forty-five (45) days from the date of the notice to Shareholders of appraisal rights ("Appraisal Notice"), then, subject to compliance with Section 2.3(b), all such shares of Cirrus Common Stock (the "Dissenters' Escrow Shares") shall be promptly delivered back to Cirrus by the Escrow Agent upon written demand of Cirrus with copy to the Shareholders' Representative. The Dissenters' Escrow Shares described in the preceding sentence shall be treated for purposes of the Escrow Agreement as an excess payment for Dissenting Shares under Section 5.1(b) of the Escrow Agreement, and any written demand of Cirrus to the Escrow Agent shall be in the form of and treated in the same manner as a Setoff Notice to the Escrow Agreement. If a Shareholder forfeits or withdraws such Shareholder's right to appraisal of Dissenting Shares, then promptly following the occurrence of such event, Cirrus shall cause to be delivered to the Escrow Agent a certificate representing such Shareholder's portion of the Dissenters' Escrow Shares previously withdrawn from the Indemnity Fund. Cirrus and the Shareholders' Representative shall deliver joint written instructions to the Escrow Agent directing the Escrow Agent to deliver the Dissenters' Escrow Shares to Cirrus in accordance with and subject to the foregoing provisions of this Section 2.2(d). 2. The references to "September 28, 2001" appearing in Sections 2.11, 6.4(a), 6.6, 7.4, 8.2(f) and 12.1(d) of the Agreement are hereby amended by deleting the words "September 28, 2001" appearing therein and substituting the words "October 1, 2001" therefor. 3. From and after the date hereof, all references to the Agreement shall be deemed to be references to the Agreement as amended hereby. 4. This Amendment is intended to amend the Agreement as provided herein and shall be deemed to do so in accordance with Section 13.9 of the Agreement. Except as modified herein, all other provisions of the Agreement (including the representations made by the parties under Articles III and IV of the Agreement) shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment has been signed on behalf of each of the parties to the Agreement as of the date first written above. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -2- CIRRUS LOGIC, INC. By /s/ STEVEN D. OVERLY ---------------------------------- Name: Title: TARGET I ACQUISITION CORPORATION By /s/ STEVEN D. OVERLY ---------------------------------- Name: Title: SHAREWAVE, INC. By /s/ ERIC J. OCHILTREE ---------------------------------- Name: Title: SHAREHOLDERS' REPRESENTATIVE By /s/ PETER BODINE ---------------------------------- PETER BODINE EX-2.4 6 d91953ex2-4.txt AGREEMENT & PLAN OF REORGANIZATION- STREAM MACHINE EXHIBIT 2.4 AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG CIRRUS LOGIC, INC., CIRRUS LOGIC SM ACQUISITION CORPORATION, STREAM MACHINE COMPANY, AND MICHAEL CANNING, AS SHAREHOLDER AGENT DATED AS OF AUGUST 9, 2001 TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER..................................................................................................1 1.1 The Merger..........................................................................................1 1.2 Effective Time......................................................................................2 1.3 Effect of the Merger................................................................................2 1.4 Articles of Incorporation and Bylaws................................................................2 1.5 Directors and Officers..............................................................................3 1.6 Effect of Merger on the Capital Stock of the Constituent Corporations; Certain Definitions..........3 1.7 Company Capital Stock..............................................................................12 1.8 Dissenting Shares..................................................................................13 1.9 Surrender of Certificates; Escrow and Holdback Shares..............................................13 1.10 No Further Ownership Rights in Company Capital Stock...............................................16 1.11 Lost, Stolen or Destroyed Certificates.............................................................16 1.12 Tax Consequences...................................................................................17 1.13 Taking of Necessary Action; Further Action.........................................................17 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................................................17 2.1 Organization of the Company........................................................................17 2.2 Company Capital Structure..........................................................................18 2.3 Authority..........................................................................................20 2.4 No Conflict........................................................................................20 2.5 Consents...........................................................................................21 2.6 Company Financial Statements.......................................................................21 2.7 No Undisclosed Liabilities.........................................................................22 2.8 No Changes.........................................................................................22 2.9 Tax Matters........................................................................................24 2.10 Restrictions on Business Activities................................................................28
TABLE OF CONTENTS (CONTINUED)
PAGE ---- 2.11 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment.....................28 2.12 Intellectual Property..............................................................................29 2.13 Agreements, Contracts and Commitments..............................................................32 2.14 Interested Party Transactions......................................................................34 2.15 Governmental Authorization.........................................................................34 2.16 Litigation.........................................................................................34 2.17 Accounts Receivable................................................................................35 2.18 Minute Books and Records...........................................................................35 2.19 Environmental Matters..............................................................................35 2.20 Brokers' and Finders' Fees; Third Party Expenses...................................................37 2.21 Employee Benefit Plans and Compensation............................................................37 2.22 Insurance..........................................................................................42 2.23 Compliance with Laws...............................................................................43 2.24 Warranties; Indemnities............................................................................43 2.25 Complete Copies of Materials.......................................................................43 2.26 Fairness Hearing...................................................................................43 2.27 Products...........................................................................................44 2.28 Budget; Projections................................................................................44 2.29 Disclosure.........................................................................................44 2.30 Relationships......................................................................................45 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.........................................................45 3.1 Organization, Standing and Power...................................................................45 3.2 Authority..........................................................................................45 3.3 Capital Structure..................................................................................46 3.4 No Conflict........................................................................................46 3.5 Consents...........................................................................................46
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PAGE ---- 3.6 SEC Documents; Parent Financial Statements.........................................................47 3.7 Tax-Free Reorganization............................................................................48 3.8 Litigation.........................................................................................49 3.9 Brokers' Fees......................................................................................49 3.10 Fairness Hearing...................................................................................50 ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.......................................................................50 4.1 Conduct of Business of the Company.................................................................50 4.2 Parent Operation of Business.......................................................................55 4.3 No Solicitation....................................................................................55 4.4 No Solicitation of Employees.......................................................................56 4.5 Covenant to Satisfy Closing Conditions.............................................................56 4.6 Additional Options.................................................................................57 ARTICLE V ADDITIONAL AGREEMENTS......................................................................................57 5.1 Parent Securities Registration or Exemption........................................................57 5.2 Restrictions on Transfer...........................................................................58 5.3 Access to Information..............................................................................58 5.4 Confidentiality....................................................................................59 5.5 Public Disclosure..................................................................................59 5.6 Consents...........................................................................................59 5.7 FIRPTA Compliance..................................................................................59 5.8 Reasonable Best Efforts............................................................................59 5.9 HSR Act............................................................................................60 5.10 Notification of Certain Matters....................................................................60 5.11 Indemnification....................................................................................61 5.12 S-8 Registration...................................................................................61 5.13 Affiliate Agreements...............................................................................61 5.14 Expenses...........................................................................................62
-3- TABLE OF CONTENTS (CONTINUED)
PAGE ---- 5.15 [Omitted]..........................................................................................62 5.16 Employee Benefits..................................................................................62 5.17 Employment Offers..................................................................................63 5.18 Updated Information................................................................................63 5.19 Shareholder Agent; Authority and Validity..........................................................63 5.20 Warrants...........................................................................................64 5.21 Additional Documents and Further Assurances........................................................64 ARTICLE VI CONDITIONS TO THE MERGER..................................................................................64 6.1 Conditions to Obligations of Each Party to Effect the Merger.......................................64 6.2 Conditions to the Obligations of Parent and Sub....................................................65 6.3 Conditions to Obligations of the Company...........................................................68 ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION..............................................69 7.1 Survival of Representations, Warranties and Covenants..............................................69 7.2 Indemnification....................................................................................70 7.3 Escrow Fund........................................................................................72 7.4 Recovery For Losses by Shareholders................................................................76 7.5 General Indemnification Provisions.................................................................77 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER.......................................................................77 8.1 Termination........................................................................................77 8.2 Effect of Termination..............................................................................78 8.3 Amendment..........................................................................................80 8.4 Extension; Waiver..................................................................................80 ARTICLE IX GENERAL PROVISIONS........................................................................................80 9.1 Notices............................................................................................80 9.2 Interpretation.....................................................................................82
-4- TABLE OF CONTENTS (CONTINUED)
PAGE ---- 9.3 Counterparts.......................................................................................82 9.4 Entire Agreement; Assignment.......................................................................82 9.5 Severability.......................................................................................82 9.6 Other Remedies.....................................................................................83 9.7 Governing Law......................................................................................83 9.8 Rules of Construction; Good Faith..................................................................84
-5- THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and entered into as of August 9, 2001 by and among Cirrus Logic, Inc., a Delaware corporation ("PARENT"), Cirrus Logic SM Acquisition Corporation, a California corporation and a wholly-owned subsidiary of Parent ("SUB"), Stream Machine Company, a California corporation (the "COMPANY"), and Michael Canning as the SHAREHOLDER AGENT (as defined in Section 7.3(d)(i) hereof). RECITALS A. The Boards of Directors of each of Parent, Sub and the Company believe it is in the best interests of each company and its respective shareholders that Parent acquire the Company through the statutory merger of Sub with and into the Company (the "MERGER") and, in furtherance thereof, have approved the Merger. B. Pursuant to the Merger, among other things, (i) all of the issued and outstanding capital stock of the Company shall be converted into the right to receive the consideration set forth herein, and (ii) all issued and outstanding options to purchase capital stock of the Company shall be assumed by the Company and converted into options to purchase capital stock of Parent. C. The Company, on the one hand, and Parent and Sub, on the other hand, desire to make certain representations, warranties, covenants and other agreements in connection with the Merger. D. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE"). NOW, THEREFORE, in consideration of the mutual agreements, covenants and other promises set forth herein, the mutual benefits to be gained by the performance thereof, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and accepted, the parties hereby agree as follows: ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2 hereof) and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the California -1- General Corporation Law ("CALIFORNIA Law"), Sub shall be merged with and into the Company, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation and as a wholly-owned subsidiary of Parent. The surviving corporation after the Merger is sometimes referred to hereinafter as the "SURVIVING CORPORATION." 1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to Section 8.1 hereof, the closing of the Merger (the "CLOSING") will take place as promptly as practicable after the execution and delivery of this Agreement by the parties hereto, but no later than five (5) business days following satisfaction or waiver of the conditions set forth in Article VI hereof, at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California, but in any event no later than December 20, 2001. The date upon which the Closing actually occurs shall be referred to herein as the "CLOSING DATE." On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing a Merger Agreement (or like instrument) and the accompanying officers' certificates, each in substantially the form attached hereto as Exhibit A (the "MERGER AGREEMENT"), with the Secretary of State of the State of California, in accordance with the applicable provisions of California Law (the time of acceptance by the Secretary of State of the State of California of such filing shall be referred to herein as the "EFFECTIVE TIME"). 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement and the applicable provisions of California Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, except as otherwise agreed to pursuant to the terms of this Agreement, all the property, rights, privileges, powers and franchises of the Company and Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Sub shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 Articles of Incorporation and Bylaws. (a) Unless otherwise determined by Parent prior to the Effective Time, the articles of incorporation of Sub, as in effect immediately prior to the Effective Time, shall be the articles of incorporation of the Surviving Corporation at the Effective Time until thereafter amended in accordance with California Law and as provided in such articles of incorporation; provided, however, that at the Effective Time, Article I of the articles of incorporation of the Surviving -2- Corporation shall be amended and restated in its entirety to read as follows: "The name of the corporation is Stream Machine Company." (b) Unless otherwise determined by Parent prior to the Effective Time, the bylaws of Sub, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation at the Effective Time until thereafter amended in accordance with California Law and as provided in the articles of incorporation of the Surviving Corporation and such bylaws. 1.5 Directors and Officers. (a) Unless otherwise determined by Parent prior to the Effective Time, the directors of Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation immediately after the Effective Time, each to hold the office of a director of the Surviving Corporation in accordance with the provisions of California Law and the articles of incorporation and bylaws of the Surviving Corporation until their successors are duly elected and qualified. (b) Unless otherwise determined by Parent prior to the Effective Time, the officers of Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation immediately after the Effective Time, each to hold office in accordance with the provisions of the bylaws of the Surviving Corporation. 1.6 Effect of Merger on the Capital Stock of the Constituent Corporations; Certain Definitions. (a) Definitions. For all purposes of this Agreement, the following terms shall have the following respective meanings: "AFFILIATE" shall mean (i) for purpose of Section 2.9 hereof, 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 issued thereunder; and (ii) for purpose of other provisions hereof, any person or entity that controls, is controlled by, or is under common control with the Company within the meaning of Rule 144 under the Securities Act. -3- "ARTICLES OF INCORPORATION" shall have the meaning given in Section 2.1 hereof. "CALIFORNIA LAW" shall have the meaning given in Section 1.1 hereof. "CLOSING" shall have the meaning given in Section 1.2 hereof. "CLOSING DATE" shall have the meaning given in Section 1.2 hereof. "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. "CODE" shall have the meaning given in the fourth recital to this Agreement. "COMPANY" shall have the meaning given in the preamble to this Agreement. "COMPANY CAPITAL STOCK" shall mean the (i) shares of Company Common Stock and (ii) shares of Company Preferred Stock. "COMPANY COMMON STOCK" shall mean the shares of common stock of the Company. "COMPANY EMPLOYEE PLAN" shall mean any plan, program, policy, practice, contract, agreement or other material arrangement providing for compensation, severance, termination pay, deferred compensation, performance awards, stock or stock-related awards, "voluntary employees' beneficiary associations" ("VEBA") under Section 501(c)(9) of the Code, fringe benefits or other employee benefits or remuneration of any kind, whether written, unwritten or otherwise, funded or unfunded, including without limitation, each "employee benefit plan," within the meaning of Section 3(3) of ERISA 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, or with respect to which the Company or any Affiliate has or may have any liability or obligation. "COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property and Intellectual Property Rights that are owned in whole or in part by, or exclusively licensed to, the Company. -4- "COMPANY MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on the assets, business, financial condition or results of operations of the Company. "COMPANY OPTIONS" shall mean all Existing Plan Options and New Plan Options. "COMPANY PREFERRED STOCK" shall mean the shares of preferred stock of the Company, including Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock of the Company. "CONFLICT" shall have the meaning given in Section 2.4 hereof. "CONTRACT" shall have the meaning given in Section 2.13(a)(xii) hereof. "CURRENT BALANCE SHEET" has the meaning given in Section 2.6 hereof. "DISCLOSURE SCHEDULE" shall have the meaning given in the first paragraph of Article II hereof. "DISSENTING SHARES" shall have the meaning given in Section 1.8(a) hereof. "DOL" shall mean the United States Department of Labor. "EFFECTIVE TIME" shall have the meaning given in Section 1.2 hereof. "EMPLOYEE" shall mean any current or former employee, consultant or director of the Company or any Affiliate. "EMPLOYEE AGREEMENT" shall mean each management, employment, severance, consulting, relocation, repatriation, expatriation, visas, work permit or other agreement, or contract between the Company and any Employee. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ESCROW AGREEMENT" shall have the meaning given in Section 1.9(b) hereof. -5- "ESCROW AMOUNT" shall mean the number of Merger Shares equal to fifteen million dollars ($15 million) divided by the Signing Stock Price. "ESCROW FUND" shall have the meaning given in Section 7.3(a) hereof. "EXCHANGE ACT" shall have the meaning given in Section 3.4 hereof. "EXCHANGE AGENT" shall have the meaning given in Section 1.9(a) hereof. "EXCHANGE RATIO" shall mean an amount equal to the quotient obtained by dividing (x) the Merger Shares by (y) the Total Outstanding Shares, which amount shall be appropriately adjusted to reflect fully the effect of any stock split, reverse stock split, reorganization, recapitalization or like change (including a stock dividend with equivalent effect) with respect to Parent Common Stock occurring after the date hereof and prior to the Effective Time. "EXISTING PLAN" shall have the meaning given in Section 1.6(d) hereof. "EXISTING PLAN OPTIONS" shall mean all options to purchase shares of Company Common Stock issued pursuant to the Existing Plan. "FIRPTA COMPLIANCE CERTIFICATE" shall have the meaning given in Section 5.7 hereof. "FMLA" shall mean the Family and Medical Leave Act of 1993, as amended. "GAAP" shall mean United States generally accepted accounting principles consistently applied. "GOVERNMENTAL ENTITY" shall have the meaning given in Section 2.5 hereof. "HSR ACT" shall have the meaning given in Section 2.5 hereof. "INDEMNIFIED PARTIES" shall have the meaning given in Section 7.2 hereof. "INTELLECTUAL PROPERTY" shall mean any or all of the following (i) works of authorship and any other works protectable under the copyright or similar law of any jurisdiction -6- including, without limitation, computer programs, source code and executable code, whether embodied in software, firmware or otherwise, development tools, documentation, designs, files, records, data, all media on which any of the foregoing is recorded, and all mask works, (ii) inventions (whether or not patentable), invention disclosures, improvements, and technology, (iii) proprietary or confidential information, trade secrets and know how, (iv) databases, data compilations and collections, customer lists and technical data, (v) logos, trade names, trade dress, trademarks, service marks and any other indicia of source or origin, (vi) domain names, web addresses, uniform resource locator and sites, (vii) tools, methods and processes, and (viii) all instantiations and disclosures of the foregoing in any form and embodied in any media and all documentation relating to the foregoing. "INTELLECTUAL PROPERTY RIGHTS" shall mean any and all rights worldwide associated with Intellectual Property including, without limitation, all: (i) patents and patent applications, (ii) copyrights, copyrights registrations and copyrights applications and "moral" rights, (iii) trade and industrial secrets databases and non-public information, (iv) trademarks, trade names and service marks, logos, common law trademarks and service marks, trademark and servicemark registrations and applications therefor and all goodwill associated therewith throughout the world, and (v) divisions, continuations, continuations-in-part, renewals, reissuances, provisionals and extensions of the foregoing (as applicable), all mask works, mask work registrations and applications therefor throughout the world. "IRS" shall mean the United States Internal Revenue Service. "KEY EMPLOYEES" shall have the meaning given in Section 1.9(c) hereof. "KNOWLEDGE" shall mean actual knowledge of the Company's or the Parent's, as the case may be, officers and directors and the knowledge that such person would have obtained of the matter represented after reasonable inquiry thereof under the circumstances. "LIENS" shall have the meaning given in Section 2.9(b)(vii) hereof. "LOSS" and "LOSSES" shall have the meaning given in Section 7.2 hereof. "MERGER" shall have the meaning given in the first recital to this Agreement. -7- "MERGER AGREEMENT" shall have the meaning given in Section 1.2 hereof. "MERGER SHARES" shall mean the number of shares of Parent Common Stock equal to the quotient of (x) the Purchase Price divided by (y) the Signing Stock Price. "MUTUAL NONDISCLOSURE AGREEMENT" shall have the meaning given in Section 4.4 hereof. "NEW PLAN" shall have the meaning set forth in Section 1.6(d) hereof. "NEW PLAN OPTIONS" shall mean all options to purchase shares of Company Common Stock issued pursuant to the New Plan. "PARENT" shall have the meaning given in the preamble to this Agreement. "PARENT COMMON STOCK" shall mean shares of common stock of Parent. "PARENT MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on the assets, business, financial condition or results of operations of Parent and its subsidiaries, taken as a whole, provided, however, changes in the trading prices of Parent Common Stock (in and of itself) shall not be deemed a Parent Material Adverse Effect. "PBGC" shall mean the United States Pension Benefit Guaranty Corporation. "PENSION PLAN" shall mean each Company Employee Plan which is an "employee pension benefit plan," within the meaning of Section 3(2) of ERISA. "PRO RATA PORTION" shall mean with respect to each Shareholder an amount equal to the quotient obtained by dividing (x) the number of shares of Company Common Stock and Company Preferred Stock (on an as-converted basis) owned by such Shareholder immediately prior to the Effective Time by (y) the number of shares of Company Capital Stock (on an as-converted basis). "PURCHASE PRICE" shall mean one hundred and ten million dollars ($110 million) or such lesser amount as adjusted pursuant to Section 1.8(c) and Section 5.14. -8- "REGISTERED INTELLECTUAL PROPERTY RIGHTS" shall mean Intellectual Property Rights that have been registered, filed, certified, issued or otherwise perfected by recordation, with any state, government or other legal authority anywhere in the world. "RELATED AGREEMENTS" shall mean the Merger Agreement, the Escrow Agreement and any other agreements entered into in connection herewith and therewith other than any employment agreement to be entered into with Parent in connection with the Merger. "RIGHTS AGREEMENT" shall have the meaning given in Section 2.2(a) hereof. "SEC" shall have the meaning given in Section 3.6 hereof. "SECURITIES ACT" shall have the meaning given in Section 3.4 hereof. "SHAREHOLDER" shall mean each holder of any Company Capital Stock immediately prior to the Closing Date. "SHAREHOLDER AGENT" shall have the meaning given in Section 7.3(d)(i). "SIGNING STOCK PRICE" shall mean $20.288. "SUB" shall have the meaning given in the preamble to this Agreement. "SURVIVING CORPORATION" shall have the meaning given in Section 1.1 hereof. "TAX" and "TAXES" shall have the meaning given in Section 2.9 hereof. "TERMINATION DATE" shall have the meaning given in Section 7.1 hereof. "THIRD PARTY EXPENSES" shall have the meaning given in Section 5.14 hereof. "TOTAL OUTSTANDING SHARES" shall be the sum of, without duplication, (i) the aggregate number of shares of Company Common Stock (including any other rights (other than Company Options) convertible into, or exercisable or exchangeable for, shares of Company Common Stock on an as-converted, exercised or exchanged basis) issued and outstanding immediately prior to the Effective Time, (ii) the aggregate number of shares of Company Preferred -9- Stock issued and outstanding immediately prior to the Effective Time (on an as-converted basis), (iii) the aggregate number of shares of Company Common Stock issued or issuable upon the exercise of all Company Options outstanding immediately prior to the Effective Time, whether vested or unvested, and (iv) shares of Company Common Stock and Company Preferred Stock issued or issuable upon exercise of Warrants (as defined in Section 2.2(a)) immediately prior to the Effective Time (on an as-converted basis)). For the avoidance of doubt, Dissenting Shares (as defined in Section 1.8(a)) shall be included in the calculation of Total Outstanding Shares. "WARRANTS" shall have the meaning given in Section 2.2(a). (b) [Omitted] (c) Conversion of Company Capital Stock. At the Effective Time, each outstanding share of the Company Capital Stock (on an as-converted basis) (other than Dissenting Shares and shares held in the Company's treasury) upon the terms and subject to the conditions set forth below and throughout this Agreement, will be canceled and extinguished and be converted automatically into the right to receive such number of shares of Parent Common Stock equal to the Exchange Ratio, upon the terms and subject to conditions set forth in this Section 1.6 and throughout this Agreement. (d) Options. Immediately prior to the Effective Time, the Board of Directors of the Company (or the appropriate committee thereof) shall have adopted such resolutions, taken such actions and obtained any necessary consents as may be required to adjust and implement, effective as of the Effective Time, the Existing Plan Options and the New Plan Options outstanding and unexercised immediately prior to the Effective Time into options to acquire Parent Common Stock, as further set forth below. The Existing Plan Options and the New Plan Options so adjusted pursuant to this Section 1.6(d) shall continue to have, and be subject to, the same terms and conditions (including vesting terms) set forth in the Company's 1996 Stock Option Plan (the "EXISTING PLAN") or in the Company's 2001 Stock Option Plan to be adopted following the execution of this Agreement, in substantially the form of Exhibit B (the "NEW PLAN"), as applicable, and the option agreements relating thereto, or such other applicable agreement, as in effect immediately prior to the Effective Time, except that (i) each such adjusted Existing Plan Option and -10- New Plan Option will be exercisable for that number of whole shares of Parent Common Stock equal to the product of the number of shares of Company Common Stock that were issuable upon exercise of such Existing Plan Option or New Plan Option (whether or not then exercisable or vested) immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of Parent Common Stock, and (ii) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of such adjusted Existing Plan Option or New Plan Option shall be equal to the quotient obtained by dividing the exercise price per share of Company Common Stock at which such adjusted Existing Plan Option or New Plan Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. (e) Aggregate Issuance of Parent Common Stock. Notwithstanding anything in this Agreement or the Related Agreements, the value of the aggregate of all shares of Parent Common Stock (based upon the Signing Stock Price) issuable pursuant to Sections 1.6(c), 1.8(b), 1.9(b) and 1.9(c) hereof, without regard to any reduction in the number of such shares issuable pursuant to Sections 1.6(g) and 1.6(i) hereof, and upon exercise of all Existing Plan Options and New Plan Options adjusted pursuant to Section 1.6(d) hereof, including any shares withheld pursuant to Section 1.6(f) hereof, plus all sums paid in lieu of fractional shares of Parent Common Stock pursuant to Section 1.6(i) hereof, and plus all sums paid by the Company or Parent to holders of Dissenting Shares to the extent not subject to deduction from the Purchase Price pursuant to Section 1.8(c) hereof, shall in no event, in the aggregate, exceed the Purchase Price. (f) Withholding for Taxes. Parent shall be entitled to deduct and withhold from the consideration otherwise payable to any Shareholder pursuant to this Section 1.6 such amounts as it is required to deduct and withhold with respect to the making of such payment under any provision of federal, state, local or foreign laws relating to Taxes. To the extent that amounts are so withheld by the Parent, such amounts shall be treated for all purposes of this Agreement as having been paid to the Shareholders in respect of which such deduction and withholding was made by the Parent. Such withholding may be made from the transfer of shares of Parent Common Stock otherwise required to be made pursuant to this Section 1.6 hereof or in respect of any such withholding requirement applicable to payment of cash otherwise required to be made pursuant to the terms of this Agreement. -11- (g) Shareholder Loans. In the event that any Shareholder has outstanding loans from the Company as of the Effective Time, the consideration payable to such Shareholder pursuant to this Section 1.6 shall be reduced by an amount equal to the outstanding principal plus accrued interest of such Shareholder's loans as of the Effective Time. For purposes of any such reduction, a share of Parent Common Stock shall be valued at the Signing Stock Price. Notwithstanding anything herein to the contrary, to the extent the consideration payable to such Shareholder pursuant to this Section 1.6 is less than the amount equal to the outstanding principal plus accrued interest of such Shareholder's loans as of the Effective Time, the remaining loan balance shall not be assumed by Parent, Sub or the Surviving Corporation. (h) Capital Stock of Sub. Each share of Common Stock of Sub issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of Common Stock of the Surviving Corporation. 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. (i) Fractional Shares. Shares evidencing the right to receive a fraction of a share of Parent Common Stock will not be delivered to former holders of Company Capital Stock who surrender such Company Capital Stock for exchange. Each former holder of shares of Company Capital Stock who would otherwise have been entitled to receive a fraction of a share of Parent Common Stock shall receive from the Exchange Agent (as defined in Section 1.9(a) hereof) an amount of cash (rounded to the nearest whole cent) equal to the product of (i) such fraction of a share of Parent Common Stock, multiplied by (ii) the Signing Stock Price. Parent shall prior to the Effective Time pay to the Exchange Agent an amount in cash sufficient for the Exchange Agent to make such cash payment. 1.7 Company Capital Stock. The Company shall not issue any shares of Company Capital Stock after the date hereof, except (i) upon the exercise of Existing Plan Options existing as of such date to the extent vested and exercisable, and (ii) upon the exercise of Warrants, to the extent exercisable. The Company shall not issue any Existing Plan Options after the date hereof, except with the written consent of Parent, which consent shall not be unreasonably withheld. -12- 1.8 Dissenting Shares. (a) Notwithstanding any other provisions of this Agreement to the contrary, any shares of Company Capital Stock held by a holder who has exercised and perfected appraisal rights for such shares in accordance with Chapter 13 of the California Law and who has not effectively withdrawn or lost such appraisal rights ("DISSENTING SHARES"), shall not be converted into or represent a right to receive the consideration for Company Capital Stock set forth in Section 1.6 hereof, but the holder thereof shall only be entitled to such rights as are provided by California Law. (b) Notwithstanding the provisions of Section 1.8(a) hereof, if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) such holder's appraisal rights under California Law, then, as of the later of the Effective Time and the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive the consideration for Company Capital Stock set forth in Section 1.6 hereof, without interest thereon, upon surrender of the certificate representing such shares. (c) The Company shall give Parent (i) prompt notice of any written demand for appraisal received by the Company pursuant to the applicable provisions of California Law, and (ii) the opportunity to direct all negotiations and proceedings with respect to such demands under California Law. The Company shall not, except with the prior written consent of Parent, make any payment with respect to any such demands or offer to settle or settle any such demands. To the extent that Parent or the Company makes any payment or payments in respect of any Dissenting Shares after the Effective Time, Parent shall be entitled to recover under the terms of Article VII hereof the aggregate amount by which such payment or payments exceeds the aggregate consideration that otherwise would have been payable in respect of such shares pursuant to Section 1.6 hereof had the holder thereof not dissented to the Merger. To the extent that the Company makes any payment or payments in respect of any Dissenting Shares prior to the Effective Time, the Purchase Price shall be reduced by the aggregate amount of such payment or payments. 1.9 Surrender of Certificates; Escrow and Holdback Shares. (a) Exchange Agent. The Corporate Secretary of Parent, or his designee, shall serve as the exchange agent (the "EXCHANGE AGENT") for the Merger. -13- (b) Parent to Provide Parent Common Stock and Escrow Fund. Promptly after the Effective Time, but in any event not later than immediately following written confirmation of approval of the Merger by the Secretary of State of the State of California, Parent shall make available to the Exchange Agent for exchange in accordance with this Article I the shares of Parent Common Stock issuable pursuant to Section 1.6 in exchange for outstanding shares of Company Capital Stock; provided that, prior to the Closing Date, Parent shall appoint an independent escrow agent reasonably satisfactory to the Company (the "ESCROW AGENT") and shall execute and deliver an escrow agreement, in substantially the form attached hereto as Exhibit C (the "ESCROW AGREEMENT"), and that Parent shall deposit into the Escrow Fund (as defined in Section 7.3 hereof) the number of shares of Parent Common Stock equal to the Escrow Amount out of the aggregate number of Merger Shares otherwise issuable to the Shareholders pursuant to Section 1.6. Each Shareholder shall be deemed to have contributed such Shareholder's Pro Rata Portion of the Escrow Amount to the Escrow Fund. The shares of Parent Common Stock deposited to the Escrow Fund shall be shares which are vested and are not subject to a repurchase option, risk of forfeiture or similar condition under any applicable stock restriction agreement or other agreement with the Company or Parent other than the Escrow Agreement and this Agreement. (c) Holdback. Notwithstanding anything in Section 1.6 to the contrary, Parent shall instruct the Exchange Agent not to issue and transfer to such of Michael Canning, Cheng-Tie Chen, Ting-Chung Chen, Fure-Ching Jeng, Victor Ren and Brian Heuckroth (each a "KEY EMPLOYEE," and collectively the "KEY EMPLOYEES"), as shall become employed with Parent at the Effective Time, respectively, that number of Merger Shares equal to twenty five percent (25%) of the sum of Merger Shares which each such Key Employee, upon the Effective Time, would otherwise be entitled to receive pursuant to Section 1.6(c) hereof that are not otherwise subject to any repurchase option (the "HOLDBACK SHARES"). In addition, Parent shall be entitled to restrict the exercise of twenty five percent (25%) of all Existing Plan Options which are vested on or prior to September 30, 2001 and held by such Key Employees other than the options to purchase, in the aggregate, up to 181,456 shares of Company Common Stock granted to such Key Employees on June 28, 2001 (the "HOLDBACK OPTIONS"). Such Key Employees shall be entitled to receive such Holdback Shares and have the restrictions on the exercise of such Holdback Options removed on the terms as provided in the Addendum to their respective employment agreement with Parent, in -14- substantially the form attached hereto as Exhibit G, delivered to Parent prior to the Closing. The Addendum shall provide that the restrictions set forth in this Section 1.9(c) shall be removed upon death and disability of any Key Employee. (d) Exchange Procedures. On the Closing Date, the Shareholders will surrender the certificates representing their shares of Company Capital Stock (the "COMPANY STOCK CERTIFICATES") to the Exchange Agent for cancellation together with a letter of transmittal in such form and having such provisions that Parent may reasonably request. Upon surrender of a Company Stock Certificate for cancellation to the Exchange Agent, or such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, subject to the terms of Section 1.9(f) hereof, the holder of such Company Stock Certificate shall be entitled to receive from the Exchange Agent in exchange therefor a certificate representing the number of whole shares of Parent Common Stock (less the number of shares of Parent Common Stock to be deposited in the Escrow Fund on such holder's behalf pursuant to Section 1.9(b) above and Article VII hereof) to which such holder is entitled pursuant to Section 1.6, and the Company Stock Certificate so surrendered shall be canceled. Until so surrendered, each outstanding Company Stock Certificate will be deemed from and for all corporate purposes, to evidence only the ownership of the number of full shares of Parent Common Stock into which such shares of Company Capital Stock shall have been so converted. (e) Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Company Stock Certificate with respect to the shares of Parent Common Stock represented thereby until the holder of record of such Company Stock Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Company Stock Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock. -15- (f) Transfers of Ownership. Subject to Section 1.9(b) and Section 1.9(c), if any certificate for shares of Parent Common Stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Parent or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Parent Common Stock in any name other than that of the registered holder of the certificate surrendered, or established to the satisfaction of Parent or any agent designated by it that such tax has been paid or is not payable. (g) No Liability. Notwithstanding anything to the contrary in this Section 1.9, neither the Exchange Agent, the Surviving Corporation nor any party hereto shall be liable to a holder of shares of Company Capital Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.10 No Further Ownership Rights in Company Capital Stock. The shares of Parent Common Stock paid in respect of the surrender for exchange of shares of Company Capital Stock in accordance with the terms hereof, shall be deemed to be full satisfaction of all rights pertaining to such shares of Company Capital Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Company Capital Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Company Stock Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.11 Lost, Stolen or Destroyed Certificates. In the event any certificates evidencing shares of Company Capital Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such amount of shares of Parent Common Stock, if any, as may be required pursuant to Section 1.6 hereof; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the Shareholder who is the owner of such lost, stolen or destroyed certificates to deliver a bond in such amount as it may reasonably direct against -16- any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. 1.12 Tax Consequences. It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368(a) of the Code, and each party is relying on its own tax advisor in connection with the Merger. 1.13 Taking of Necessary Action; Further Action. If at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company, then Parent, Sub and the officers and directors of the Surviving Corporation are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Sub, subject to such exceptions as are specifically disclosed in the disclosure letter (referencing the appropriate section and paragraph numbers) supplied by the Company to Parent (the "DISCLOSURE SCHEDULE") as of the date hereof: 2.1 Organization of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has the corporate power to own its properties and to carry on its business as currently conducted and as currently contemplated to be conducted. The Company is duly qualified or licensed to do business and in good standing as a foreign corporation in each jurisdiction in which it conducts business, except where the failure to be so qualified or in good standing has not had and would not reasonably be expected to have a Company Material Adverse Effect. The Company has delivered a true and correct copy of its Amended and Restated Articles of Incorporation (the "ARTICLES OF INCORPORATION") and bylaws, each as amended to date and in full force and effect on the date hereof, to Parent. Section 2.1 of the Disclosure Schedule lists the directors and officers of the Company. The operations now being conducted by the Company are not now and have never been conducted -17- by the Company under any other name, other than under the name of CRISC Corporation. The Company does not have, and has never had, any subsidiaries and does not otherwise own, and has not otherwise owned, any share in the capital of or any interest in, or control of, directly or indirectly, any corporation, partnership, association, joint venture or other business entity. 2.2 Company Capital Structure. (a) The authorized capital stock of the Company consists of (i) 84,000,000 shares of Common Stock, of which 5,735,219 shares are issued and outstanding as of the date hereof and (ii) 60,750,000 shares of Company Preferred Stock, of which, 8,750,000 shares are designated Series A Preferred Stock, 8,749,999 of which are issued and outstanding as of the date hereof (which are convertible into 8,749,999 shares of Company Common Stock at the conversion ratio of 1:1); 17,000,000 shares are designated Series B Preferred Stock, 16,197,099 of which are issued and outstanding as of the date hereof (which are convertible into 16,197,099 shares of Company Common Stock at the conversion ratio of 1:1); 15,000,000 shares are designated Series C Preferred Stock, 12,616,142 of which are issued and outstanding as of the date hereof (which are convertible into 14,193,159 shares of Company Common Stock at the conversion ratio of 1:1.125); and 20,000,000 are designated as Series D Preferred Stock, 13,504,332 of which shares are issued and outstanding as of the date hereof (which are convertible into 13,504,332 shares of Company Common Stock at the conversion ratio of 1:1). As of the date hereof, the capitalization of the Company is as set forth in Section 2.2(a) of the Disclosure Schedule. The total number of shares of Company Capital Stock outstanding immediately prior to the Effective Time (assuming the conversion, exercise or exchange of all securities, including all of the shares of Company Preferred Stock, convertible into, or exercisable or exchangeable for, shares of Company Common Stock, and the exercise of all Company Options) will be as set forth in Section 2.2(a) of the Disclosure Schedule. The Company Capital Stock is held by the persons with the domicile addresses and in the amounts set forth in Section 2.2(a) of the Disclosure Schedule, and such shares are owned of record and beneficially solely by such Shareholder free and clear of all Liens (as defined in Section 2.9(b)(vii)). All outstanding shares of Company Capital Stock are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights. All outstanding shares of Company Capital Stock and Existing Plan Options have been issued or repurchased (in the case of shares that were outstanding and repurchased by the Company) in compliance with all applicable -18- federal, state, foreign or local statutes, laws, rules or regulations, including federal and state securities laws. The designations, powers, preferences, rights, qualifications, limitations and restrictions in respect of the Company Preferred Stock are as set forth in the Articles of Incorporation and in the Second Amended and Restated Investor Rights Agreement (the "RIGHTS AGREEMENT") dated October 3, 2000. Warrants to purchase 50,000 shares of Company Common Stock, warrants to purchase 327,661 shares of Series B Preferred Stock, warrants to purchase 167,813 shares of Series C Preferred Stock, and warrants to purchase 189,200 shares of Series D Preferred Stock are outstanding as of the date hereof (collectively, the "WARRANTS"). There are not outstanding any adjustments made or required to be made to the conversion rates applicable to Company Preferred Stock set forth in the Articles of Incorporation. There are no declared or accrued but unpaid dividends with respect to any shares of Company Capital Stock. The Company has no other capital stock authorized, issued or outstanding. (b) Except for the Existing Plan and the New Plan to be adopted prior to the Effective Time pursuant to Section 4.6 hereof, the Company has never adopted or maintained any stock option plan or other plan providing for equity compensation of any person. The Company has reserved 16,000,000 shares of Company Common Stock for issuance to employees and directors of, and consultants to, the Company upon the exercise of options granted under the Existing Plan, of which options to purchase 8,145,029 are outstanding and options to purchase 2,230,252 shares remain available for issuance under the Existing Plan. Section 2.2(b) of the Disclosure Schedule sets forth (i) for each outstanding Existing Plan Option, the name of the holder of such option, the domicile address of such holder, the number of shares of Company Common Stock issuable upon the exercise of such option, the exercise price of such option, the vesting schedule for such option, including the extent vested to date (provided that no such options will be accelerated by the transactions contemplated by this Agreement), and whether such option is intended to qualify as an incentive stock option as defined in Section 422 of the Code and (ii) for each right to repurchase shares in favor of the Company, the name of Shareholder, the number of shares of Company Common Stock subject to repurchase by the Company, the price at which such shares may be repurchased, the schedule by which such repurchase right lapses, including the extent such repurchase right has lapsed to date and whether the lapsing of the repurchase right will be accelerated by the transactions contemplated by this Agreement. Except for the Existing Plan -19- Options and Warrants, all of which are listed on Section 2.2(b) of the Disclosure Schedule, there are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of the Company or obligating the Company to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or other similar rights with respect to the Company. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting stock of the Company. As a result of the Merger, Parent will be the sole record and beneficial holder of all issued and outstanding Company Capital Stock and all rights to acquire or receive any shares of Company Capital Stock, whether or not such shares of Company Capital Stock are outstanding. 2.3 Authority. The Company has all requisite power and authority to enter into this Agreement and any Related Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, and no further action is required on the part of the Company to authorize this Agreement and any Related Agreements and the transactions contemplated hereby and thereby, subject only to the approval of this Agreement and the transactions contemplated hereby by the Shareholders. This Agreement, the Related Agreements and the Merger have been unanimously approved by the Board of Directors of the Company. This Agreement and each of the Related Agreements have been duly executed and delivered by the Company, and assuming the due authorization, execution and delivery by the other parties hereto and thereto, constitute the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as such enforceability may be subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 2.4 No Conflict. The execution and delivery by the Company of this Agreement and the Related Agreements, and the consummation of the transactions contemplated hereby and thereby, will not conflict with or result in any violation of or default under (with or without notice or lapse of -20- time, or both) or give rise to a right of termination, cancellation, modification or acceleration of any obligation or loss of any benefit under (any such event, a "CONFLICT") (i) any provision of the Articles of Incorporation or bylaws of the Company, (ii) any Contract (as defined in Section 2.13(a)(xii)) or (iii) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or any of its properties (tangible and intangible) or assets. 2.5 Consents. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with any court, administrative agency or commission or other federal, state, county, local or other foreign governmental authority, instrumentality, agency or commission (each, a "GOVERNMENTAL ENTITY") or any third party, including a party to any agreement with the Company (so as not to trigger any Conflict), is required by or with respect to the Company in connection with the execution and delivery of this Agreement and any of the Related Agreements or the consummation of the transactions contemplated hereby, except for (i) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable securities laws and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), (ii) the filing of the Merger Agreement with the Secretary of State of the State of California, (iii) the approval of this Agreement and the transactions contemplated hereby by the Shareholders, and (iv) consents, waivers, approvals, orders, authorizations, registrations, declarations and filings set forth in Section 2.5 of the Disclosure Schedule. 2.6 Company Financial Statements. Section 2.6 of the Disclosure Schedule sets forth (i) the Company's audited financial statements (in tentative and preliminary form) as of December 31, 2000 (the "YEAR-END FINANCIALS"), and (ii) the Company's unaudited financial statements as of May 31, 2001 (the "INTERIM FINANCIALS," and, together with the Year-End Financials, collectively, the "FINANCIALS"). The Financials are correct in all material respects and have been prepared in accordance with GAAP consistently applied on a basis consistent throughout the periods indicated and consistent with each other (except that the Interim Financials do not contain footnotes and other presentation items that may be required by GAAP). The Financials present fairly the financial condition, operating results and cash flows of the Company as of the dates and during the periods indicated therein, subject in the case of the Interim Financials to normal year-end adjustments which are not material in amount or significance in any individual case or in -21- the aggregate. The Company's unaudited balance sheet as of May 31, 2001 is referred to hereinafter as the "CURRENT BALANCE SHEET." 2.7 No Undisclosed Liabilities. The Company has no liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, unmatured or other (whether or not required to be reflected in financial statements in accordance with GAAP), which individually or in the aggregate (i) has not been reflected in the Current Balance Sheet, (ii) has not arisen in the ordinary course of business consistent with past practices since May 31, 2001 and (iii) which exceeds $100,000. 2.8 No Changes. Except as expressly contemplated by this Agreement, since January 1, 2001, there has not been, occurred or arisen: (a) any transaction or event that would have a Company Material Adverse Effect, or is reasonably foreseeable that might have a Company Material Adverse Effect; (b) any amendments or changes to the Articles of Incorporation or bylaws of the Company; (c) any declaration, setting aside or payment or other distribution in respect of any of the Company Capital Stock, or any direct or indirect redemption, purchase or other acquisition of any of such stock by the Company except repurchasing of vested stock required pursuant to written agreements outstanding on the date hereof and disclosed on the Disclosure Schedule; (d) any waiver by the Company of a valuable right or of a material debt owed to it; (e) any material change or amendment to a contract or arrangement by which the Company or any of its assets or properties is bound or subject; (f) any damage, destruction or loss to any asset of the Company (whether or not covered by insurance) that, individually or in the aggregate, would have a Company Material Adverse Effect; -22- (g) any commitment, transaction or other action by the Company other than in the ordinary course of business and consistent with past practice; (h) any sale or other disposition of any right, title or interest in or to any assets or properties of the Company or any revenues derived therefrom other than in the ordinary course of business and consistent with past practice; (i) any increase in the salary or other compensation payable or to become payable by the Company to any of its officers, directors, employees or advisors, or the declaration, payment or commitment or obligation of any kind for the payment by the Company of a severance payment, termination payment, bonus or other additional salary or compensation to any such person, and any hiring or termination of employees of the Company, except in the ordinary course of the Company's business and consistent with past practice; (j) any creation, incurrence or assumption of any indebtedness (including obligations for borrowed money, obligations representing the deferred purchase price of property other than accounts payable arising in the ordinary course of the Company's business, obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now or hereafter owned or acquired by the Company, obligations which are evidenced by notes, acceptances, letters of credit or other instruments, capitalized lease obligations, obligations relating to hedges and swaps, and obligations pursuant to a guaranty) exceeding $50,000; (k) total capital expenditures by the Company in aggregate in excess of $200,000; (l) any change in any accounting principle or method or election for federal income tax purposes used by the Company; (m) any revaluation by the Company of any of its assets; (n) the commencement, settlement, notice or threat of any claim, litigation, suit, arbitration or other proceeding against the Company or its affairs, or any reasonable basis for any of the foregoing; or -23- (o) any authorization, approval, agreement or commitment to do any of the foregoing. 2.9 Tax Matters. (a) Definition of Taxes. For the purposes of this Agreement, the term "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 2.9(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 clauses (i) or (ii) of this Section 2.9(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 Effective Time, the Company will 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 its operations and such Returns are true and correct and have been completed in accordance with applicable law. (ii) As of the Effective Time, the Company (A) will have timely paid all Taxes it is required to pay, and withheld with respect to its employees, all federal and state income taxes, Federal Insurance Contribution Act ("FICA"), Federal Unemployment Tax Act ("FUTA") and other Taxes required to be withheld, and (B) will have accrued on the Current Balance Sheet all Taxes attributable to the periods preceding the Current Balance Sheet and will not have incurred any liability for Taxes for the period commencing after the date of the Current Balance Sheet and ending immediately prior to the Effective Time, other than in the ordinary course of business. -24- (iii) The Company has not been delinquent in the payment of any Tax, nor is there any Tax deficiency outstanding, assessed or proposed against the Company, nor has the Company executed any waiver of any statute of limitations on or extended the period for the assessment or collection of any Tax. (iv) No audit or other examination of any Return of the Company is presently in progress, nor has the Company been notified of any request for such an audit or other examination. (v) As of the date of the Current Balance Sheet, the Company has no liabilities for unpaid federal, state, local and foreign Taxes which have not been accrued or reserved on the Current Balance Sheet, whether asserted or unasserted, contingent or otherwise, and since the date of the Current Balance Sheet, the Company has not incurred any liability for Taxes in excess of $25,000 which remain unpaid at the Effective Time. (vi) The Company has made available to Parent or its legal counsel, copies of all foreign, federal, state and local income and all state and local sales and use Returns for the Company filed for all periods since its inception or for the five years prior to the date hereof, whichever period is shorter. (vii) There are (and immediately following the Effective Time 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) The Company does not have 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 is treated as "tax-exempt use property," within the meaning of Section 168(h) of the Code. -25- (x) The Company has not filed any consent agreement under Section 341(f) of the Code 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. (xi) The Company is not a party to any tax sharing, indemnification or allocation agreement nor does the Company owe any amount under any such agreement. (xii) 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. (xiii) No adjustment relating to any Return filed by the Company has been proposed formally or informally by any tax authority to the Company or any representative thereof. (xiv) The Company has (a) never been a member of an affiliated group (within the meaning of Code Section 1504(a)) filing a consolidated federal income Tax Return, (b) no liability for the Taxes of any person under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise and (c) never been a party to any joint venture, partnership or other agreement that could be treated as a partnership for Tax purposes. (xv) The Company has not constituted either a "distributing corporation" or a "controlled corporation" in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (x) in the two years prior to the date of this Agreement or (y) in a distribution which could otherwise constitute part of a "plan" or "Series of related transactions" (within the meaning of Section 355(e) of the Code) in conjunction with the Merger. (c) Executive Compensation Tax. There is no contract, agreement, plan or arrangement to which the Company is a party, including, without limitation, the provisions of this Agreement, covering any employee or former employee of the Company, which, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Sections 280G, 404 or 162(m) of the Code. -26- (d) Tax Free Reorganization. (i) The Company has not taken or agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. Prior to and in connection with the Merger, the Company will not have redeemed, and related persons with respect to the Company, as such term is defined by Treasury Regulation Section 1.368-1(e)(3), (without regard to Section 1.368-1(e)(3)(i)(A)), will not have purchased any Company Capital Stock, and the Company will not have made any distributions with respect to the Company Capital Stock that would be treated as other property or money within the meaning of Section 356 of the Code or that would cause the Shareholders to violate the continuity of interest requirement set forth in Treasury Regulation Section 1.368-1(e). (ii) Immediately following the Merger, the Surviving Corporation will hold at least 90% of the fair market value of the Company's net assets and at least 70% of the fair market value of the Company's gross assets held immediately prior to the Merger. For purposes of this representation, amounts paid by the Company to dissenters, amounts paid by the Company to Shareholders who receive cash or other property, amounts used by the Company to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) made by the Company will be included as assets of the Company immediately prior to the Merger. (iii) At the Effective Time, the Company will not have any outstanding warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the Company that, if exercised or converted, would affect Parent's acquisition or retention of control of the Company, as defined in Section 368(c)(1) of the Code. (iv) The Company is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (v) At the Effective Time, the fair market value of the assets of the Company will exceed the sum of its liabilities, plus the amount of any other liabilities, if any, to which the assets are subject. -27- (vi) The Company is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 2.10 Restrictions on Business Activities. There is no agreement (non-compete or otherwise), commitment, judgment, injunction, order or decree to which the Company is a party or otherwise binding upon the Company which has or may reasonably be expected to have the effect of prohibiting or impairing any business practice of the Company, any acquisition of property (tangible or intangible) by the Company, the conduct of business by the Company or otherwise limiting the freedom of the Company to engage in any line of business or to compete with any person. Without limiting the generality of the foregoing, the Company has not 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. 2.11 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment. (a) The Company owns no real property, nor has it ever owned any real property. Section 2.11(a) of the Disclosure Schedule sets forth a list of all real property currently leased by the Company, 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 payable under any such lease and the term thereof. 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) by the Company or, to the Knowledge of the Company, by any other party. (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 (i) as reflected in the Current Balance Sheet, (ii) such imperfections of title, (e.g., easements and similar encumbrances) which do not detract materially from the value or interfere materially with the present use of the property subject thereto or affected thereby, and (iii) Liens listed on Section 2.11(b) of the Disclosure Schedule. -28- (c) Section 2.11(c) of the Disclosure Schedule lists all material items of equipment (the "EQUIPMENT") owned or leased by the Company and such Equipment is (i) adequate for the conduct of the business of the Company as currently conducted and as currently contemplated to be conducted, and (ii) in good operating condition, regularly and properly maintained, subject to normal wear and tear. (d) The Company has sole and exclusive ownership, free and clear of any Liens, of all customer lists, customer contact information, customer correspondence and customer licensing and purchasing histories relating to its current and former customers (the "CUSTOMER INFORMATION"). No person other than the Company possesses any claims or rights with respect to use of the Customer Information. 2.12 Intellectual Property. (a) Section 2.12(a) of the Disclosure Schedule lists all Registered Intellectual Property Rights owned in whole or in part by, or filed in the name of, the Company (the "COMPANY REGISTERED INTELLECTUAL PROPERTY RIGHTS"), with a description of the Company's ownership interest and lists any proceedings or actions before any court or 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 Rights. (b) Each item of Company Intellectual Property is free and clear of any Liens or other encumbrances. (c) The Company has not transferred ownership of, or granted any exclusive license of or exclusive right to use, or authorized the retention of any exclusive rights to use or joint ownership of, any Intellectual Property or Intellectual Property Rights that is or was Company Intellectual Property, to any other person. (d) The Company owns, possesses or has access to all Intellectual Property Rights necessary to the conduct of the business of the Company as it currently is conducted or is currently contemplated to be conducted, including, without limitation, the Company's design, development, manufacture, use, import and sale of products, technology and services (including products, -29- technology or services currently under development). Consummation of the transactions contemplated by this Agreement will not result in the loss of, or otherwise adversely affect, any rights of the Company in any Intellectual Property or Intellectual Property Rights. (e) Other than "shrink wrap" and similar widely distributed binary code and commercial end user licenses the license fee for which is less than $50,000 and as to all of which no further license fees are payable, Section 2.12(e) of the Disclosure Schedule lists all contracts, licenses and agreements to which the Company is a party with respect to any Intellectual Property and Intellectual Property Rights. No person who has licensed Intellectual Property or Intellectual Property Rights to the Company has rights to improvements made by the Company in such Intellectual Property. None of such contracts, licenses and agreements contains provisions 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 of the Intellectual Property Rights of a third party. (f) The operation of the business of the Company as it currently is conducted or is currently contemplated to be conducted, including, but not limited to, the design, development, use, import, manufacture and sale of the products, technology or services (including products, technology or services currently under development) of the Company has not, does not and, to the Knowledge of the Company, will not infringe or misappropriate the Intellectual Property Rights of any person, violate any 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 received no 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 Property Rights or any other rights of any person or constitutes unfair competition or trade practices under the laws of any jurisdiction (nor, to the Knowledge of the Company, is there any basis therefor). (g) Each item of Company Registered Intellectual Property Rights is valid and subsisting, and all necessary registration, maintenance and renewal fees in connection with such Company Registered Intellectual Property Rights have been paid and all necessary documents and -30- certificates in connection with such Company Registered Intellectual Property Rights 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 Registered Intellectual Property. In each case in which the Company has acquired any Intellectual Property or Intellectual Property Rights from any person, the Company has obtained a valid and enforceable assignment sufficient to irrevocably transfer all rights therein to the Company and, to the maximum extent provided for by, and in accordance with, applicable laws and regulations, the Company has recorded each such assignment with the relevant Governmental Authorities, including the PTO, the U.S. Copyright Office, or their respective equivalents in any relevant foreign jurisdiction, as the case may be. (h) To the Company's Knowledge, there are no disputes relating to contracts, licenses or agreements between the Company and any other person with respect to Intellectual Property. (i) Neither this Agreement nor the transactions contemplated by this Agreement, including the assignment to Parent by operation of law or otherwise (to the extent that such transactions are deemed to effect such assignment) of any contracts or agreements to which the Company is a party, will result in: (i) Parent, Sub or the Company granting to any third party any right to or with respect to any Intellectual Property or Intellectual Property Rights owned by, or licensed to, any of them, (ii) Parent, Sub or the Company being bound by, or subject to, any non-compete or other material restriction on the operation or scope or their respective businesses, (iii) Parent, Sub or the Company being obligated to pay any royalties or other material amounts to any third party in excess of those payable by any of them, respectively, in the absence of this Agreement or the transactions contemplated hereby, or (iv) breach of or default regarding any agreement relating to Intellectual Property or Intellectual Property Rights. (j) To the Knowledge of the Company, no person is infringing or misappropriating any Company Intellectual Property. (k) The Company has taken all reasonable steps that are required to protect the Company's rights in confidential information and trade secrets of the Company or provided by any -31- other person to the Company. Without limiting the foregoing, the Company has, and enforces, a policy requiring each employee and consultant to execute proprietary information, confidentiality and assignment agreements substantially in the Company's standard forms, and except as would not constitute a Company Material Adverse Effect, all current and former employees and consultants of the Company have executed such an agreement in substantially the Company's standard form. (l) No Company Intellectual Property or Intellectual Property Rights or service of the Company is subject to any proceeding or outstanding decree, order, judgment or settlement 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. 2.13 Agreements, Contracts and Commitments. (a) Except as set forth in Section 2.13(a) of the Disclosure Schedule, the Company is not a party to nor is it bound by: (i) any 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 by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (iii) any fidelity or surety bond or completion bond; (iv) any lease of personal property having a value in excess of $50,000 individually or $100,000 in the aggregate; (v) any agreement, contract or commitment relating to capital expenditures and involving future payments in excess of $50,000 individually or $100,000 in the aggregate; -32- (vi) any agreement, contract or commitment relating to the disposition or acquisition of assets or any interest in any business enterprise; (vii) any mortgage, indenture, guarantee, loan or credit agreement, security agreement, capital lease or other agreement or instrument relating to the borrowing of money or extension of credit; (viii) any purchase order or contract for the purchase of materials involving in excess of $50,000 individually or $100,000 in the aggregate; (ix) any construction contract; (x) any dealer, distribution, joint marketing or development agreement; (xi) any sales representative, original equipment manufacturer, value added, remarketer, reseller or independent software vendor or other agreement for use or distribution of the Company's products, technology or services; or (xii) any other agreement, contract, license or commitment that involves in excess of $50,000 individually or $100,000 in the aggregate and is not cancelable without penalty within thirty (30) days (each of the items in this Section 2.13(a), including all amendments, modifications, or supplements thereto, a "CONTRACT," and collectively, "CONTRACTS"). (b) Except as noted on Section 2.13(b) to the Disclosure Schedule, each Contract is in full force and effect, and (i) there exists no default or event of default or event, occurrence, condition or act (including the consummation of the transactions contemplated by this Agreement or the Related Agreements) on the part of the Company, or to the Knowledge of the Company on the part of any other party thereto, which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default thereunder that individually or in the aggregate, would have a Company Material Adverse Effect; (ii) no approval or consent of, or notice to, any person or entity is needed in order that each Contract shall continue in full force and effect in accordance with its terms without penalty, acceleration or rights of early termination by reason of the consummation of the transactions contemplated by this Agreement and the Related Agreements the failure of which to obtain individually or in the aggregate would have a Company -33- Material Adverse Effect; and (iii) the consummation of the transactions contemplated by this Agreement or the Related Agreements will not alter in any material respect the rights and obligations of any of the parties to any Contract. 2.14 Interested Party Transactions. No employee, officer, director or Shareholder is indebted to the Company nor is the Company indebted to any of them. To the Company's Knowledge, none of such persons has any direct or indirect ownership in any entity with which the Company is affiliated or with which the Company has a business relationship, or any entity that competes with the Company except that employees, officers, directors or Shareholders may own not more than 5% of the capital stock in publicly traded companies that may compete with the Company. No officer, director or, to the Knowledge of the Company, holder of more than 5% of Company Capital Stock (on an as-converted basis) is interested in any material Contract with the Company. Section 2.14 of the Disclosure Schedule lists all agreements, arrangements, commitments and understandings, whether written or oral, between the Company and any officer, director or Affiliate of the Company. 2.15 Governmental Authorization. Each consent, license, permit, grant or other authorization (i) pursuant to which the Company currently operates or holds any interest in any of its properties, or (ii) which is required for the operation of the Company's business as currently conducted or currently contemplated to be conducted or for the holding of any such interest (collectively, "COMPANY AUTHORIZATIONS") has been issued or granted to the Company. 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 as currently conducted or hold any interest in its properties or assets. 2.16 Litigation. There is no action, suit, claim or proceeding of any nature pending, or threatened against the Company, its properties (tangible or intangible) or any of its officers or directors, nor to the Knowledge of the Company is there any reasonable basis therefor. There is no investigation or other proceeding pending or to the Knowledge of the Company threatened against the Company, any of its properties (tangible or intangible) or any of its officers or directors by or before any Governmental Entity, nor to the Knowledge of the Company is there any reasonable basis therefor. No Governmental Entity has at any time challenged or questioned the legal right of the -34- Company to conduct its operations as presently or previously conducted or as presently contemplated to be conducted. 2.17 Accounts Receivable. (a) The Company has made available to Parent a list of all accounts receivable of the Company as of May 31, 2001, together with a range of days elapsed since invoice. (b) All of the Company's accounts receivable arose in the ordinary course of business, are carried at values determined in accordance with GAAP consistently applied and, are collectible except to the extent of reserves therefor set forth in the Current Balance Sheet or, for receivables arising subsequent to May 31, 2001, as reflected on the books and records of the Company (which are prepared in accordance with GAAP). No person has any Lien on any of the Company's accounts receivable and no request or agreement for deduction or discount has been made with respect to any of the Company's accounts receivable. 2.18 Minute Books and Records. The minutes of the Company made available to counsel for Parent are the only minutes of the Company and contain accurate summaries of all meetings of the Board of Directors (or committees thereof) of the Company and its shareholders or actions by written consent since the time of incorporation of the Company. The Company does not have any of its records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) that are not under the exclusive ownership and direct control (including all means of access thereto and therefrom) of the Company. 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 amount of any substance that has been designated by any Governmental Entity 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 -35- 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 the land and the improvements, 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 Effective Time, 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 herein as "HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity 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, respectively, and other businesses of the Company as such activities and businesses are currently being conducted and as currently contemplated to be conducted. (d) Environmental Liabilities. No action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or to the Knowledge of the Company threatened, concerning any Environmental Permit, Hazardous Material or any Hazardous Materials Activity of the Company. There are no facts or circumstances which are reasonably likely to involve the Company in any environmental litigation or impose upon the Company any environmental liability. The Company has complied with, and on the Effective Date will be in compliance with, in all material respects, the requirements of any permits issued under any applicable environmental laws. -36- 2.20 Brokers' and Finders' Fees; Third Party Expenses. Section 2.20 of the Disclosure Schedule sets forth the principal terms and conditions of any agreement, written or oral, with respect to brokerage or finders' fees or agents' commissions or any similar charges in connection with the Agreement or any transaction contemplated hereby. 2.21 Employee Benefit Plans and Compensation. (a) Section 2.21(a) of the Disclosure Schedule contains an accurate and complete list of each Company Employee Plan and, to the Knowledge of the Company, each Employee Agreement. There are no Employee Agreements that are not terminable at will without severance or financial obligation. The Company has no plan or commitment to establish any new Company Employee Plan or Employee Agreement, to modify any Company Employee Plan or Employee Agreement (except to the extent required by law or to conform any such Company 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 Company Employee Plan or Employee Agreement. Schedule 2.21(a) of the Disclosure Schedule also sets forth a table setting forth the name and salary of each employee of the Company. (b) The Company has delivered to Parent (i) correct and complete copies of all documents embodying each Company Employee Plan and each Employee Agreement including, without limitation, all amendments thereto and all related trust documents, (ii) the three (3) most recent annual reports (Form Series 5500 and 990 and all schedules and financial statements attached thereto), if any, required under ERISA or the Code in connection with each Company Employee Plan, (iii) if the Company Employee Plan is funded, the most recent annual and periodic accounting of Company Employee Plan assets, (iv) the most recent summary plan description together with the summary(ies) of material modifications thereto, if any, required under ERISA with respect to each Company Employee Plan, (v) all material written agreements and contracts relating to each Company Employee Plan, including, without limitation, administrative service agreements and group insurance contracts, (vi) all communications material to any Employee or Employees relating to any Company Employee Plan and any proposed Company 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, -37- (vii) all correspondence to or from any governmental agency relating to any Company Employee Plan, (viii) all COBRA forms and related notices, (ix) all policies pertaining to fiduciary liability insurance covering the fiduciaries for each Company Employee Plan, (x) all discrimination tests for each Company Employee Plan for the most recent plan year, (xi) all registration statements, annual reports (Form 11-K and all attachments thereto) and prospectuses prepared in connection with each Company Employee Plan, and (xii) the most recent IRS determination letter obtained with respect to each Company Employee Plan intended to be qualified under Section 401(a) of the Code or exempt under Section 501(a) or 501(c)(9) of the Code. (c) Employee Plan Compliance. The Company has performed all obligations required to be performed by it under, is not in default or violation of, and has no Knowledge of any default or violation by any other party of, each Company Employee Plan, and each Company Employee Plan has been established and maintained in accordance with its terms and in material compliance with all applicable laws, statutes, orders, rules and regulations, including but not limited to ERISA or the Code. No "prohibited transaction," within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has occurred with respect to any Company Employee Plan. There are no actions, suits or claims pending, threatened or reasonably anticipated (other than routine claims for benefits) against any Company Employee Plan or against the assets of any Company Employee Plan. Each Company Employee Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms, without liability to Parent, the Company or any Affiliate (other than ordinary administration expenses). There are no audits, inquiries or proceedings pending or to the Knowledge of the Company or any Affiliates, threatened by the IRS or DOL with respect to any Company Employee Plan. Neither the Company nor any Affiliate nor any of their respective directors, officers, employees or any other person who participates in the operation of any Company Employee Plan or related trust or funding vehicle, has engaged in any transaction with respect to any Company Employee Plan or breached any applicable fiduciary responsibilities or obligations under Title I of ERISA that would subject any of them to a liability, penalty or tax with respect to any Company Employee Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the Code. -38- (d) No Pension Plans. Neither the Company nor any other Affiliate has ever maintained, established, sponsored, participated in, or contributed to, any (i) Pension Plans subject to Section 412 of the Code or Section 302 of ERISA or Title IV of ERISA, (ii) "multiemployer plan" within the meaning of Sections (3)(37) and 4001 (a)(3) of ERISA, or (iii) "multiple employer plan" within the meaning of the Code or ERISA. (e) No Post-Employment Obligations. No Company Employee Plan provides, or reflects or represents any liability to provide, retiree life insurance, retiree health or other retiree employee welfare benefits to any person for any reason, except as may be required by COBRA or other applicable statute, and the Company has never represented, promised or contracted (whether in oral or written form) to any Employee (either individually or to Employees as a group) or any other person that such Employee(s) or other person would be provided with retiree life insurance, retiree health or other retiree employee welfare benefit, except to the extent required by statute. (f) COBRA. The Company and each Affiliate has, prior to the Effective Time, complied with the health care continuation requirements of COBRA, the requirements of FMLA or any similar provisions of state law applicable to its Employees, except where the non-compliance would not, individually or in the aggregate, have a Company Material Adverse Effect. (g) Liabilities. No Company Employee Plan which is a "group health plan" (as such term is defined in Section 607(l) of ERISA or Section 5000(b) (1) of the Code) is a "multiple employer welfare arrangement," within the meaning of Section 3(40) of ERISA. Each Company Employee Plan that is intended to meet the requirements of Section 125 of the Code meets such requirements, and each program of benefits for which employee contributions are provided pursuant to elections under any Company Employee Plan meets the requirements of the Code applicable thereto. Neither the Company nor any of its Affiliates has any unfunded liabilities pursuant to any Company Employee Plan that is not intended to be qualified under Section 401(a) of the Code. No Company Employee Plan holds as an asset any interest in any annuity contract, guaranteed investment contract or any other investment or insurance contract, policy or instrument issued by an -39- insurance company that, to the Knowledge of the Company, is or may be the subject of bankruptcy, conservatorship, insolvency, liquidation, rehabilitation or similar proceedings. No civil or criminal action brought pursuant to the provisions of Title I, Subtitle B, Part 5 of ERISA is pending, threatened, anticipated, or, to the Knowledge of the Company, expected to be asserted against the Company or any of its Affiliates or any fiduciary of any Company Employee Plan, in any case with respect to any Company Employee Plan. (h) Contributions. Full payment has been timely made of all amounts which the Company or any of its Affiliates is required, under applicable law or under any Company Employee Plan or any agreement relating to any Company Employee Plan to which the Company or any of its Affiliates is a party, to have paid as contributions or premiums thereto as of the last day of the most recent fiscal year of such Company Employee Plan ended prior to the date hereof. All such contributions and/or premiums have been or will be fully deducted for income tax purposes and no such deduction has been challenged or disallowed by any governmental entity, and to the Knowledge of the Company and its Affiliates no event has occurred and no condition or circumstance has existed that could give rise to any such challenge or disallowance. The Company has made adequate provision for reserves to meet contributions and premiums and any other liabilities that have not been paid or satisfied because they are not yet due under the terms of any Company Employee Plan, applicable law or related agreements. Benefits under all Company Employee Plans are as represented and have not been increased subsequent to the date as of which documents have been provided. (i) Tax Qualification. Each Company Employee Plan intended to be qualified under Section 401(a) of the Code has, as currently in effect, been determined to be so qualified by the IRS. Each trust established in connection with any Company Employee Plan which is intended to be exempt from Federal income taxation under Section 501(a) of the Code has, as currently in effect, been determined to be so exempt by the IRS. Each VEBA has been determined by the IRS to be exempt from Federal income tax under Section 501(c)(9) of the Code. Since the date of each most recent determination referred to in this paragraph (i), no event has occurred and no condition or circumstance has existed that resulted or is likely to result in the revocation of any such -40- determination or that could adversely affect the qualified status of any such Company Employee Plan or the exempt status of any such trust or VEBA. (j) 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 Company Employee Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay termination, change in control or otherwise), "parachute payment" (as such term defined in section 280G of the Code) acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee, except as expressly required by this Agreement. (k) Employment Matters. The Company: (i) is in compliance with all applicable foreign, federal, state and local 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 and reported all amounts required by law or by agreement to be withheld and reported with respect to wages, salaries and other payments to Employees, (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 governed by or maintained by or on behalf of any governmental authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for Employees (other than routine payments to be made in the normal course of business and consistent with past practice). There are no pending, threatened, or reasonably anticipated claims or actions against the Company under any worker's compensation policy or long-term disability policy. There are no pending, or to the Knowledge of the Company, threatened, or reasonably anticipated Equal Employment Opportunity Commission charges, other claims of employment discrimination, wage and hour department investigations, or occupational health or safety claims against the Company. The Company has not effectuated a (i) "plant closing" (as defined by the Worker Adjustment Retraining Notification Act ("WARN")) affecting any site of employment or facilities or operating units within any site of employment or facility of the Company or (ii) "mass layoff" (as defined by WARN) affecting any site of employment or facility of the Company; nor has the Company been affected by any -41- transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar state or local law. (l) Labor. No work stoppage or labor strike against the Company is pending, threatened, or reasonably anticipated. The Company does not know of any activities or proceedings of any labor union to organize any Employees. There are no actions, suits, claims, labor disputes or grievances pending, threatened, or reasonably anticipated relating to any labor, safety or discrimination matters involving any Employee, including, without limitation, charges of unfair labor practices or discrimination complaints. The Company has not engaged in any unfair labor practices within the meaning of the National Labor Relations Act. The Company is not presently, nor has it been in the past, 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. (m) No Interference or Conflict. No officer and, to the Knowledge of the Company, no employee or consultant of the Company, is obligated under any contract or agreement, subject to any judgment, 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 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 currently proposed to be conducted, will to the Knowledge of the Company 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 officers, directors, employees or consultants is now bound. 2.22 Insurance. Section 2.22 of the Disclosure Schedule lists 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 or, to the Knowledge of the Company, by any third party, 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 -42- material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). The Company has no Knowledge of threatened termination of, or premium increase with respect to, any of such policies. 2.23 Compliance with Laws. The Company has complied in all material respects with, is not in material violation of, and has not received any notices of violation with respect to, any foreign, federal, state or local statute, law, rule, ordinance or regulation. 2.24 Warranties; Indemnities. Except for the warranties and indemnities contained in those contracts and agreements set forth in Section 2.12(e) of the Disclosure Schedule and warranties implied by law, the Company has not given any warranties or indemnities relating to products or technology sold or licensed or services rendered by the Company. 2.25 Complete Copies of Materials. The Company has delivered or made available true and complete copies of each document (or true and accurate summaries of same) that is referenced on the Disclosure Schedule or has been requested by Parent or its counsel. 2.26 Fairness Hearing. When Parent, pursuant to Section 5.1(a) hereof, prepares Disclosure Documents and Hearing Documents (as defined in Section 5.1(a), then the information concerning the Company supplied by the Company for inclusion in the Disclosure Documents and sent to the shareholders of the Company will not, at the time that the Disclosure Documents and Hearing Documents are filed with the California Commissioner of Corporations and mailed to the shareholders of the Company, contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements included therein, in light of the circumstances under which they were made, not misleading. The information concerning the Company supplied by the Company for inclusion in the Disclosure Documents and the Hearing Documents will not, on the date such documents are first mailed to the shareholders of the Company, at the time of such shareholders' approval of this Agreement and the Merger and at the Effective Time and the Closing Date, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements included therein, in light of the circumstances under which they were made, not misleading, or omit to state any material fact necessary to correct any -43- statement in any earlier communication with respect to the solicitation of approval of such shareholders of this Agreement which has become false or misleading. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information concerning Parent or Sub contained in any of the foregoing documents which is supplied by Parent or Sub. 2.27 Products. Section 2.27 of the Disclosure Schedule lists and describes each of the products and services sold, licensed, developed or otherwise provided by the Company to customers or other third parties, or supported or tested by the Company (the "PRODUCTS"). Each of the Products has been and is in conformity with all applicable contractual commitments of the Company, all express and implied warranties with respect thereto made by the Company and all legal requirements applicable thereto. If the Company obtained, by license, the right to sell, license, develop or otherwise provide any Product under sublicense or other agreement with a third party, this representation and warranty as to such Product is based solely on the Company's Knowledge. The Company has no liability for any replacement, repair or remediation of any Product or for any other damages or refunds in connection with any Product. Section 2.27 of the Disclosure Schedule sets forth a description of all guaranties, warranties and other indemnities to which any of the Products is subject, other than the Company's applicable standard terms and conditions of sale and standard guaranties and warranties, copies of which have been provided to Parent. 2.28 Budget; Projections. The Annual Operating Plan for Fiscal Year 2001 and the revenue and financial forecasts for years 2001 and 2002 attached as Schedule 2.28 are accurate and complete copies of such plan and forecasts, and they have not since been amended or supplemented in any manner. The forecasts are based on certain assumptions, estimates and qualifications which the Company's Board of Directors believes to be reasonable as of July 9, 2001. 2.29 Disclosure. The statements made by the Company in this Agreement and the Related Agreements (including, without limitation, the representations and warranties made by the Company therein and in the Schedules and Exhibits thereto), when taken as a whole, do not include or contain any untrue statement of a material fact, and do not omit to state any material fact required to be stated in order for such statements not to be misleading. -44- 2.30 Relationships. To the Company's Knowledge, the relationship of the Company after the Effective Time with its present suppliers, customers, licensors, vendors and contractors will not be materially adversely affected as a result of the change of control of the Company as a consequence of the transactions contemplated by this Agreement and the Related Agreements. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Parent and Sub hereby represent and warrant to the Company that on the date hereof, subject to such exceptions as are specifically disclosed in the disclosure letter (referencing the appropriate section and paragraph numbers) supplied by the Parent to the Company (the "PARENT DISCLOSURE SCHEDULE") as of the date hereof and as of the Closing Date as follows: 3.1 Organization, Standing and Power. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Sub is a corporation duly organized, validly existing and in good standing under the laws of California. Each of Parent and Sub has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the failure to be so qualified or licensed would have a Parent Material Adverse Effect. 3.2 Authority. Each of Parent and Sub has all requisite corporate power and authority to enter into this Agreement and any Related Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and thereby have been approved by the Board of Directors of Parent and have been (or on the Effective Date, will have been) duly authorized by all necessary corporate action on the part of Parent and Sub. This Agreement to which Parent and Sub are parties has been duly executed and delivered by Parent and Sub, and constitutes the valid and binding obligation of Parent and Sub, enforceable in accordance with its terms, except as such enforceability may be limited by principles of public policy and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. -45- 3.3 Capital Structure. (a) The authorized stock of Parent consists of 280,000,000 shares of Common Stock, $0.001 par value, of which approximately 74 million shares were issued and outstanding as of August 3, 2001 (excluding approximately 6,400,000 treasury shares held by Parent), and 5,000,000 shares of Preferred Stock, $.001 par value, none of which were issued or outstanding on the date hereof. The authorized capital stock of Sub consists of 1,000 shares of Common Stock, $.001 par value, 1,000 shares of which are issued and outstanding and are held by Parent. As of August 3, 2001, Parent has reserved approximately 17,000,000 shares of Common Stock for issuance pursuant to its employee and director stock and option plans. (b) The shares of Parent Common Stock to be issued pursuant to the Merger will be duly authorized, validly issued, fully paid, non-assessable, free of any Liens and not subject to any preemptive rights or rights of first refusal created by statute or the charter documents or bylaws of Parent or Sub or any agreement to which Parent or Sub is a party or is bound and will be issued in compliance with applicable federal and state securities laws. 3.4 No Conflict. The execution and delivery of this Agreement does not, and, the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a Conflict under (i) any provision of the Certificate of Incorporation, as amended, and bylaws of Parent or Sub, (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise or license to which Parent or any of its respective properties or assets are subject and which has been filed as an exhibit to Parent's filings under the Securities Act of 1933, as amended (the "SECURITIES ACT") or the Securities and Exchange Act of 1934, as amended (the "EXCHANGE ACT") or (iii) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or Sub or their respective properties or assets, except in each case where such Conflict will not have a material adverse effect on the legality, validity or enforceability of this Agreement. 3.5 Consents. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity, or any third party is required by or with respect -46- to Parent or Sub in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable securities laws and the HSR Act, (ii) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings which, if not obtained or made, would not have a Parent Material Adverse Effect, and (iii) the filing of the Articles of Merger with the Secretary of State of the State of California. 3.6 SEC Documents; Parent Financial Statements. Parent has made available to the Company a true and complete copy of each annual, quarterly and other reports, registration statements (without exhibits) and definitive proxy statement filed by Parent with the Securities and Exchange Commission (the "SEC") since March 31, 2001 (the "PARENT SEC DOCUMENTS"). As of their respective filing dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Parent SEC Documents, and none of the Parent SEC Documents contained on their filing dates 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 therein, in light of the circumstances under which they were made, not misleading, except to the extent corrected by a subsequently filed Parent SEC Document. The financial statements of Parent included in the Parent SEC Documents (the "PARENT FINANCIAL STATEMENTS") complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto or, in the case of unaudited financial statements, as permitted under Form 10-Q under the Exchange Act) and fairly presented the consolidated financial position of Parent and its consolidated subsidiaries as of the respective dates thereof and the consolidated results of Parent's operations and cash flows for the periods indicated (subject to, in the case of unaudited statements, to normal year-end audit adjustments). -47- 3.7 Tax-Free Reorganization. (a) Neither Parent, Sub, nor, to the Knowledge of Parent, any of its affiliates, has taken, proposes to take, or has agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. (b) Parent has no plan or intention and has no Knowledge that any person related to Parent (within the meaning of Treas. Reg. Section 1.368-1(e)(3)) has any plan or intention, in connection with the Merger, directly or indirectly, to redeem or acquire any of the Parent Common Stock issued in the Merger, other than in exchange for Parent stock. For purposes of this representation, (i) repurchases in the ordinary course of business of unvested shares, if any, acquired from terminating employees of Parent or the Company, (ii) repurchases in the open market pursuant to an ongoing stock repurchase program which was not created or modified in connection with a plan or intent formed subsequent to the initiation of negotiations concerning the Merger and for which there is a reasonable business purpose, and (iii) retention, pursuant to this Agreement or any related Agreement, of Parent Common Stock otherwise issuable pursuant hereto, will be disregarded. In addition, for purposes of the foregoing representation, the payment of cash in lieu of the issuance of fractional shares of Parent Common Stock will be disregarded provided the fractional share interests of each Company shareholder are aggregated, no Company shareholder will receive cash in an amount greater than the value of one full share of Parent Common Stock and the total cash consideration that will be paid in the transaction to the Company shareholders instead of issuing fractional shares of Parent Common Stock will not exceed 1% of the total consideration that will be issued in the transaction to the Shareholders in exchange for their shares of the Company Capital Stock. (c) Parent has no plan or intention to cause the Company, after the Merger, to issue additional shares of Company capital stock that would result in Parent losing control of the Company within the meaning of Section 368(c)(1) of the Code. (d) Except for transfers of stock and assets described in Treas. Reg. Section 1.368-2(k)(2), Parent has no plan or intention to liquidate the Company; to merge the Company with or into another corporation other than Parent; to sell or otherwise dispose of the stock -48- of the Company; or, except for dispositions made in the ordinary course of business, to cause the Company to sell or otherwise dispose of any of its assets. (e) Parent intends to cause the Company to continue its historic business or use in a business a significant portion of the assets of its historic business. For purposes of this representation, Parent will be deemed to satisfy the foregoing representation if (a) the members of Parent's qualified group (as defined in Treas. Reg. Section 1.368-1(d)(4)(ii)), in the aggregate, continue the historic business of the Company or use a significant portion of the Company's historic business assets in a business, or (b) the foregoing activities are undertaken by a partnership as contemplated by Treas. Reg. Section 1.368-1(d)(4). (f) There is no intercorporate indebtedness existing between Parent and the Company or between Sub and the Company that was issued, acquired, or will be settled at a discount. (g) Parent does not own, nor has it owned during the past five years, any shares of the stock of the Company. (h) Parent is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. 3.8 Litigation. Except as set forth in Section 3(f) of the Parent Disclosure Schedule, there are not any (a) outstanding judgments against the Parent or any of its subsidiaries, (b) action, suit, claim or proceeding pending or, to the knowledge of the Parent, threatened against the Parent or any of its subsidiaries or (c) investigations or other proceedings by any Governmental Entity that are, to the knowledge of the Parent, pending or threatened against the Parent or any of its subsidiaries that, in any case, individually or in the aggregate, would materially impair the ability of the Parent to perform its obligations under this Agreement. 3.9 Brokers' Fees. Neither Parent nor Sub has any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement. -49- 3.10 Fairness Hearing. When Parent, pursuant to Section 5.1(a) hereof, prepares Disclosure Documents and Hearing Documents (as defined in Section 5.1(a)), then the information concerning Parent and Sub supplied by Parent for inclusion in the Disclosure Documents and sent to the shareholders of the Company will not, at the time that the Disclosure Documents and Hearing Documents are filed with the California Commissioner of Corporations and mailed to the shareholders of the Company, contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements included therein, in light of the circumstances under which they were made, not misleading. The information concerning Parent and Sub supplied by Parent for inclusion in the Disclosure Documents and the Hearing Documents will not, on the date that such documents are first mailed to the shareholders of the Company, at the time of such shareholders' approval of this Agreement and the Merger and at the Effective Time and the Closing Date, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements included therein, in light of the circumstances under which they were made, not misleading, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of approval of such shareholders of this Agreement which has become false or misleading. Notwithstanding the foregoing, Parent makes no representation or warranty with respect to any information concerning the Company contained in any of the foregoing documents which is supplied by the Company. ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 4.1 Conduct of Business of the Company. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, the Company agrees to use its reasonable best efforts to cause the Company, except to the extent that Parent shall otherwise consent in writing, to carry on the Company's business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay the debts and Taxes of the Company when due, to pay or perform other obligations when due, to preserve intact the Company's present business organizations, and, to the extent consistent with such business, use its reasonable best efforts consistent with past practice and policies, to keep available the services of the Company's present officers and employees and preserve the Company's relationships with customers, suppliers, distributors, licensors, licensees, and others having business -50- dealings with it, all with the goal of preserving unimpaired the Company's goodwill and ongoing businesses from the date hereof to the Effective Time. The Company shall promptly notify Parent of any event or occurrence or emergency not in the ordinary course of business of the Company and any material event involving the Company that occurs between the date hereof and the Effective Date. If at any time prior to the Effective Time any event relating to the Company, or any of its officers or directors should be discovered by the Company which should be set forth in a supplement to the Disclosure Documents referenced in Section 2.26 hereof, the Company shall promptly inform Parent of such event. Except as expressly contemplated by this Agreement and as set forth in Section 4.1 of the Disclosure Schedule, the Company shall not, without the prior written consent of Parent: (a) make any expenditures or enter into any commitment, contract or transaction exceeding $50,000 individually or $100,000 in the aggregate or any commitment or transaction of the type described in Sections 2.8 (a), (d), (e), (g), or (k) hereof; (b) (i) except for the granting of non-exclusive licenses relating to the sale of the Company's products shipping on the date hereof entered into in the ordinary course of business, sell, license or transfer to any person or entity any rights to any Intellectual Property used or owned by the Company or enter into any agreement with respect to any Intellectual Property used or owned by the Company with any person or entity or with respect to any Intellectual Property of any person or entity, (ii) buy or license any Intellectual Property or enter into any agreement with respect to the Intellectual Property of any person or entity, (iii) enter into any agreement with respect to the development of any Intellectual Property with a third party, (iv) or change pricing or royalties charged by the Company to its customers or licensees, or the pricing or royalties set or charged by persons who have licensed Intellectual Property to the Company; (c) amend or violate the terms of any Contract, or enter into any contract, in the case of each such amendment or contract such that is reasonably likely to cause the Company to incur liabilities, obligations or expenses in excess of $50,000 or such that it is not terminable by the Company without payment or penalty upon not more than 30 days notice; -51- (d) commence or settle or cause to be commenced or settled any claim, litigation, action, suit, proceeding or arbitration; (e) declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any Company Capital Stock, or split, combine or reclassify any Company Capital Stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of Company Capital Stock, or repurchase, redeem or otherwise acquire, directly or indirectly, any shares of Company Capital Stock (or options, warrants or other rights exercisable therefor), except in accordance with the agreements evidencing Existing Plan Options as in effect on the date hereof; (f) 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 capital stock of the Company 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, except, as provided in Section 1.7 hereof, for the issuance of shares of Company Capital Stock upon the exercise of outstanding Existing Plan Options, or for the issuance of New Plan Options pursuant to Section 4.6 hereof or the repurchase of outstanding shares required pursuant to written agreements outstanding on the date hereof and disclosed on the Disclosure Schedule or make any changes to its capital structure; (g) cause or permit any amendments to its Articles of Incorporation, bylaws or other organizational documents of the Company except as described in Section 2.4 of the Disclosure Schedule; (h) 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; (i) except as allowed pursuant to Section 4.1(b) hereof or except in the ordinary course of business such that the Company shall not incur liabilities, obligations or expenses in the -52- aggregate in excess of $250,000, sell, lease, license, transfer, assign, encumber, mortgage or otherwise dispose of any of its properties or assets or allow to exist a Lien, other than the Liens set forth in Section 2.11(b) to the Disclosure Schedule, on any such properties or assets; (j) incur any indebtedness or guarantee any indebtedness or issue or sell any debt securities or guarantee any debt or debt securities of others; (k) grant any loans (including trade credits, except in the ordinary course of business consistent with past practices) to others or purchase debt securities of others or amend the terms of any outstanding loan agreement; (l) pay, discharge or satisfy, in an amount in excess of $50,000 in any one case, or $100,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected, or reserved against in the Current Balance Sheet, or incurred after the date of the Current Balance Sheet in the ordinary course of business that is not otherwise in violation of this Agreement and that is reasonably likely not to cause the Company to incur liabilities, obligations or expenses in the aggregate in excess of $50,000; (m) hire employees (other than for the positions set forth in the Disclosure Schedule), terminate any employees or encourage any employees to resign from the Company; or grant any severance or termination pay (i) to any director or officer, or (ii) to any other employee except payments made pursuant to standard written agreements outstanding on the date hereof and disclosed in the Disclosure Schedule; (n) adopt, amend or terminate 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, wage rates or other compensation of its employees, except commission payments in the ordinary course of business, payments made pursuant to standard written agreements in place on the date hereof and disclosed in the Disclosure Schedule, or as may be required to conform any employee benefit plan to applicable law; -53- (o) take any action to accelerate the vesting schedule of any of the outstanding Existing Plan Options or Company Common Stock or amend, modify or waive any term or provision of any stock restriction or repurchase agreement to which the Company is party; (p) revalue any of its assets, including, without limitation, writing down the value of inventory or writing off accounts receivable other than in the ordinary course of business; (q) make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; (r) enter into any joint marketing arrangement without consent of Parent which shall not be unreasonably withheld, or any strategic alliance; (s) make any purchases, or enter into any contract or commitment to purchase, any inventory, except any inventory purchased in the ordinary course of business or in accordance with a written inventory purchase plan previously approved by Parent; (t) enter into any new line of business; (u) cancel or terminate any insurance policies held by the Company in effect on the date hereof; (v) increase or decrease prices charged to its customers other than in the ordinary course of business; (w) except as expressly permitted in this Agreement, enter into or amend any contract or transaction with any of its directors, officers, shareholders or Affiliates, other than the indemnification agreement to be entered into with its directors or officers, in substantially the form attached hereto in Exhibit D; (x) except as required by applicable law or GAAP, make any material change in its method of accounting; -54- (y) approve or agree in writing or otherwise to take any of the foregoing actions; or (z) take any action or fail to take any action not prohibited by this Agreement, without the written consent of Parent, with the knowledge that such action or failure to take such action would result in any of the conditions to the Merger set forth in Article VI not being satisfied. 4.2 Parent Operation of Business. Prior to the Effective Time, Parent shall not (and shall cause its subsidiaries not to), without the written consent of the Company, take any action or fail to take any action permitted by this Agreement with the knowledge that such action or failure to take such action would result in any of the conditions to the Merger set forth in Article VI not being satisfied. 4.3 No Solicitation. (a) Until the earlier of (i) the Effective Time, or (ii) the date of termination of this Agreement pursuant to the provisions of Section 8.1 hereof, the Company shall not, and the Company shall require each of its officers, directors, employees, representatives and agents not to, directly or indirectly, (i) initiate or solicit any inquiry, proposal, offer or discussion with any party (other than Parent) concerning any merger, reorganization, consolidation, recapitalization, business combination, liquidation, dissolution, share exchange, sale of stock, sale of material assets or similar business transaction involving the Company, (ii) furnish any non-public information concerning the business, properties or assets of the Company (other than Parent), except as required by the Rights Agreement (and the Company will ensure that any recipient of such non-public information will be obligated to keep it confidential), or (iii) engage in discussions or negotiations with any party (other than Parent) concerning any such transaction; provided, however, that this subsection (a) shall not limit the power of the Board of Directors of the Company to consider any unsolicited bona fide offer or proposal of the nature described above and take appropriate action in connection therewith as necessary in each case to comply with its fiduciary obligations under law. (b) The Company shall immediately notify any party with which discussions or negotiations of the nature described in subsection (a) above are pending that the Company is terminating such discussions or negotiations. If the Company receives any inquiry, proposal or offer -55- of the nature described in subsection (a) above, the Company shall, promptly after such receipt, notify Parent of such inquiry, proposal or offer, including the identity of the other party and the terms of the inquiry, proposal or offer. 4.4 No Solicitation of Employees. Until the earlier of (i) the Effective Time, or (ii) two years following the date of termination of this Agreement pursuant to the provisions of Section 8.1 hereof, neither party (including any authorized employee of such party's human resources department) shall directly or indirectly solicit for services as an employee, consultant, or other capacity any of the other party's employees who are employed by the other party at the date of this Agreement or who are subsequently employed by the other party prior to the termination of this Agreement, or otherwise engage in any activities inconsistent with the terms of the Mutual Nondisclosure Agreement effective as of June 29, 2001 (the "MUTUAL NONDISCLOSURE AGREEMENT"), provided, however, that this Section 4.4 shall not limit the right of each party to continue its respective customary general advertisement for employees, and provided, further, that this Section 4.4 shall not apply to a party's hiring of any former employee of the other party who leaves his or her employment, voluntarily or involuntarily, not as a result of solicitation, initiation or inducement by the other party in violation of this Section 4.4. The parties hereto agree that irreparable damage would occur in the event that the provisions of this Section 4.4 were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed by the parties hereto that each party shall be entitled to seek an injunction or injunctions to prevent breaches of the provisions of this Section 4.4 and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which such party may be entitled at law or in equity. 4.5 Covenant to Satisfy Closing Conditions. (a) The Company shall satisfy or cause to be satisfied, on or before December 20, 2001, the conditions to the obligations of Parent and Sub to consummate the transactions contemplated hereby within its control and shall use its reasonable efforts to effect or cause to be effected all such other matters within its control that may be necessary or desirable for the satisfaction of all such other conditions to the obligations of Parent to consummate the transactions contemplated hereby. -56- (b) Parent shall satisfy or cause to be satisfied, on or before December 20, 2001, the conditions to the obligations of Company to consummate the transactions contemplated hereby within its control and shall use its reasonable efforts to effect or cause to be effected all such other matters within its control that may be necessary or desirable for the satisfaction of all such other conditions to the obligations of Company to consummate the transactions contemplated hereby. 4.6 Additional Options. Prior to the Effective Time, the Company shall adopt the New Plan in substantially the form of Exhibit B, and pursuant to such New Plan shall grant and issue to its employees in such quantities as shall be approved in writing by Parent, options exercisable to purchase five million (5,000,000) shares of Company Common Stock at an exercise price per share of not less than eighty-five percent (85%) of the quotient of the Purchase Price divided by the Total Outstanding Shares. ARTICLE V ADDITIONAL AGREEMENTS 5.1 Parent Securities Registration or Exemption. (a) The parties intend that Parent issue Parent Common Stock to the Shareholders in the Merger pursuant to an exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) of the Securities Act. In order to qualify for such exemption Parent must apply to the California Commissioner of Corporations for a permit (the "CALIFORNIA PERMIT"), which may only be issued after a public hearing on the fairness of the terms and conditions of the Merger (the "FAIRNESS HEARING"). Parent, with the full cooperation and assistance of the Company, shall prepare an Application for Qualification of Securities by Permit under a related Notice of Hearing and other disclosure materials (the "DISCLOSURE DOCUMENTS") to be supplied to the shareholders of the Company in connection with the transactions contemplated hereby (collectively, the "HEARING DOCUMENTS"). Promptly thereafter but in no event later than twenty (20) days after the date of this Agreement, Parent shall use its reasonable effort to cause to be filed, with the full cooperation of the Company, the Disclosure Documents and the Hearing Documents with the California Department of Corporations and request a hearing on the fairness of the Merger pursuant to Section 25132 of the California Corporate Securities Law of 1968, as amended. Parent and the Company will thereafter endeavor in good faith to obtain a finding of fairness and the issuance of a -57- California Permit to such effect by the California Department of Corporations as a result of such Fairness Hearing, but they shall in no event be required to alter in any material respect the terms of the Merger in order to obtain such finding and issuance. All parties hereto shall proceed expeditiously and cooperate fully in making available all information necessary to complete the California Permit application and to participate as may be necessary or appropriate at the Fairness Hearing. (b) As promptly as practical after the date of this Agreement, Parent shall prepare and make such filings as are required under applicable Blue Sky laws relating to the transactions contemplated by this Agreement, and prepare and file a Nasdaq National Market Notification for Listing of Additional Shares with Nasdaq with respect to the listing of the Merger Shares on Nasdaq National Market. 5.2 Restrictions on Transfer. Each share of Parent Common Stock to be issued hereunder shall be issued without any legend restricting such transfer of shares except (i) as relates to restrictions on transfer pursuant to Rule 144 or Rule 145 promulgated under the Securities Act ("RULE 145"), as applicable, or other applicable federal securities law and (ii) any legend necessary with respect to such shares that are subject to any repurchase option, risk of forfeiture or other condition. Subject to Section 5.13 hereof, Parent will remove all legends specified in clause (i) of the preceding sentence upon the effectiveness of the Registration Statement. 5.3 Access to Information. The Company shall afford Parent and its accountants, counsel and other representatives, reasonable access during the period prior to the Effective Time to (i) all of the Company's properties, books, contracts, commitments and records, including the Company's source code, (ii) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicable law) of the Company as Parent may reasonably request, and (iii) all employees of the Company identified by Parent. The Company agrees to provide to Parent and its accountants, counsel and other representatives copies of internal financial statements and operating data (including Tax returns and supporting documentation) promptly upon request. Neither the right to make such investigations nor any information or knowledge obtained in any investigation in connection with the transactions contemplated by this Agreement shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the -58- obligations of the parties to consummate the Merger in accordance with the terms and provisions hereof. 5.4 Confidentiality. Each of the parties hereto hereby agrees that the information obtained in any investigation pursuant to Section 5.3 hereof, or pursuant to the negotiation, execution, performance and effectuation of this Agreement and the transactions contemplated hereby, shall be governed by the terms of the Mutual Nondisclosure Agreement among the Company and Parent. 5.5 Public Disclosure. Neither party shall issue any statement or communication to any third party (other than their respective agents or employees) regarding the subject matter of this Agreement or the transactions contemplated hereby, including, if applicable, the termination of this Agreement and the reasons therefor, without the consent of the other party, which consent shall not be unreasonably withheld, except that this restriction shall be subject to Parent's obligation to comply with applicable laws or by obligations pursuant to any listing agreement with any national securities exchange. 5.6 Consents. The Company shall use its reasonable best efforts to obtain the consents, waivers and approvals under any of the Contracts deemed appropriate or necessary by any party in connection with the Merger, including all consents, waivers and approvals set forth in Section 2.5 of the Disclosure Schedule, so as to preserve all rights of, and benefits to, the Company thereunder from and after the Effective Time. 5.7 FIRPTA Compliance. On the Closing Date, the Company shall deliver to Parent a properly executed statement (a "FIRPTA COMPLIANCE CERTIFICATE") in a form reasonably acceptable to Parent for purposes of satisfying Parent's obligations under Treasury Regulation Section 1.1445-2(c)(3). 5.8 Reasonable Best Efforts. Except as otherwise provided in this Agreement, each of the parties hereto shall use its reasonable best efforts 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 consummate and make effective the transactions contemplated hereby, to obtain all necessary waivers, consents and approvals and to effect all necessary -59- registrations and filings and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement. 5.9 HSR Act. As soon as may be reasonably practicable, to the extent applicable, Company and Parent each shall file, and the Company shall use best efforts to cause any applicable Shareholder of the Company to file, with the United States Federal Trade Commission (the "FTC") and the Antitrust Division of the United States Department of Justice ("DOJ") Notification and Report Forms relating to the transactions contemplated herein as required by the HSR Act as well as comparable pre-merger notification forms required by the merger notification or control laws and regulations of any applicable jurisdiction, as agreed to by the parties. The Company shall use its reasonable best efforts to cause any applicable Shareholder of the Company to promptly (i) supply Parent and the Company with any information which may be required in order to effectuate such filings and (ii) supply any additional information which reasonably may be required by the FTC, the DOJ or the competition or merger control authorities of any other jurisdiction and which the parties may reasonably deem appropriate. 5.10 Notification of Certain Matters. The Company shall give prompt notice to Parent of: (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which is likely to cause any representation or warranty of the Company contained in this Agreement to be untrue or inaccurate at or prior to the Effective Time, and (ii) any failure of the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.10 shall not (a) limit or otherwise affect any remedies available to the party receiving such notice or (b) constitute an acknowledgment or admission of a breach of this Agreement. No disclosure by the Company pursuant to this Section 5.10, however, shall be deemed to amend or supplement the Disclosure Schedule or prevent or cure any misrepresentations, breach of warranty or breach of covenant. -60- 5.11 Indemnification. (a) Parent shall not, for a period of three (3) years after the Effective Time, take any action to alter or impair any exculpatory or indemnification provisions now existing in the Articles of Incorporation or bylaws of the Company for the benefit of any individual who served as a director or officer of the Company at any time prior to the Effective Time, except for any changes which may be required to conform with changes in applicable law and any changes which do not affect the application of such provisions to acts or omissions of such individuals prior to the Effective Time. Parent shall (i) assume and honor, as of the Effective Time, all obligations of the Company under the Articles of Incorporation and bylaws, as currently in effect, and indemnification agreements of directors and executive officers of the Company who served as such prior to the Effective Time and (ii) pay all amounts that become due and payable under such provisions. This Section 5.11 shall survive the consummation of the Merger, is intended to benefit Parent, the Company and each indemnified party, shall be binding, jointly and severally, on all successors and assigns of the Company and Parent, and shall be enforceable by the indemnified parties. (b) For a period of two (2) years after the Effective Time, Parent shall use its reasonable best efforts to cause the Company to maintain in effect, if available, directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy on terms comparable to those applicable as of the date of this Agreement to the current directors and officers of the Company. 5.12 S-8 Registration. Not later than thirty (30) days after the Closing Date, Parent agrees to file, if available for use by Parent, with the SEC a registration statement on Form S-8 registering a number of shares of Parent Common Stock equal to the number of shares of Parent Common Stock issuable upon the exercise of all Existing Plan Options and New Plan Options (as adjusted pursuant to Section 1.6(d) hereof) held by persons for whom registration on Form S-8 is available. 5.13 Affiliate Agreements. Section 5.13 of the Disclosure Schedule sets forth those persons who, in the Company's reasonable judgment, are or may be Affiliates of the Company. The Company shall provide Parent such information and documents as Parent shall reasonably request for purposes of reviewing such list. The Company shall deliver or cause to be delivered to Parent, -61- prior to the Closing Date from each of the Affiliates of the Company, an executed Affiliate Agreement in substantially the form attached hereto as Exhibit E. Parent and Sub shall be entitled to place appropriate legends on the certificates evidencing any Parent Common Stock to be received by such Affiliates pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for Parent Common Stock, consistent with the terms of such Affiliate Agreements. 5.14 Expenses. Each of the Parties shall bear its own costs and expenses (including legal, accounting, financial advisory and broker fees and expenses) incurred in connection with this Agreement and the transactions contemplated herein, provided, however, that the third party expenses incurred by the Company in connection with this Agreement, the Related Agreements, and the transactions contemplated hereby and thereby ("THIRD PARTY EXPENSES") in excess of $1,000,000 shall be deducted from the Purchase Price. The Company may pay the fees on behalf of the Shareholders payable to the Escrow Agent as set forth in the Escrow Agreement, and the amount so paid shall be deducted from the Purchase Price. 5.15 [Omitted] 5.16 Employee Benefits. Parent shall arrange for each participant (including without limitation all dependents which would be consistent with Parent's existing plans) in the Company Employee Plans ("COMPANY PARTICIPANTS") who continue in service with Parent or the Surviving Corporation to participate in Parent benefit plans on the same basis as those of similarly situated employees of Parent. Each Company Participant who continues to be employed by Parent (or any of its subsidiaries) immediately following the Effective Time shall, to the extent permitted by law and applicable tax qualification requirements, and subject to any generally applicable break in service or similar rule, receive credit for purposes of eligibility to participate and vest under any Parent benefits plans, including Parent severance plan or policies, in which they are eligible to participate after the Effective Time for years of service with the Company (and its subsidiaries and predecessors) prior to the Effective Time to the extent such service was recognized for similar purposes under similar Company Employee Plans. Parent shall use commercially reasonable efforts to cause any and all pre-existing condition (or actively-at-work or similar) limitations, eligibility waiting periods and -62- evidence of insurability requirements under any group health plans to be waived with respect to such Company Participants and their eligible dependents. 5.17 Employment Offers. The Company shall use reasonable best efforts to cause each of its employees to accept the offer of employment made by Parent prior to the Closing, including, without limitation, executing and delivering Parent's standard employment agreement and/or offer letter. Such letters of employment shall include base salary that is identical to such employee's existing base salary with the Company. In addition, such employees shall be eligible for merit raises and additional option grants in accordance with the Parent's policies and programs. 5.18 Updated Information. (a) Immediately prior to the Closing, the Company shall provide to Parent a statement certified by any officer of the Company setting forth any changes required to be set forth on Section 2 of the Disclosure Schedule so as to make such sections of the Disclosure Schedules true and complete as of Closing. Such statement shall not be deemed to amend the Disclosure Schedule or affect adversely in any respect the rights of Parent under this Agreement, including the right to terminate pursuant to Section 8.1(e) hereof, or the rights of the Indemnified Parties (as defined in Section 7.2 hereof) under this Agreement, including the right to indemnification for Losses pursuant to Article VII hereof. (b) Immediately prior to the Closing, Parent shall provide to Company a statement certified by any officer of Parent setting forth any changes required to be set forth on Section 3 of the Parent Disclosure Schedule so as to make such sections of the Disclosure Schedule true and complete as of Closing. Such statement shall not be deemed to amend the Parent Disclosure Schedule or affect adversely in any respect the rights of Shareholders under this Agreement, including the right to terminate pursuant to Section 8.1(f) hereof and the right to indemnification for Losses pursuant to Article VII hereof. 5.19 Shareholder Agent; Authority and Validity. As of the Closing, the Shareholder Agent shall have the requisite power and authority to execute and deliver this Agreement and any Related Agreements to which it is a party on behalf of the Shareholders. The execution and delivery of this Agreement and the Related Agreements to which the Shareholder Agent is a party shall have been -63- duly authorized and approved by the Shareholders, and no other action on the part of the Shareholders is or will be necessary to authorize the execution and delivery of this Agreement and the Related Agreements by the Shareholder Agent on behalf of the Shareholders. This Agreement and the Related Agreements to which the Shareholder Agent is a party as have been executed and delivered by the Shareholder Agent on or prior to the date hereof have been, and on the Closing Date such other of the Related Agreements to which the Shareholder Agent is a party will have been, duly executed and delivered by the Shareholder Agent and are and will be valid and binding obligations enforceable against the Shareholders in accordance with their respective terms, except as such enforceability may be subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 5.20 Warrants. The Company shall notify holders of Warrants of the Merger, and shall cause the Warrants to be exercised or canceled prior to the Closing. 5.21 Additional Documents and Further Assurances. Each party hereto, at the request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of the Merger and the transactions contemplated hereby. ARTICLE VI CONDITIONS TO THE MERGER 6.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of the Company and Parent to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) No Order. No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or -64- other legal restraint or prohibition preventing the consummation of the Merger shall be in effect, 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. (c) Exemption. The permit referenced in Section 5.1(a) shall have been issued and there shall not be in effect any stop order suspending the effectiveness of the permit or any proceedings seeking such a stop order. (d) HSR Act. All waiting periods, if any, under the HSR Act relating to the transactions contemplated hereby shall have expired or terminated early and all material foreign antitrust approvals required to be obtained prior to the Merger in connection with the transactions contemplated hereby shall have been obtained. (e) Shareholder Approval. The Shareholders holding a sufficient number of shares of Company Common Stock and Company Preferred Stock as required under the Articles of Incorporation and California Law shall have approved this Agreement, the Merger and the transactions contemplated hereby and thereby. 6.2 Conditions to the Obligations of Parent and Sub. The obligation of Parent and Sub to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, exclusively by Parent and Sub: (a) Representations, Warranties and Covenants. (i) The representations and warranties of the Company in this Agreement and the Related Agreements shall be true and correct (without regard to any materiality qualifications set forth therein) in all material respects on the date they were made and on and as of the Closing Date as though such representations and warranties were made on and as of such time, and (ii) the Company shall have performed and complied in all material respects with all covenants and obligations under this Agreement and the Related Agreements required to be performed and complied with by it as of the Closing. (b) Resignation of Directors. Parent shall have received a written resignation from each of the directors of the Company effective as of the Effective Time. (c) Omitted. -65- (d) Legal Opinion. Parent shall have received from Wilson Sonsini Goodrich & Rosati, legal counsel to the Company, an opinion reasonably satisfactory to the Parent, addressed to the Parent and dated as of the Closing Date, in substantially the form attached hereto as Exhibit F. (e) Certificate of the Company. Parent shall have received a certificate, validly executed by the Chief Executive Officer of the Company, to the effect that, as of the Closing: (i) all representations and warranties made by the Company in this Agreement were true and correct (without regard to any materiality qualifications set forth therein) in all material respects on the date they were made and on and as of the Closing Date as though such representations and warranties were made on and as of such time; (ii) all covenants and obligations under this Agreement to be performed by the Company on or before the Closing have been so performed in all material respects; (iii) the conditions to the obligations of Parent and Sub set forth in this Section 6.2 have been satisfied (unless otherwise waived in accordance with the terms hereof); and (iv) no uncured breaches, defaults or events of default exist under the Loan and Security Agreement with Silicon Valley Bank as described in Section 2.7 of the Disclosure Schedule. (f) Certificate of Secretary of Company. Parent shall have received a certificate, validly executed by the Secretary of the Company, certifying as to (i) the terms and effectiveness the Articles of Incorporation and the bylaws of the Company, and (ii) the valid adoption of resolutions of the Board of Directors of the Company and the Shareholders approving this Agreement and the consummation of the transactions contemplated hereby. (g) Certificate of Good Standing. Parent shall have received certificates of good standing of the Company from (i) the Secretary of State of the State of California, and (ii) the Franchise Tax Board of the State of California, each dated within a reasonable period prior to the Closing. -66- (h) FIRPTA Certificate. Parent shall have received a copy of the FIRPTA Compliance Certificate, validly executed by a duly authorized officer of the Company. (i) Affiliate Agreements. Each of the persons listed in Section 5.13 of the Disclosure Schedule shall have executed and delivered to Parent an Affiliate Agreement, in substantially the form attached hereto as Exhibit E, and such Affiliate Agreements shall be in full force and effect. (j) Employees. Each of the employees of the Company who shall join Parent upon the Effective Time shall have entered into Parent's standard form of confidentiality and invention assignment agreement attached hereto as Exhibit I, provided that the decision of one or more employees of the Company not to join Parent upon the Effective Time shall not result in a Company Material Adverse Effect. Each of Michael Canning, Cheng-Tie Chen, Ting-Chung Chen, Fure-Ching Jeng and Brian Heuckroth shall become an employee of Parent upon the Effective Time and shall have entered into their respective Employment Agreement Addenda in substantially the form attached as Exhibit G. (k) Audited Financials. Parent shall have received the audited Year-End Financials that shall not be materially different from the Year-End Financials. (l) New Plan Options. The New Plan Options provided for in Section 4.6 hereof shall have been granted in accordance therewith. (m) Consents. The Company shall have delivered to Parent evidence of the Company having obtained all consents, waivers, approvals, orders or authorizations of, or registrations, declarations or filings listed in Section 6.2(m) of the Disclosure Schedule. (n) Expenses. Parent shall have received a certificate, validly executed by an executive officer of the Company, in form and substance reasonably satisfactory to Parent, certifying the total amount of third party expenses incurred in connection with the Merger, as described in Section 5.14 hereof, and providing in reasonable detail how such amount was calculated. -67- (o) Securities. At the time of the Closing, the Company shall not have outstanding any type of security or right to acquire any security except Company Preferred Stock, Company Common Stock or Company Options. (p) Employment. All of the existing employment agreements between the Company and its employees shall have been terminated or expired. (q) Warrants. The Warrants to purchase Company Capital Stock shall have been exercised or canceled. (r) Certain Contracts. The Representation Agreement with Aisys Corporation dated April 13, 2001, the SOC Design Agreement with Altius Solutions, Inc. dated July 1, 2000 and the letter agreement with the Law Offices of Iman & Associates dated January 24, 2000 shall have been modified so that no shares of Company Capital Stock nor Company Option shall be payable or issuable under such contracts at or after the Effective Time, or shall have been terminated immediately prior to the Effective Time. 6.3 Conditions to Obligations of the Company. The obligations of the Company to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, exclusively by the Company: (a) Representations, Warranties and Covenants. (i) The representations and warranties of Parent and Sub in this Agreement and the Related Agreements were true and correct (without regard to any materiality qualifications set forth therein) in all material respects when made and on and as of the Effective Time as though such representations and warranties were made on and as of such time and (ii) each of Parent and Sub shall have performed and complied in all material respects with all covenants and obligations of this Agreement required to be performed and complied with by it as of the Effective Time. (b) Certificate of Parent. Company shall have received a certificate executed on behalf of Parent by a Vice President to the effect that, as of the Closing: -68- (i) all representations and warranties made by the Parent and Sub in this Agreement were true and correct (without regard to any materiality qualifications set forth therein) in all material respects when made and on and as of the Closing Date as though such representations and warranties were made on and as of such time; (ii) all covenants and obligations under this Agreement to be performed by Parent and Sub on or before the Closing have been so performed in all material respects; and (iii) the conditions to the obligations of the Company set forth in this Section 6.3 have been satisfied (unless otherwise waived in accordance with the terms hereof). (c) Listing on the Nasdaq. Parent shall have filed a notice with Nasdaq with respect to the listing of the Merger Shares thereon. (d) Opinion. The Company shall have received from White & Case LLP, counsel to Parent and Sub, an opinion, in form reasonably satisfactory to the Company, addressed to the Company and dated as of the Closing Date, in substantially the form attached hereto as Exhibit H. (e) Good Standing Certificate. The Company shall have received certificates of good standing of Parent and the Sub in their respective jurisdictions of organization, certified charter documents and certificates as to the incumbency of officers and the adoption of authorizing resolutions. ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 7.1 Survival of Representations, Warranties and Covenants. The representations and warranties of the Company contained in this Agreement, or in any certificate or other instrument delivered pursuant to this Agreement or any Related Agreement, shall terminate fifteen (15) months following the Closing Date (the "TERMINATION DATE"); except that the Company's representations and warranties relating to Taxes made in Section 2.9 hereof shall survive until the expiration of the statute of limitations applicable thereto; and provided that the delivery of an officer's certificate (as set forth in the Escrow Agreement) prior to the Termination Date shall extend the period of survival applicable to any claim set forth therein through the date such claim is conclusively resolved. The -69- representations and warranties of Parent and Sub contained in this Agreement or any Related Agreement, or in any certificate or other instrument delivered pursuant to this Agreement, shall terminate twelve (12) months following the Closing Date. 7.2 Indemnification. Prior to the Effective Time the Company, and after the Effective Time the Shareholders, severally but not jointly, shall indemnify and hold Parent and Sub (including the Surviving Corporation and their respective officers, directors, Affiliates, employees, agents, advisors, and their respective successors and assigns (collectively, the "INDEMNIFIED PARTIES")) harmless against all claims, losses, liabilities, damages, deficiencies, demands, fines, penalties, interest, assessments, judgments, actions, proceedings and suits of whatever kind and nature, and costs and expenses relating to each of the foregoing, including reasonable attorneys' fees and expenses of investigation and defense (hereinafter individually a "LOSS" and collectively "LOSSES") incurred by the Indemnified Parties directly or indirectly as a result of: (a) any inaccuracy or breach of a representation or warranty of the Company contained in this Agreement or in any certificate, instrument or other document delivered by Company pursuant to the terms of this Agreement; (b) any failure by the Company to perform or comply with any covenant contained herein or in any Related Agreement; (c) any obligation to any broker or finder employed or alleged to have been employed by or on behalf of the Company or any Shareholder; (d) any Dissenting Shares to the extent set forth in Section 1.8(c); (e) (A) the claim described in Section 2.16 of the Disclosure Schedule, (B) any failure to obtain consent of any party pursuant to the terms of the contracts that are listed in Section 2.13(b) of the Disclosure Schedule and that are not listed in Section 6.2(m) of the Disclosure Schedule, (C) unilateral termination or cancellation of any Warrant, (D) termination of any contract described in Section 6.2(r), (E) any breach existing on the date hereof of the Master Equipment Lease Agreement with El Camino Resources Ltd. described in Section 2.11(b) of the Disclosure -70- Schedule, or (F) termination of a former employee as described in the third paragraph of Section 2.7 of the Disclosure Schedule; and (f) one-half (1/2) of any amount by which the aggregate Revenues (as defined below) during the period commencing at the Effective Time and ending on the Termination Date is less than $57,000,000. "REVENUE" means the total revenue of the Company calculated in accordance with GAAP from the following (i) the sale to manufacturers (OEMs or ODMs) of integrated circuit products, designed and developed by the Company (including sales of third party components sold in conjunction with the Company's integrated circuit products and/or software products in the ordinary course of business), but not including any sales of integrated circuit products or software products at discounts to their average selling price of more than twenty percent (20%), sales to stocking distributors, or sales to distributors with rights of return, except, in each case, with the prior written consent or at the express direction of Parent, and (ii) the sale of integrated circuit products jointly developed by Parent (including its affiliates) and the Company, but only to the extent of the proportion of such revenues as the die size of the Company's modules represents to the total die size of such products; provided however, that such a proportion shall be determined in good faith by Parent. Parent and the Company shall cooperate on a good faith basis in the effort to achieve the Revenue milestone. At the Termination Date, if the Shareholder Agent objects to the amount Parent determines to be the Revenue, then the Shareholder Agent and Parent shall retain the accounting firm of Arthur Anderson to audit such Revenue, which audit shall be final and binding upon Parent, the Surviving Corporation and the Shareholders, and the cost of which audit shall be borne by the Shareholders, unless the Revenue as so audited shall be greater than 110% of the amount of such Revenue as determined by Parent in which event Parent shall bear the cost of such audit. (g) Nothing herein shall limit the liability of the Company for any breach of any representation, warranty or covenant if the Merger does not close because Parent terminates the Agreement pursuant to Section 8.1(e). The Shareholders shall not have any right of contribution from the Company with respect to any Loss pursuant to this Article VII except for valid claims with respect to any directors or officers of the Company pursuant to the indemnification agreement with the Company and/or under any director/officer insurance policy then in effect. -71- 7.3 Escrow Fund. (a) Subject to this Section 7.3, as sole and exclusive security and for the indemnity of the Shareholders provided for in Section 7.2 hereof and by virtue of this Agreement and the Escrow Agreement, the Shareholders will be deemed to have received and deposited with the Escrow Agent the Escrow Amount (plus any additional shares as may be issued in respect of any stock split, stock dividend or recapitalization effected by Parent after the Effective Time) without any act of the Shareholders. The Escrow Amount shall be available to compensate the Indemnified Parties for any claims by such parties for any Losses suffered or incurred by them and for which they are entitled to recovery under this Article VII from the Shareholders. As promptly as practicable after the Closing, the Escrow Amount, without any act of the Shareholders, will be deposited with the Escrow Agent, such deposit of the Escrow Amount to constitute an escrow fund (the "ESCROW FUND") to be governed by the terms set forth herein and in the Escrow Agreement. The adoption of this Agreement and the approval of the Merger by the Shareholders shall constitute approval of the Escrow Agreement and of all of the arrangements relating thereto, including, without limitation, the placement of the Escrow Amount in escrow. (b) Notwithstanding any provision of this Agreement to the contrary, after the Effective Time the Indemnified Parties shall not be entitled to indemnification or to obtain any proceeds from the Escrow Fund or to otherwise recover any amount unless and until the Indemnified Parties have identified and established Losses in excess of $150,000 in the aggregate (the "BASKET AMOUNT") pursuant to the procedures set forth in the Escrow Agreement, in which case the Indemnified Parties shall be entitled to recover all Losses so identified, including those comprising the Basket Amount. (c) Limitations. (i) Notwithstanding anything to the contrary herein, (A) the sole recourse that the Indemnified Parties may utilize to recover Losses indemnified by the Shareholders in connection with any transactions contemplated by this Agreement or the Related Agreements or any certificate, instrument or document delivered in connection herewith shall be the Escrow Amount and such Losses (other than for fraud and Losses as set forth in clause (ii) of this Section 7.3(c)) -72- shall be recovered solely from the Escrow Amount from the Escrow Fund; the aggregate liability of the indemnifying Shareholders for Losses under this Article VII (other than for fraud and Losses as set forth in clause (ii) of this Section 7.3(c)) shall be limited to the Escrow Fund, (B) except for fraud, each indemnifying Shareholder shall only be liable for indemnification under this Article VII for up to his, her or its Pro Rata Portion of the Escrow Fund; and (C) this Agreement shall be the exclusive means for any Indemnified Party to recover any Loss for which it or they seek indemnification pursuant to this Article VII, (ii) Notwithstanding anything to the contrary herein, prior to the Effective Time the Company, and after the Effective Time, the Shareholders, jointly and severally, shall be liable for Losses of any Indemnified Party based upon, arising out of or relating to fraud by the Company or any of its officers and directors to the extent such Losses exceed the amount then remaining in the Escrow Fund, provided that no Shareholder shall be liable for any amount in excess of the value (based upon the Signing Stock Price) of the amount of Merger Shares (and cash in lieu of fractional shares thereof) actually received by such Shareholder. (iii) Notwithstanding anything to the contrary herein, following the termination of the Escrow Period (as defined in the Escrow Agreement), the Shareholders will continue to be liable for Losses based on representations and warranties relating to Taxes till the expiration of the statute of limitations applicable thereto, provided, however, (A) the aggregate liability of the indemnifying Shareholders for such Losses shall be limited to an amount equal to the balance of the Escrow Amount upon the termination of the Escrow Period, and (B) each indemnifying Shareholder's liability with respect to such Losses shall be limited to up to his, her or its Pro Rata Portion of such amount. (d) Shareholder Agent of the Shareholders; Power of Attorney. (i) In the event that the Merger is approved by the Shareholders, effective upon such vote, and without further act of any Shareholder, Michael Canning shall be appointed as agent and attorney-in-fact for each Shareholder (the "SHAREHOLDER AGENT") (except such Shareholders, if any, as shall have perfected their appraisal or dissenters' rights under California Law), for and on behalf of the Shareholders, to give and receive notices and communications, to -73- authorize delivery to Parent of shares of Parent Common Stock from the Escrow Fund in satisfaction of claims by Parent, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of the Shareholder Agent for the accomplishment of the foregoing. Such agency may be changed by the Shareholders from time to time upon not less than thirty (30) days' prior written notice to Parent; provided that the Shareholder Agent may not be changed or removed unless holders of a two-thirds interest of the Escrow Fund agree to such removal and to the identity of a substituted agent. Any vacancy in the position of Shareholder Agent may be filled by approval of the holders of a majority in interest of the Escrow Fund. No bond shall be required of the Shareholder Agent, and the Shareholder Agent shall not receive compensation for its services; provided, however, that the Shareholder Agent shall be entitled to all reasonable and documented out-of-pocket expenses not exceeding $20,000 as incurred in its capacity as Shareholder Agent from the Escrow Fund and after all Losses of the Indemnified Parties required to be indemnified under this Agreement have been reimbursed to them out of the Escrow Fund in accordance with this Agreement and the Escrow Agreement, but prior to the distribution of the Escrow Fund to Shareholders pursuant to the Escrow Agreement, any reasonable expenses in excess of $20,000 shall be reimbursed first from the Escrow Fund at the Termination Date if the Escrow Fund has sufficient balance, and then from the Shareholders. Notices or communications to or from the Shareholder Agent shall constitute notice to or from each of the Shareholders. (ii) The Shareholder Agent shall not be liable for any act done or omitted hereunder as Shareholder Agent while acting in good faith and in the exercise of reasonable judgment. The Shareholders on whose behalf the Escrow Amount was contributed to the Escrow Fund shall severally indemnify the Shareholder Agent and hold the Shareholder Agent harmless against any loss, liability or expense incurred without negligence or bad faith on the part of the Shareholder Agent and arising out of or in connection with the acceptance or administration of the Shareholder Agent's duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Shareholder Agent. (iii) In order to induce the Shareholder Agent to act in such capacity, the Shareholder Agent: -74- (A) shall not be under any duty to give greater consideration to the interest of any Shareholder or Shareholders than to that of any other Shareholder or Shareholders; (B) may act in reliance upon any statement (oral or written), instrument or signature believed by the Shareholder Agent to be genuine and may assume that any such statement, instrument or signature purportedly given by any Shareholder in connection with this Agreement has been given by such Shareholder; (C) shall not be liable to the Shareholders for any mistake of fact or error in judgment or for any acts of omission of any kind unless by the Shareholder Agent's own gross negligence, bad faith or willful misconduct; (D) shall not be required to make any representation as to the validity, value or genuineness of any document or instrument held by the Shareholder Agent or delivered by the Shareholder Agent; (E) shall not be obligated to risk its own funds in the course of performing as Shareholder Agent; and (F) shall not have any duties or responsibilities except those expressly set forth in this Agreement or any Related Agreement to which the Shareholder Agent is a party and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or shall otherwise exist against the Shareholder Agent. (e) Actions of the Shareholder Agent. A decision, act, consent or instruction of the Shareholder Agent, including, but not limited to, an amendment, extension or waiver of this Agreement pursuant to Section 8.3 and Section 8.4 hereof, shall constitute a decision of all the Shareholders and shall be final, binding and conclusive upon each of such Shareholders, and the Escrow Agent and Parent may rely upon any such decision, act, consent or instruction of the Shareholder Agent as being the decision, act, consent or instruction of each and every such Shareholder. The Escrow Agent and Parent are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Shareholder Agent. -75- (f) Third-Party Claims. In the event Parent becomes aware of a third-party claim which Parent believes may result in a demand against the Escrow Fund, Parent shall promptly notify the Shareholder Agent of such claim, and the Shareholder Agent, as representative for the Shareholders, in cooperation with Parent, shall be entitled to participate in, but not to determine or conduct, the defense of such claim. Any reasonable expenses associated with the Shareholder Agent's participation shall be the responsibility of the Shareholders and shall be reimbursed pursuant to Section 7.3(d). Parent shall have the right in its sole discretion to conduct the defense of, and in the reasonable exercise of its discretion to settle, any such claim; provided, that in determining whether to settle any such claim, Parent shall in good faith consider any and all factors that it considers to be relevant. 7.4 Recovery For Losses by Shareholders. Parent agrees to indemnify and hold the Shareholders and their officers, directors, employees, agents, advisors, and their respective successors and assigns (collectively, the "SHAREHOLDER INDEMNIFIED PARTIES") harmless against all Losses incurred by them as a result of: (i) any inaccuracy or breach of a representation or warranty of Parent contained in this Agreement or in any certificate, instrument or other document delivered by Parent pursuant to the terms of this Agreement: and (ii) any failure by Parent to perform or comply with any covenant of Parent contained herein. Nothing herein shall limit the liability of Parent for any breach of any representation, warranty or covenant if the Merger does not close because the Company terminates the Agreement pursuant to Section 8.1(f). Notwithstanding any provision of this Agreement to the contrary, after the Effective Time the Shareholders shall not be entitled to indemnification unless the Losses are in excess of $150,000 in the aggregate (the "SHAREHOLDER BASKET AMOUNT"), in which case the Shareholder Indemnified Parties shall be entitled to recover all Losses so identified, including those comprising the Shareholder Basket Amount. Any claim by the Shareholder Indemnified Parties against Parent pursuant to this Section 7.4 shall be brought only by the Shareholder Agent; no claims may be brought by individual Shareholders. Notwithstanding any provision of this Agreement to the -76- contrary and except as set forth in Section 7.2(d) hereof, (i) the aggregate liability of Parent for Losses under this Article VII shall be limited to the Escrow Amount, (ii) all claims for indemnification of the Shareholder Indemnified Parties pursuant to this Section 7.4 shall be made pursuant to the procedures set forth in Section 5 of the Escrow Agreement mutatis mutandis, and (iii) this Agreement shall be the exclusive means for the Shareholder Indemnified Parties to recover any Loss for which they seek indemnification under this Section 7.4. Notwithstanding anything to the contrary herein, Parent shall be liable for all Losses of any and all Shareholders based upon, arising out of or relating to fraud by the Parent or Sub or any of its officers and directors, not to exceed in the aggregate as to all Losses of all Shareholders the full amount of the Purchase Price. 7.5 General Indemnification Provisions. (a) No Punitive or Consequential Damages. No party or indemnitee hereunder may recover punitive, consequential, indirect or special damages in any claim made for indemnification or otherwise with respect to this Agreement and the Related Agreements and the transactions contemplated hereby and thereby. (b) Duty to Mitigate Losses. Nothing herein shall be deemed to relieve any party or indemnitee hereunder from any duty to mitigate any Losses under applicable law. (c) No Double Recovery. No party or indemnitee shall be entitled to be indemnified more than once under this Agreement for the same claim. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.1 Termination. As provided in Section 8.2, certain obligations of the parties under this Agreement may be terminated and the Merger abandoned at any time prior to the Closing: (a) by mutual agreement of the Company and Parent; (b) by Parent or the Company if the Closing Date shall not have occurred by December 20, 2001; -77- (c) by Parent or the Company if: (i) there shall be a final non-appealable order of a federal or state court in effect preventing consummation of the Merger, or (ii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Closing by any Governmental Entity that would make consummation of the Closing illegal; (f) (d) by Parent if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would: (i) prohibit Parent's ownership or operation of any portion of the business of the Company or (ii) compel Parent or the Company to dispose of or hold separate all or any portion of the business or assets of the Company or Parent as a result of the Merger; (e) by Parent if there has been a breach of any representation, warranty, covenant or agreement of the Company contained in this Agreement such that any of the conditions set forth in Section 6.1 or Section 6.2 would not be satisfied and such breach has not been cured within ten (10) calendar days after written notice thereof to the Company; provided, however, that no cure period shall be required for a breach which by its nature cannot be cured; and provided further, that the right to terminate this Agreement under this Section 8.1(e) shall not be available to Parent if any action or failure to act by Parent has been a principal cause of any Company breach or the failure to cure such breach within ten (10) calendar days after written notice thereof; (f) by the Company if there has been a breach of any representation, warranty, covenant or agreement of Parent contained in this Agreement such that any of the conditions set forth in Section 6.1 or Section 6.3 would not be satisfied and such breach has not been cured within ten (10) calendar days after written notice thereof to Parent; provided, however, that no cure period shall be required for a breach which by its nature cannot be cured; and provided further, that the right to terminate this Agreement under this Section 8.1(f) shall not be available to the Company if any action or failure to act by the Company has been a principal cause of any Parent breach or the failure to cure such breach within ten (10) calendar days after written notice thereof. 8.2 Effect of Termination. In the event of termination as provided in Section 8.1 hereof: (a) there shall be no further liability or obligation on the part of Parent, Sub, the Company or their respective officers, directors or shareholders, if applicable, to perform this -78- Agreement other than the obligations set forth in Sections 5.4 and 5.5 hereof; provided, that each party hereto shall remain liable pursuant to the terms hereof for any breaches of this Agreement prior to its termination; and provided further, however, that, the provisions of Sections 5.4 and 5.5 hereof, Article IX hereof and this Section 8.2 shall remain in full force and effect and survive any termination of this Agreement pursuant to the terms of this Article VIII. (b) Notwithstanding anything herein to the contrary, in the event that: (i) prior to the Effective Time, the Company shall have failed to satisfy the conditions set forth in Section 6.2(a) and the Parent shall terminate the Agreement pursuant to Section 8.1(e); (ii) prior to the Effective Time, the Board of Directors of the Company (or any committee thereof) shall have withdrawn, modified, conditioned, qualified or amended its recommendation to approve and adopt the Merger; (iii) prior to the Effective Time, the Shareholders shall have voted against approval and adoption of the Merger; or (iv) prior to December 20, 2001, the Shareholders shall have failed to approve and adopt the Merger, unless such failure is a result of the failure to receive the California Permit in a timely manner through no fault of the Company or the shareholders of the Company, (viii) then Parent and Sub shall have no further obligation to perform and comply with this Agreement and the Related Agreements and the Company shall, following the formal termination of this Agreement pursuant to any of the clauses (i) through (iv) above, promptly pay Parent in immediately available funds the amount of three million dollars ($3,000,000) for its out-of-pocket expenses (including, without limitation, printing fees, filing fees, fees and expenses of its legal and financial advisors and all fees and expenses payable to any financing sources) and lost profits related to the transactions contemplated hereby and by the Related Agreements. Such payment shall not relieve the Company or the Shareholders from their continuing obligations pursuant to the Confidential Disclosure Agreement. -79- 8.3 Amendment. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto. For purposes of this Section 8.3, any amendment of this Agreement shall be binding upon and effective against the Shareholders if such amendment is approved by the Shareholder Agent and signed by the Shareholder Agent. 8.4 Extension; Waiver. At any time prior to the Closing, Parent, on the one hand, and the Company and the Shareholder Agent, on the other hand, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations of the other party hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. For purposes of this Section 8.4, any extension or waiver shall be binding upon and effective against all Shareholders if such extension or waiver is approved by the Shareholder Agent and signed by the Shareholder Agent. ARTICLE IX GENERAL PROVISIONS 9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial messenger or courier service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice); provided, however, that notices sent by mail will not be deemed given until received: (a) if to Parent, to: Cirrus Logic, Inc. 4210 South Industrial Drive Austin, TX 78744 Attention: Steven D. Overly, Esq. Telephone: (512) 912-3234 Facsimile Number: (512) 912-3136 -80- with a copy to: White & Case LLP 1155 Avenue of the Americas New York, NY 10036-6700 Attention: Neal F. Grenley, Esq. Telephone: (212) 819-8200 Facsimile Number: (212) 354-8113 (b) if to the Company, to: Stream Machine Company 580 Cottonwood Drive Milpitas, California 95035 Attention: Michael Canning Telephone No.: (408) 435-9166 Facsimile No.: (408) 435-9169 with a copy to: Arthur Schneiderman, Esq. John T. Sheridan, Esq. Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Telephone No.: (650) 493-9300 Facsimile No.: (650) 493-6811 (c) if to the Shareholder Agent, to: Michael Canning 115 Euclid Avenue Los Gatos, California 95030 Telephone No.: (408) 395-7024 Facsimile No.: (408) 395-9397 with a copy to: Arthur Schneiderman, Esq. John T. Sheridan, Esq. Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Telephone No.: (650) 493-9300 Facsimile No.: (650) 493-6811 -81- 9.2 Interpretation. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 9.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto, the Disclosure Schedule, the Parent Disclosure Schedule, the Related Agreements, the Confidential Disclosure Agreement, and the documents and instruments and other agreements among the parties hereto referenced herein: (i) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, (ii) are not intended to confer upon any other person any rights or remedies hereunder (except as provided in Article VII hereof), (iii) shall not be assigned by operation of law or otherwise except that Parent may assign its rights and delegate its obligations hereunder to its affiliates as long as Parent remains ultimately liable for all of Parent's obligations hereunder and (iv) any non-individual Shareholder may assign its rights and delegate its obligations hereunder to its affiliates, provided, however, that such transferring Shareholder shall remain liable under this Agreement following such transfer or assignment. 9.5 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. -82 9.6 Other Remedies. Any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.7 Governing Law. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. (b) Any controversy, dispute or claim arising out of or relating to this Agreement or the Related Agreements, or the breach or termination thereof, including all claims for indemnification pursuant to Article VII hereof, which has not been settled by negotiation within thirty (30) days following written notice by one party to one or more other parties of the existence of such dispute, controversy or claim (including as to the validity and amount of any claim in any officer's certificate (as set forth in the Escrow Agreement)), shall be finally settled by arbitration under the Commercial Arbitration Rules of the American Arbitration Association ("AAA") by three arbitrators. In such event, the claimant will deliver a written notice to the respondent(s) and the AAA initiating arbitration and naming an arbitrator. Within twenty (20) days after receipt of such arbitration notice, the respondent(s) shall name an arbitrator. Within twenty (20) days from the naming of the two arbitrators, the two arbitrators shall name a third arbitrator. If there are multiple claims and/or multiple respondents, all claimants and/or all respondents shall attempt to agree upon the naming of their respective arbitrator. If the claimants or respondents, as the case may be, fail to name their respective arbitrator, or if the two arbitrators fail to name a third arbitrator, or if within twenty (20) days after any arbitrator shall resign or otherwise cease to serve as such, or a replacement arbitrator is not named by the party that originally named such arbitrator, such arbitrator as to which agreement cannot be reached or as to which a timely appointment is not made shall be named by the AAA. The arbitrator or arbitrators shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the judgment of a majority of the three arbitrators to discover relevant information from the opposing parties about the subject matter of the dispute. A majority of the -83- three arbitrators shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys' fees and costs, to the same extent as a court of competent law or equity, should a majority of the three arbitrators determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of a majority of the three arbitrators shall be binding and conclusive upon the parties to this Agreement, the Shareholders and the Shareholder Agent. Such decision shall be written and shall be supported by written findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrator. (c) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in New York, New York, under the rules then in effect of the American Arbitration Association. The arbitrator shall determine how all expenses relating to the arbitration shall be paid, including without limitation, the respective expenses of each party, the fees of the arbitrator and the administrative fee of the American Arbitration Association. (d) Notwithstanding the foregoing or anything to the contrary herein, a party hereto may bring an action in any competent court having jurisdiction in the United States seeking equitable relief, solely for the purpose of ensuring its right to arbitration pursuant to this Section 9.7 or to an effective remedy upon conclusion of any such arbitration (e.g. relief to preserve an asset that may be used to satisfy an arbitration award). 9.8 Rules of Construction; Good Faith. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefor, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. The parties hereto further agree to act in good faith in all respects in connection with this Agreement. [Remainder of Page Intentionally Left Blank] -84- IN WITNESS WHEREOF, Parent, Sub, the Company, and the Shareholder Agent have caused this Agreement to be signed, all as of the date first written above. CIRRUS LOGIC, INC. CIRRUS LOGIC SM ACQUISITION CORPORATION By: /s/ Steven D. Overly By: /s/ Steven D. Overly ------------------------------- ----------------------------------- Name: Steven D. Overly Name: Steven D. Overly Title: Senior Vice President Title: Director SHAREHOLDER AGENT STREAM MACHINE COMPANY By: /s/ Michael Canning By: /s/ Michael Canning ------------------------------- ----------------------------------- Name: Michael Canning Name: Michael Canning Title: President and Chief Executive Officer [SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION] -----END PRIVACY-ENHANCED MESSAGE-----